Tenant Lease Agreements: Straight Leases vs. Graduated Leases
April 7th 2008
Tenant lease agreements are something that most real estate investors have to deal with at some point. After all when it comes to real estate investing, one of the most common means of earning a return on an investment is to rent out a property. This is a simple concept that is quite easy to follow. If your mortgage on the property is $1200 a month and you are renting the property out for $1500 a month, then you are already pocketing $300/month. When you take into consideration that the value of the rented property is appreciating you are really the beneficiary of a good deal. In fact, if you are able to pay off the mortgage and are still collecting rental income then the investment is even more profitable.
But, there needs to be some safeguard in place. You simply can not let someone rent the property and move out whenever they feel like it. Nor can you risk renting to someone without agreeing in writing that they are responsible for any damages to the property. Rentals should never work on a handshake deal. Handshakes don’t hold up in court.
This is why a tenant lease agreement is critical. It spells out not only the agreed upon rental amount, but also clearly details the terms and conditions of the rental agreement. Without a lease there is the potential for various gaps of time when no one is occupying the property and no rental income is generated. Needless to say, this can undermine a real estate investment and is not recommended.
Not all tenant lease agreements, however, are created equal. When it comes to drawing income from a residential or commercial property, it is critical to have the proper lease in place. This will maximize your potential return (through consistent and stable rent) and protect your assets. Remember, you are placing the care of your equity in the hands of a third party. You will want to make sure that all the bases are properly covered. From this you must decide whether to use a straight lease or a graduated lease.
Straight Leases
Most people are familiar with the straight lease. It is the lease agreement most commonly used. A straight lease used a fixed monetary amount for the lease payment over a fixed period of time. A common example would be renting out an apartment for a fixed rate of $600 a month for a 12 month period. A graduated lease, on the other hand, provides a clause where the landlord can raise (or lower) the rent either at will or within the confines of certain specific conditions.
Graduated Leases
Often due to a lack of foresight, real estate investors will sign tenants to a straight lease agreement without thinking of potential problems in the future. Case in point, the local property taxes may be raised unexpectedly and the ability to raise the rent on a lease an extra $50 a month could prove beneficial. With a straight lease agreement this would not be possible and the increased property taxes would have a negative effect on the cash flow of the property.
Opting for a graduated lease agreement vs. a straight lease agreement will be based on a number of factors and conditions. The bottom line, however, is that you need to carefully weigh your options so as to arrive at the right lease agreement for your needs.
A.M. Caro is a freelance writer from Southern California.
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