What Are The Different Types of Rental Leases – and Which Is Best for Me?
Signing a rental lease is a big deal, and it is important that you fully understand the rules and conditions outlined in your lease agreement before entering into a legally binding agreement. One of the most crucial factors your rental lease will outline is the length of the lease agreement. Different types of leases have lengths that range from 30 days to multiple years. The length of the lease term is typically determined by your landlord or property manager, but you do have the right to negotiate on the length of the lease term if your landlord is willing to do so.
What is the most common type of rental lease?
There are generally three different types of rental leases we see in the U.S: month-to-month, annual and multi-year. The type of lease you’re most likely to see as a tenant will vary based on factors like the type of rentals and the renter demographics in your market. For example, in my home state of California, year-long leases were the most likely agreement, but when I relocated to Oregon I quickly noticed that month-to-month leases were much more common.
Annual leases are typically the best option for stability from both a landlord and tenant perspective, but after the global pandemic, we are seeing more and more landlords shift toward month-to-month lease agreements in order to stay on top of any issues they may have with tenants. Multi-year lease agreements are the most scarce in the residential rental space and are much more commonly seen in the commercial rental market.
What is a month-to-month lease?
A month-to-month lease agreement is just as it sounds – the terms and conditions of the tenancy agreement are outlined for one month, giving both parties the ability to terminate the lease agreement within an approximate month-long timeframe. While most month-to-month lease agreements will automatically renew at the end of each month, the lease will list requirements for situations where a tenant wants to move out or a landlord wants a tenant to vacate the property. The amount of notice required to change the terms or end tenancy in a month-to-month lease situation is dictated by state and local laws, but will generally range from 30-60 days.
Pros and cons
● Pro: flexibility. The biggest plus to a month-to-month lease agreement is the flexibility to change lease terms or move. If you’re looking for a short-term living arrangement or trying out a new location, the ability to move without breaking your lease is much easier than if you’re involved in an annual or multi-year lease agreement. It can also be easier to negotiate lease terms from month to month for items like pet policies or maintenance requirements.
● Con: lack of stability. While a month-to-month tenancy means you can move at any time, it also means that your landlord can ask you to vacate the premises at any time (with proper notice). You could find yourself in a less than ideal situation if your landlord ends your tenancy and you haven’t been able to plan ahead.
● Con: potential for rent increases. Month-to-month renters often feel the biggest impact from rent increases. Because you are technically entering into a new lease agreement each month, your landlord does have the ability to implement a rent increase at any time. State laws will specify how much notice landlords are required to give tenants before implementing a rent increase on a month-to-month lease, but few state laws limit the number of times or amount of rent increases in a given year.
What is an annual lease?
An annual lease, or a fixed-term lease, has a designated start and end date. Fixed-term lease agreements generally range from six months to one year, and at the end of the term the tenant will either move out or the lease will transition to a month-to-month agreement. Your lease agreement should provide specific details on what will happen at the end of the one-year agreement. Some landlords will offer a renewal option at the end of the lease term, which can often be accompanied by a rent increase.
Pros and cons
● Pro: guaranteed occupancy. In an annual lease agreement, you are not at risk of lease terms or rental rates changing for the entire duration of the lease. Your landlord typically cannot institute new rules, fees or conditions unless both parties mutually agree to an addendum. As long as both parties uphold the terms and conditions of the lease agreement and follow local landlord-tenant laws, you’re guaranteed tenancy for the entirety of the annual agreement.
● Con: can’t move if your situation changes. If your job changes or you go through another unexpected life change like a family or medical emergency, you’ll likely have to pay a fee to break your lease agreement before the annual agreement is up. This also means you’re stuck with your living situation despite circumstances like bad neighbors or roommates.
What is a multi-year lease?
A multi-year lease is another version of a fixed-term lease agreement, the agreed-upon term is just longer than one year. Finding housing with a reliable, honest landlord or management company can be difficult – especially in a competitive rental market. Multi-year leases certainly allow you to avoid starting the search process over each year, but you need to seriously consider all of the factors of the living situation and whether or not you are willing to commit for multiple years.
Pros and cons
● Pro: security. If you’re not planning to make any major life changes in the next few years, a multi-year lease can be an excellent option to ensure your housing, expenses and landlord will all be fixed for the foreseeable future. Regardless of the economy, inflation or other factors, you have the guarantee that your rent won’t increase for the duration of your agreement. (Unless an automatic annual increase is written into your agreement, in which case, you will have the security of knowing exactly how much you will be spending in the future.)
● Con: you’re locked in. A multi-year lease means limited flexibility, should the need arise. A bad landlord, an inconsiderate neighbor or an exciting job opportunity in a new town won’t leave you with much room for flexibility. Do your due diligence and ask all of the important questions upfront to be sure you want to continue to live in the same place and rent from the same person for multiple years.
What is the best type of rental lease?
The best type of rental lease for you will depend on your location, lifestyle, financial situation and goals for the future. Consider the pros and cons of each different type of rental lease and decide which one will work best for your unique set of circumstances. Of course, the type of lease agreement will ultimately be decided by your landlord.
Month-to-month, annual and multi-year lease agreements all have their pros and cons for both landlords and tenants. As a tenant, you always have the option to negotiate on lease terms with your landlord. If you and your landlord have a good relationship, you might consider suggesting a longer lease term so both parties will know what to expect moving forward.