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While a lease and rental agreement may look the same at first glance, leasing a house vs. renting have some significant differences. They would have some aspects in common, but aside from the basics, they are quite different. If you can’t buy a house with a Chapter 13 bankruptcy, you will want to know the differences between leasing a house vs. renting.
The difference between leasing and renting is the time frame involved. Rentals are more suited to short-term occupancy (30 days), and leases are related to longer-term occupancy agreements (12 months). Being aware of them can help you pick the most suitable option for your needs.
Whether you choose a lease or a rental agreement, it’s vital you know the difference between them and how that would affect your liability and rights in terms of rental, term of occupancy, and restrictions applicable and enforceable by the landlord.
What Is The Definition of Leasing a House?
Leasing a house is also known as a residential tenancy agreement. When leasing a house, tenants rent the property from the landlord for a set period of time (usually 12 months). The rental contract or lease specifies how long you can use the home and any rules you must follow. Just like under contract vs. pending differs, so does leasing a house vs. renting.
Standard Terms For Leasing a House
- You may be required to pay bills such as utilities and taxes if they’re not included in your rent price.
- Leases typically allow for free reign of renovations and updates.
- Pets may be allowed, but the tenant may pay fees to those landlords who do allow them.
- You must pay a security deposit before moving in and paying one month’s rent as an “advance payment.”
What Is The Definition Of Renting A House?
Renting is when you take temporary occupancy of a home for a fixed period of time (from night to month). Typically you will be expected to vacate the premises at the end of the rental term. If you do not, there may be consequences such as having your belongings put out on the street and being charged with breaking and entering.
Standard Terms For Renting a House
- Rental agreements usually have more restrictions than leases.
- It’s vital that you know the difference between them and how they affect your liability and rights in terms of rental, term of occupancy, and restrictions applicable and enforceable by the landlord.
- Rent is typically paid month-to-month.
- There are often restrictions on pets, smoking, overnight guests, music levels, etc.
Leasing VS Renting Residential Property – The Commonalities
According to nonpartisan fact tank Pew Research Center, more people are renting now than owning a home at any time within the last 50 years. Both of these are contracts that cover the terms of renting a residential property. While leases cover a longer-term, typically 12 months or more, rentals cover shorter-term periods from month to month.
While they differ in terms of the time frames they cover, there are certain elements they have in common, and those are:
- They provide the rules of property usage about pets, noise levels, and the landlord’s rights to entry.
- They address the costs involved from the rental amount, rental payment date, and the security deposit.
- They stipulate the maintenance responsibilities for both the tenant and the landlord.
- They cover the utility costs and utility services and include items like internet, parking, and security costs.
- They specify the period that the contract is in effect.
- They cover liabilities for property damage.
- They specify terms around disruptive or illegal activities on the property.
These are standard terms and conditions that would apply to any agreement, whether renting or leasing. Now let’s look at the pros and cons of each from both a tenant and landlord perspective and related to residential properties; commercial properties will be addressed later in this discussion.
The Pros And Cons Of Leasing
1. Stability For Both Tenant And Landlord
The typical 12-month term for a lease provides fundamental stability for the tenant and landlord. The tenant would be entitled to stay in the property for the duration of the lease, and is an excellent option for people that don’t want the risk of short-term instability.
For the landlord, the same applies to the income, as the lease guarantees a rental income for its duration and on the specified dates. This is true even for section 8 landlords and tenants. So if you are leasing a property, you can rely on the income due every month/week as per the contract terms.
As a tenant, you need to be sure that you want to stay that long in that property and in that area. If there is uncertainty on this, then perhaps a shorter six-month initial term may be better. Additionally, you can also add an option to renew at the same or slightly higher rental after six months. You also want to make sure that by leasing, you can save money on housing instead of purchasing a house.
The downside of leasing is that it becomes difficult to move suddenly if your circumstances change. So if your company decides to send you to another branch and you have signed a long-term lease, it becomes an issue to pack up and go.
2. The Rent May Not Be Increased For The Lease Duration
For people who need to know exactly what their monthly costs will be on accommodation, the lease is ideal as the lease terms may not be changed unilaterally by the landlord, including the rental amount.
That figure is determined and agreed upon by both parties and comes into effect upon the signature of the lease agreement. This aspect provides another element of stability to both the tenant and the landlord.
The tenant and landlord can make both budgets accurately in terms of rental and revenue, respectively. This removes uncertainty concerning the revenue and rental costs over the lease term.
Conversely, suppose the tenant finds cheaper accommodation in the same area. There are many affordable housing options for cheap living in every city.
In that case, he will lose out on saving money as he is bound to the lease, and should property rates rise in that area, the landlord may lose out on potentially higher revenue from his rental.
3. There Are Consequences For Breach Of Agreement
Because the lease is a legally binding agreement (as is a rental) on both parties, there are ramifications involved should either party breach the terms of the agreement. For example, should the tenant decide that they don’t like the area or need to deal with lifestyle inflation, they may be liable for the balance of the lease rentals unless there is a subletting clause in the agreement.
Subletting means that the tenant could find another tenant to stay in the property for the duration of the lease without incurring penalties like losing their deposit or early cancellation fees.
Similarly, the landlord will be held to account for breach should they decide to cancel or enter the property without a proper process for the lease agreement being followed. The landlord risks losing out on revenue rentals and may fall foul of rental authorities in extreme cases.
The Pros And Cons Of Renting
1. Flexibility In The Short Term
For the tenant who is perhaps only in town for a month or two, rental makes perfect sense. Rental agreements are typically over a month-to-month period, with the rental renewing automatically every thirty days, unless otherwise stated in the rental agreement.
You as the tenant may have just arrived in a new town and need a short-term accommodation solution, then renting till you find a more suitable place is perfect. Rentals are the perfect solution for towns with fluctuating populations, such as college towns as holiday destinations.
The issue with renting is that while it offers flexibility, it also creates instability for both parties as either can simply walk away at the end of the thirty days. Some rental contracts stipulate a required notice period from either party to advise vacation of the property at the end of the current month, and some do not.
If you are the tenant, make sure you are clear regarding the agreement terms, so you don’t have a nasty surprise at month-end and find yourself on the street! For the landlord, this instability with rentals can mean frequent turnovers and potential loss of income should the tenant not renew, and no immediate replacement is forthcoming.
2. No Protection From Rental Increases
With a thirty-day term and unless otherwise stipulated in the rental agreement, the landlord may increase the rent after thirty days with a ‘take it or leave it attitude. This can leave the tenant in a lurch as they may not have expected nor budgeted for the increase.
While this may be good for the landlord, it may not bode well for the tenant, who has to either cough up the extra, start living below their means, or find another place to live. Another cause for this may be an increase in rental or property values in the area, and the landlord can take advantage of that in his property. This is a significant difference of leasing a house vs. renting.
For some protection from this practice, the terms and percentage of the permitted increase should be contained in the rental contract.
As a landlord, frequent turnover could lead to the headache of having quality tenants looking elsewhere as the prospect of unpredictable raises in rentals and accommodation instability would not be appealing.
Landlords would also have to foot the costs of advertising the property, screening potential tenants, and cleaning costs.
Leasing vs. Rental For Commercial Properties
The terms and conditions like the lease period, rental amount, and certain terms and conditions regarding upkeep, maintenance, and utilities may be similar for commercial properties; there are some differences between residential and commercial agreements.
One of the significant differences, especially for large properties such as warehouses or office buildings, is that many landlords would not agree to thirty days as these are usually high-value properties.
However, renting a smaller furnished office space can work on the month-to-month option. Several high-profile property companies like Regus specialize in short-term rentals of furnished, equipped office space. These furnished offices are much smaller and are more like residential properties.
CAM for Commercial Properties
One thing to be aware of for leases on commercial properties is that the tenants are usually responsible for CAM. This term means “common area maintenance,” which is exactly what they sound like.
CAM items for commercial properties include:
- the bills and repairs associated with things in your space (heating, cooling, general upkeep, etc.)
- utility charges (water, sewage, electricity)
- Property taxes (not the same as local property taxes that you pay your government)
- Insurance (this is not typically covered by CAM charges, and renters should ask specifically for what is included here, so they know what to budget for next month)
Landlords tend to pass along CAM costs because it’s not an area they have any control over.
If you are leasing commercial property, be very specific about what is included in CAM. If you are unsure, ask someone specializing in commercial leasing to point out the areas you need to look closely to avoid surprises later on.
The standard CAM fee for most commercial properties is around $.50 per square foot, but this fee will fluctuate depending on the landlord and the property’s location. These CAM items can add up quickly, so be aware of them before you sign a lease.
The All-Inclusive Lease vs. Net Leases
The gross lease or full-service lease is where the monthly rental payment includes other costs like the tenant’s share of the property taxes, insurance, and maintenance costs for the exterior and interior of the building.
This arrangement often has more benefits for the landlord. Still, it also provides a level of cost stability for the tenant. They will have an accurate fixed cost for the property every month, making operational cost predictions easy on the accounting side.
While this may suit some tenants, others may find that the contracted service providers may be more expensive or that the services offered may not be required, or that the provider job quality may be sub-standard.
In this case, the terms of service for the third-party service providers should be included clearly in the lease contract with clauses that address remedies where the tenant feels that good quality services are not being rendered or are not required.
This is where reading the contract and clarifying all the terms would be advisable before signing any agreement.
The Net Or Gross Lease
In this version, only the monthly rental and possibly a portion of the property taxes are paid to the landlord. This is a leasing a house vs. renting difference. The tenant has the right to choose and appoint their service providers for janitorial, maintenance, cleaning, security, and other amenities like internet and catering services.
For the tenant, this can mean paying less per month than if the services were included, and that means less operating expenses for the business while still being able to deduct these costs for tax purposes.
With this type of agreement, make sure that the terms of the monthly rental payments and the separate individual payments to service providers, due dates, amounts, and allocations are clearly defined in the agreement, so there is no risk of dispute or litigation.
Benefits of Net or Gross Leases:
• Save time and money on hiring different service providers
• Get the most out of your property taxes with a net lease
• Lease can provide an opportunity to experiment with different janitors, cleaners, and maintenance teams
Leasing Vs. Renting Fundamentals
Whether you are a tenant or landlord, there are some fundamental strategies to ensure you come out on the right, legal end of any agreement, and the first is due diligence.
1. Due Diligence
Most landlords will vet their prospective tenants by requesting documentation like proof of employment in paystubs and personal references. They may even run background checks for criminal records or credit history. Even cooperative housing will do a background check as well.
This is necessary to ensure that the tenant is legit and can afford the rentals, as litigation to remove tenants can be costly.
Renting from a reputable agency or group will reduce a tenant’s risk of being exploited by unscrupulous landlords. Should your landlord assure that a ‘handshake will do’ or ‘we don’t need a contract,’, you should seek other arrangements.
You have every right as the potential tenant to request verification of the business, references, and other documents or information to ensure that the landlord is legitimate as well. Fortunately, with the available information on the internet, it won’t take long to establish whether the landlord is above board or not.
2. Read The Contract
Before concluding any lease or rental agreement, be sure you have read and understood it properly, even if that means spending some money on a lawyer to advise you. Many tenants have been ripped off without remedy because they didn’t read the contract terms and questioned some more suspicious ones.
Don’t be rushed into signing by any ‘sales talk like ‘this is only available today’ or similar as this inevitably hides some aspect of the agreement that is not favorable for you.
You have every right to walk away should the alarms bells start ringing while either in conversation with the landlord or reading the contract. Remember that most contracts are negotiable provided both parties agree in writing and include those terms as part of the signed agreement. You will have to know where to get free newspapers for packing, however.
3. Be Certain About Your Lease Period And The Area
Make sure you are 100% certain that you will be in this area for at least the duration of the agreement and that you like the area before you move in and before you sign any agreement. There are many moving hacks to save money on your move.
Spend some time in the area and get a feel for the neighborhood and community before you commit to a lease or rental agreement. While the rental does give you the flexibility to move if you find you aren’t happy, rather avoid that inconvenience by taking some time to learn about the neighborhood first.
While there are definite similarities and differences between leasing a house vs. renting, the key to deciding which is most suitable for you will always depend on being clear on your specific requirements as a lessor or lessee.
The duration, terms of the agreements, and the costs involved for both parties are all an integral part of leasing or renting property.
Dotting the “I’s” and crossing the “T’s” before you sign anything is imperative. You can worry about where to get free wooden crates for moving after you sign the contract. If you do your homework correctly as both a tenant and a landlord, you will have what both parties want, which is satisfied with the agreement between you.