Lease agreement vs. rental agreement: which should you use for your property?

People often use the terms "lease agreement" and "rental agreement" interchangeably, but significant differences exist. If you own real estate and are thinking about renting out your property, it's important to know the differences so you can choose the type of contract that works best for you as a landlord.

The lease agreement

A lease agreement is a contract for the rental of property over a fixed timeframe. Lease agreements typically cover 12 months, although the rental period is negotiable.

In commercial situations, for example, companies might negotiate a five- or 10-year term. Or a residential tenant might want a longer-term lease if they feel confident they'll want to stay in the property for two or more years.

The reason a tenant — commercial or residential — might want to lock in a lease for more than a year is because all other terms of the lease are fixed during the rental period. In other words, the landlord cannot change any terms, including the amount of rent, for the duration of the lease. However, signing a longer-term lease might be beneficial to you as landlord because it provides greater stability — especially if you own property in an area where it's difficult to find tenants.

Your tenant can't end the lease earlier without your consent. If they do, they'll be in breach of contract. When the rental period ends, so does the agreement itself and, if both you and the tenant wish to continue the rental arrangement, you'll need to enter into a new lease agreement.

The rental agreement

Unlike a lease agreement, a rental agreement is more suitable for short-term rental situations. The typical period covered by a rental agreement is 30 days — although in some situations an even shorter period might be used, such as weekly or even daily.

The key benefit of a rental agreement for landlords is flexibility to increase the amount collected, since the terms are fixed only for the duration of the rental period. However, you will still need to give the tenant notice of your intention to increase the rent. Generally, 30 days' notice is required, but some states require longer notice, such as 60 days, so always check state laws for actual requirements.

If you use a rental agreement, you'll be selecting from tenants who want the flexibility of a short-term rental arrangement. For example, a person moving to your area to take a short-term job is probably more likely to sign a rental agreement than a lease agreement. If you live in an area near a college, you might also find that the college's students prefer the flexibility of a rental agreement as well.

Rental agreements renew automatically at the end of the rental term but are easy to get out of because the duration is so short. The main requirement is that the party wishing to end the agreement must give notice of this intent.

Choosing between a lease agreement and a rental agreement

As a prospective landlord, the choice between a lease agreement and a rental agreement depends largely on your particular situation. For example, if your property is in an area where rents fluctuate seasonally, a rental agreement might be more beneficial because you'll have the flexibility to adjust rent on a month-by-month basis.

If, however, your goal is income security, a lease agreement might be preferable, as it locks in your tenant (and therefore your monthly rental income) for a longer term. Whether it's to avoid going through the tenant selection process too frequently or to help ensure your monthly income goals, the lease agreement might be more advantageous.

As a landlord, it's important to know the differences between the lease agreement and the rental agreement so you can pick the type that works best for your goals and needs.