Rental agreements are not the same thing as a lease, although sometimes the terms are used interchangeably. One gives you flexibility; the other is a binding agreement between two parties for a fixed term. You might decide ahead of time that you prefer one over the other. But you'd be better off to keep documents for both on hand and decide when you're investigating prospective tenants which one you want to offer. Landlords do not have to give every tenant a one-year lease. You can offer a lease for three or six months, or use a month-to-month rental agreement instead of a lease.

What's a Rental Agreement?

Think of a rental agreement as a month-to-month (or biweekly) contract between a landlord and tenant. It gives both parties flexibility to make changes or get out of the agreement after giving the other party thirty days' (or two weeks') notice.

Also known as a “periodic contract,” a rental agreement spells out the landlord's and the tenant's duties and obligations. It includes the landlord's rules and expectations and informs the tenant about such things as trash disposal, changing locks, and storage and may include an attachment that has additional provisions and rules for tenants. Both parties should sign and date this attachment, as well as the rental agreement itself.

What's a Lease?

A lease — usually written for one year, although it can be shorter — is a binding legal contract between two parties. As with rental agreements, attachments may also be provided, usually containing additional provisions and general house rules. Again, such an attachment must be signed by both parties to be valid.

During the period of the lease rent is fixed, rules cannot be changed by the landlord, and the only way to get rid of a tenant before the lease expires is by evicting him. Tenants can only be evicted for serious situations, including nonpayment of rent, violations of lease terms, damage to property, or illegal activities. Consult a lawyer if you're not sure whether you have legal grounds to evict a tenant.

Pros and Cons of Rental Agreements

Rental agreements establish a month-to-month (or biweekly) tenancy; tenants can stay in your apartment for as long as neither of you want the relationship terminated. Despite the uncertainty of how long your tenant will live there, the agreement should be in writing because it also sets forth your expectations and rules.

Landlords have much more flexibility with rental agreements than with a lease. They can get rid of problem tenants without going through the hassle of an eviction. They can raise the rent if utility expenses go up dramatically or a variable or balloon mortgage with higher payments kicks in. And they can change rules in the agreement. The only requirement is that the tenant get thirty days' notice before having to vacate or before changed terms go into effect.

The only reason you might not want to use a rental agreement is that it can establish a revolving door. In other words, you might have tenants moving in and, a short time later, moving out. Of course, they, too, are required to give you thirty days' notice that they are leaving. You have to decide whether you want to risk having to prepare for and find suitable tenants over and over again.

Pros and Cons of Leases

Leases may be written for any length of time, but will typically run a year. During that time neither tenants nor landlords have flexibility to change anything written into the document or any attachments to the lease signed by both parties. The lease locks in the length of time a tenant will be residing in the apartment, rules to be followed, and how much rent has to be paid.

Tenants are locked into their responsibilities and obligations. They agreed to stay a year and if they move sooner, they have to continue making rent payments until a new tenant moves in. (Landlords are not allowed to collect double rent.) Tenants can break a lease without being obligated to pay the remaining rent, however, if they go into the military or a nursing home.

However, the downside is that you're also locked into the agreement you made. If your lease allows the tenant to have a dog and you later regret it, you can't do anything about it unless the dog damages your property or creates a noise nuisance. When the year is up, in most states the lease ends automatically. Then you can raise rent, change parts of the lease, or change your tenant.

Benefits of Six-Month Leases

Sometimes landlords issue leases for less than a year. A six-month lease has all the benefits of a lease, but since it expires twice a year, landlords are free to make changes and raise the rent more frequently.

If you expect your expenses to increase dramatically or if rental rates in your area are unstable but on their way up, you might want to give your tenant a short-term lease. Then you can make an adjustment before you issue anyone a new lease. A short-term or six-month lease is also a good idea if you plan to start renovating or remodeling your property in a few months.

If the people who answered your ad seem to be less than the ideal tenants you had hoped to get or if the unit has been vacant for too long and you need the monthly rent payments, you don't want to be locked into the binding one-year contract that is typical for a lease.

If you are thinking of selling your property, this is another case where you may want a short-term lease. If you find a buyer, the new landlord won't have to wait long before the lease expires and he can decide whether to keep the tenant, find a new one, or work on the apartment before putting it up for rent.