What length lease should I offer?
As a landlord one of the major decisions you will be required to make is the length of the lease you wish to offer any tenant.
And it’s an important thing to consider. A longer lease lets you set and forget your rental income, and also offers a bit of assurance your tenants won’t up and leave with little notice.
A shorter lease allows flexibility if you have intended plans for the property in the shorter term.
So, let’s enjoy a quick recap of the common lease options and the pro’s and cons of each.
Two main types of leases
In Australia there are two main types of lease arrangements for residential properties: a fixed-term lease or a periodic lease.
Most new tenancies start with a fixed-term lease as it sets the expectations of the responsibilities of both the landlord and the tenant.
Meanwhile, periodic leases tend to be offered to tenants after a fixed-term lease has expired.
A fixed-term lease
As the name suggests, a fixed term lease is one that goes for a set amount of time. In most cases that’s either six or 12 months, but they can be shorter or longer if required.
Within a fixed-term lease, there will be set conditions like the commencement and end date, and the rent that’s expected to be regularly paid during that period.
There will also be obligations that need to be adhered to by both the landlord and the tenant. For example, breaking a fixed term lease requires a lengthy notice period, and the tenant may be required to pay for re-letting and also compensate the landlord for the loss of rent until the end of the tenancy.
Whether you decide to opt for a six-month or 12-month fixed term lease depends on a few factors.
A 12-month fixed-term lease offers the security that for the next year your rental income will be consistent, meanwhile you can relax in the knowledge the property is tenanted.
It also reduces the cost of re-letting fees and re-advertising as you will potentially only have to pay them a maximum of once within a 12-month period.
A 12-month fixed term lease provides stability for the tenant as well, allowing them security of tenure for an entire year.
On the flipside, a 12-month lease reduces your flexibility. As we mentioned before, breaking a fixed term lease comes with additional notice periods.
If you have possible plans for your investment property in the shorter term, a six-month lease could be ideal. It allows you to see how reliable the tenant is, and you can then renew their lease period for another fixed term.
It also gives you greater options when it comes to changing the rent. For example, if the market improves, you can re-let the property after six months at a higher price.
On the downside, a six-month fixed term leases means more administration costs. Even if you choose to re-let the property to the same tenant there are costs involved in the new lease preparation that will be covered under a re-letting fee.
A periodic lease is one with no fixed term, meaning a property is rented week-to-week or month-to-month.
The benefit of this is that the notice periods required to end a rental agreement are shorter, and there’s flexibility when it comes to changing the price of the rent.
As we noted previously, periodic leases tend to be offered only after a fixed-term lease has expired and they’re ideal if there’s
chance you or the tenant might need to end the rental arrangement quickly.
How we can help
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