Renting a property can be an exciting prospect, but before you dive in, it’s crucial to understand the key difference between leasing and renting. This is essential for landlords producing these documents and the tenants who will be signing them. While these terms are often used interchangeably, they have distinct implications for each party.
Whether you’re looking to rent a new home or you’re considering becoming a landlord, knowing the difference between renting and leasing can help prevent costly problems arising from the language unique to each of these arrangements. Here, we’ll explore the nuances of each to help you understand both kinds of contracts.
What is a Lease Agreement?
Think of a lease as a handshake agreement – but on paper and legally binding. A lease is a contract between a tenant (lessee) and landlord (lessor) that gives a tenant the right to live in a property for a fixed period of time, typically covering a 6 to 12-month rental period, whilst making consistent payments for the duration.
One of the primary benefits of a lease agreement is stability. Landlords prefer leases because they provide a guaranteed income stream for a set period. Tenants benefit from knowing they have a secure place to live without the risk of sudden rent increases or changes in terms.
However, there are some drawbacks to consider as you explore the difference between leasing and renting. Once a lease is signed, the rent is typically fixed for the duration of the agreement. In areas where property values are rapidly increasing, tenants may miss out on potential savings by locking into a long-term lease.
What is a Rental Agreement?
A rental agreement can be thought of as a month-to-month agreement, which is almost always more flexible than leasing. It allows tenants to rent a property on a monthly basis, with the agreement automatically renewing at the end of each month unless either party gives notice to terminate.
The flexibility of a rental agreement appeals to tenants who may not be ready to commit to a long-term lease. It also allows landlords to adjust rent prices more frequently to reflect changes in the market.
However, this flexibility comes with some drawbacks. Landlords may struggle to maintain a stable income stream with frequent tenant turnover. Additionally, tenants may be subject to more frequent rent increases, which can make budgeting more challenging.
Difference Between Leasing and Renting: Key Takeaways
Now that we’ve defined what renting and leasing is, let’s take a look at the main differences between each kind of contract
The length of tenancy can be similar, but the terms are different. Perhaps, the most significant difference between a lease and a rental agreement is the length of the tenancy. A lease typically lasts for a fixed term, while a rental agreement technically renews monthly, even though they’re typically written to cover similar timeframes of tenant occupancy for any given property.
Leases offer more stability. Leases offer more stability in terms of rent, as the amount is fixed for the duration of the lease. Rental agreements allow for more frequent rent adjustments. Keep in mind, some areas will not allow landlords or property managers to raise rent in the middle of a rental agreement so make sure to check with local authorities.
Renting offers more flexibility. Rental agreements are more flexible, allowing tenants to move out with relatively short notice. Leases require tenants to stay for the full term unless they are willing to incur penalties, but not in all cases. Note that many times, terminating rental agreements early can subject tenants to certain costs (e.g., loss of deposits) when moving out before the agreement expires.
Legal implications differ. Both renting and leasing agreements are legally binding contracts, but they have different implications for both landlords and tenants. Leases offer more protection for both parties, while rental agreements offer more flexibility.
Pros and Cons of Renting and Leasing
Next, we’re going to provide an easy pro and con list for each kind of contract.
Lease Agreement Pros
- A lease is more stable compared to renting, providing a fixed monthly payment that can’t be easily changed during the term of the lease.
- Leases better protect both parties, offering more concrete terms and without the potential fluctuation in pricing.
Lease Agreement Cons
- Being more stable means leasing is less flexible – once a lease is signed, it’s challenging to make changes without mutual agreement.
- Because housing markets can rapidly change, as we observed during and after the COVID-19 pandemic, landlords may miss out on potential rental increases while lessees can sometimes get locked into contracts with rates higher than the market value.
Rental Agreement Pros
- A key difference between leasing and renting is that a rental agreement offers more flexibility for tenants, technically allowing them to move out with short notice without an official fee for breaking the agreement.
- Landlords can adjust rent prices more frequently to reflect changes in the market, though this can work against renters, should they suddenly be subjected to a higher rental payment than previous months.
- With shorter terms and fewer binding clauses, there is less risk of being locked into a long-term agreement that no longer suits the needs of the landlord or tenant.
Rental Agreement Cons
- Just as rent increases are often favorable for landlords, tenants can find themselves in unsustainable living situations as not all locations in the US offer protection from excessive hikes.
- Landlords may experience more frequent tenant turnover, leading to higher costs associated with finding new tenants – likewise, frequently moving can place high levels of stress on tenants.
Final Thoughts on Renting and Leasing
It’s crucial to carefully consider your needs and preferences before producing or signing any lease or rental agreement. Be sure to understand your goals as a landlord or fully read the terms of the agreement and ask questions if you plan to be an occupant. By understanding the difference between leasing and renting, you can make an informed decision that meets your needs.
Both renting and leasing agreements have their pros and cons – it’s essential to weigh these factors carefully and choose the option that best suits the circumstances. When possible, the landlord and potential occupant should discuss this matter before generating or signing any documents.
