Figuring out the difference between a fixed term and periodic lease agreement and determining the better option for investment properties often leave property owners scratching their heads.
Do you want the comfort of a steady income or the satisfaction of a big sale on your property? Depending on your vision for your investment property, either leasing type might do the trick.
We’ve highlighted the differences between fixed-term and periodic lease agreements here so you can decide what lease type is right for your investment property.
What is a fixed-term lease agreement?
A fixed-term lease has a fixed start and end date.
In the Australian real estate market, fixed-term leases usually go between 6 to 12 months and are agreed upon by the tenants and landlord. When fixed-term leases end, tenants sometimes roll into a month to month periodic leases.
One of the downsides of fixed-term leases is that sometimes they end when it’s hard to find new tenants - think: a flat in Bondi vacated in June might take longer to get tenanted than if it got vacated in November.
If that happens, you’ll still have time to plan ahead. As soon as you find out your tenant doesn’t want to renew the lease or roll into a periodic lease, start looking for tenants.
What is a periodic lease?
A periodic lease has a start date but no definite end date. Periodic leases usually roll over from month to month.
In 2017, 20% of renters had periodic leases - folks who are big on moving around a lot prefer them because of the flexibility they offer.
For tenants wanting more stability, a periodic lease can eventually become a fixed-term lease.
Around a quarter of property owners sell their investment property within a year of buying it. If that’s you, a periodic lease means you can still make a quick buck while you wait to sell your property to the best bidder.
Breaking up: periodic vs fixed term lease
Whether you have a fixed-term or periodic lease, make sure of the notice period required by your state before issuing an eviction notice.
In most cases, notice periods will range between 1-8 weeks.
Let’s get into the deets.
Breaking a fixed-term lease
When fixed-term leases expire, they can be renewed if both the tenant and landlord agree to it.
That being said, can a landlord break a fixed-term lease?
Landlords research this question more than 100 times a month on average.
Yes - landlords can break a fixed term lease if tenants breach the lease agreement or the tenancy act for your state.
Sometimes it’s a simple maintenance issue that is easily resolved. Sometimes, tenants just can’t afford rent anymore.
You may be entitled to penalty fees from tenants so check the tenancy laws in your state. Another precaution is making sure your insurance policy covers you for rent loss.
Ending a periodic lease
Landlords tend to get the shorter end of the stick when it comes to ending periodic leases.
Because periodic are less committal so the end date could be any day, as long as the landlord and tenant inform each other in advance.
The problem is when tenants receive a notice to vacate, tenants can leave the property whenever they want within the vacation period, without providing any notice to the landlord. And they only have to pay you up until the last day they are on the property.
Let’s start with insurance.
Insurance policies favour fixed-term leases because they’re less risky. It is a similar story with financiers of investment property - so periodic agreements might leave you a bit exposed.
Landlords that offer periodic leases usually furnish their properties. Periodic leases are short term so they’re more attractive to tenants when properties are furnished, which sometimes also stops them from breaking the lease.
Laws relating to rent increases also differ slightly by state. In most cases, you’ll only be able to raise the rent once a year for both leasing types, and you’ll have to let tenants know well in advance.
Here’s a list of resources breaking it down by state:
So - Periodic vs fixed term lease - which way to go?
Fixed-term leases make it easier to plan ahead and make financial predictions. They provide stability for tenants who are looking for a long term nest and property investors seeking continual income.
With the expected house price growth of some homes to be up to 15%, you might be hoping to sell your property. Then periodic leases might be the way to go because you can keep your property tenanted without a longer commitment.
With property leasing it really all comes down to what you want for your investment property. If you need assistance getting clear on your financial goals, consider consulting an expert.
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