The prosperity of your investment property largely depends on choosing the lease agreement that is right for you. While there are many factors to consider when renting out your property, your lease agreement may be the most important. There is often some confusion around whether a fixed agreement or periodic agreement best suits your objectives, so we’ve pared back both options to help you compare the difference and make the right choice. Both options offer pros and cons, and as the property owner, you should carefully consider how they individually affect you.
A fixed-term lease agreement basically means it has a definitive start and end date. However, there are certain non-negotiable factors included in a fixed agreement (the clue is in the name – ‘fixed’, not ‘flexible’). But don’t be fooled by the scary terminology, there are definitely some benefits to this type of contract.
- Because it’s fixed, you have peace of mind that your rental income is secure for the period of the agreement.
- There are no financial surprises or uncertainties with a fixed agreement. This means no more worrying about loss of income, and you can budget for any repairs or renovations ahead.
- To end a fixed-term agreement, a landlord must issue the tenant with a Notice to Leave two months prior to the termination date.
- A tenant cannot leave prior to the end of the fixed term, but they must give 14-days notice if they are ending the agreement.
- Rent increases can be written into the lease agreement, so even though the tenancy term is fixed, the rent price doesn’t have to be.
- A fixed-term agreement means you get to dictate when the lease ends. Therefore, you can align the end date for when the market is hot, giving you and your agent greater control.
A periodic agreement, or month-to-month lease agreement, has no specific end date. There is a little more flexibility in this contract, but the conditions are not necessarily in your favour. These are some of the factors which may (or may not) affect you:
- The tenant can dictate when they wish to end the tenancy. They must still give 14-days notice, but the higher risk of vacancy may leave you high and dry.
- After receiving a Notice to Leave, the tenant can move out at any time. They only need to pay rent until the day they return the keys or vacate the premises (whichever is later).
- The tenant does not need to commit to a period of tenancy other than the period required for the notice.
- Rent price increases are harder to implement due to the continual tenancy. Unless the agency has their finger on the pulse with monitoring all periodic agreements, you may miss opportunities for valuable financial gains.
- The tenant may terminate the agreement at a time when the market is least active, i.e. just before Christmas. It can be harder to replace tenants during slow periods, which means longer vacancy times and loss of income.
- The landlord or agent must provide 90 days Termination Notice if they require vacant possession. However, upon receiving the notice, the tenant can move out anytime they wish without any further notice.
To decide which option is best for you, you should carefully consider your objectives for your investment property. A periodic agreement offers more flexibility, but as the landlord, not all the conditions are beneficial to you. If you’re considering selling or renovating the property in the future, a fixed-term agreement provides greater control and financial security, giving more peace of mind for your investment. And aligning the lease term with peak rental periods is always a smart idea if you don’t require immediate vacant possession of the property. It’s best to discuss your investment plans with your property manager first, as they can help guide you through the decision process and find the lease agreement that’s right for you.