Lease Agreement vs Rental Agreement
While the terms are sometimes used interchangeably in the investment real estate industry, there is an actual difference between a lease agreement and a rental agreement.
As a landlord, you want to make sure you are set up for success with your tenant management strategy, and that requires an understanding of which renter-landlord agreement type is best for you.
This is a simple guide for landlords to understand the legal and structural differences between lease agreements and rental agreements.
What is a Lease Agreement?
A lease agreement is a contract signed by both landlord and tenant, prior to the tenant moving into the leased property, which lays out the policies and responsibilities to which landlord and tenant both agree. The lease also outlines the time period for which the agreement is valid, or how long the tenant can live in the property under the current agreement.
The landlord may choose to offer the tenant the opportunity to renew the lease at the end of the rental period, but it does not automatically renew. The landlord has the right to propose new lease terms for a new rental period, and the tenant can agree to the new lease terms or decide to live elsewhere instead.
Typically, lease agreements are used for rental periods of 6 months or more, with the option to renew at the end of each rental period. Annual lease agreements are the most common, but the terms can cover rental periods of multiple years if the landlord desires.
Key elements of a lease agreement include:
- Rent amount owed by tenant, and payment schedule
- Pet policy
- Cleaning checks or routine inspections
- Late fee policy
- Utilities policy
- Maintenance responsibilities
- Who is allowed to live on property
- Landlord right of entry
- State-required disclosures
Once a lease agreement has been signed by both tenant and landlord, the terms are legally binding and cannot be altered by either party without the written consent of the other party.
The terms of the lease are designed to protect both landlord and tenant, and maintain a positive relationship in which both parties understand their responsibilities. If either fails to uphold the lease terms, they may be subject to eviction (tenant) or legal action (landlord).
Pros for Landlord
- Long-term renters ensure more stable rental income for the period outlined in the lease.
- More predictable income for landlord
Cons for Landlord
- In markets where rental rates are likely to be rising rapidly, landlords may miss out on some potential income by being locked into a long-term lease during which they cannot raise the rent (a pro for the tenant).
What is a Rental Agreement?
The main difference between a rental agreement and a lease agreement is the length of the contract. Rental agreements are used for short-term rental, usually one month at a time.
While lease agreement terms must be agreed to each time a lease is renewed, rental agreements automatically renew at the end of each rental period if the landlord and tenant can agree to terms. This means that the renter and the landlord are able to propose new terms on a regular basis, if they feel the need to.
If the landlord decides they do not wish to renew a rental agreement at the end of the current rental period, they are legally required to provide a 30-day notice to the renter letting them know the agreement will not be renewed. This makes sense, otherwise tenants could find themselves unexpectedly homeless at the end of their current rental period.
The elements included in a rental agreement are basically the same as those in a lease agreement, just with a shorter rental period that will automatically renew unless notice is given by the tenant or landlord.
Pros for Landlord
- Flexibility in choosing renters and establishing terms of contract
- Ability to capitalize on rising rental rates in the market
Cons for Landlord
- Since renters are not locked into long-term contracts, they have many opportunities (e.g., every month) to choose to leave. Depending on your market, this may make it difficult to keep your property rented.
- Since terms must be agreed to each new period, rental income may fluctuate much less predictably compared to a long-term lease.
Choosing An Agreement Type For Your Property
In deciding whether a long-term lease agreement or a rental agreement is best for your property investing strategy, you should consider the type of renter you want to go after, the demand for rental property in your area, and how stable you feel rental rates will be.
Joseph Thomas Property Management Can Help
As an experienced team of property managers that also own our own rental property, we help advise our clients on the rental agreement types that will work best for their situations as well as help manage tenant relationships.
If you are interested in these or any other of our property management services in Utah, let’s talk!