Lease Length: Residential and Commercial Pros and Cons

How long should you sign a rental lease for? The length of your lease impacts your living situation, business operations, and future plans. Weigh the advantages and disadvantages of different lease lengths to choose what works best for your unique circumstances.

By
Nichole Stohler
|
Last Updated
April 3, 2024
Lease Length: Residential and Commercial Pros and Cons

Imagine having the security and predictability of a longer lease. Sounds great, right? But what if your life or business takes an unexpected turn before the lease is up? That's where the flexibility of a shorter lease agreement comes in handy. The trick is to find that sweet spot between stability and adaptability. A lease that's just right for you will give you the peace of mind you need while still allowing you to roll with the punches if necessary.

Throughout this article, we'll break down how various lease lengths can impact your unique situation. By the time you're finished reading, you'll have a solid grasp on how to choose a lease that aligns perfectly with your goals and circumstances. If you are looking for a place to call home or aiming to maximize your investment returns, understanding lease lengths is a key piece of the puzzle.

What is a lease term?

A lease term is the length of time a tenant agrees to rent a property from a landlord. Lease terms in both residential and commercial properties can be short, like month-to-month, or long-term, multi-year commitments.

What's the usual length of a lease term?

The lease length can differ based on your location, property type, needs, and the current state of the market. Residential leases are shorter, typically around 6 months to a year. Commercial leases, depending on various factors, can range from 3 years to 10 or more.

What is a short-term lease?

A short-term lease is a rental agreement that lasts for less than one year. In the residential space, it's good option for people who are moving temporarily for work or study. It's also suitable for those who want to try out living in a new area before committing long-term.

For commercial leases, shorter terms may be suitable for businesses that are testing a new market or location. They may also be a good fit for companies that need a temporary space while their permanent location is under construction or renovation.

Short-term leases fall into one of two categories:

  1. Month-to-month lease: This option allows the tenant and the property owner to end the lease agreement with a 30-day notice. If you're not sure how long you'll stay and want the freedom to leave on short notice or extend your lease, this is a great choice.
  2. Three to six-month lease: This lease requires longer term commitment than month-to-month leases. It sets a specific timeframe, which is usually three to six months. It's suitable for renters with clearer short-term plans.

Pros of short-term leases

Short-term leases give tenants and landlords numerous flexibility and benefits, such as:

  • Higher potential for earnings: Short-term leases have the potential to increase landlord revenue, as people looking for temporary places to stay are usually willing to pay a premium for flexibility and convenience. Leveraging this demand can help landlords maximize their rental income in a shorter amount of time.
  • Frequent tenant turnover: Some landlords might not like tenant turnover, but others see it as an advantage. Shorter leases allow landlords to frequently replace tenants and adjust rental prices. This strategy is useful in high-demand areas or markets that change quickly, helping landlords stay competitive with the ability to easily increase rents.
  • Quick move-in: For tenants who need space quickly, a short-term lease can help you get into a rental unit sooner, as properties with short-term leases are typically move-in ready.

Cons of short-term leases

While short-term leases have advantages, they also have drawbacks for both the tenant and landlord, such as:

  • Fluctuating demand: One of the challenges of short-term rentals is the potential for changes in demand. Most landlords can make more money during peak seasons, but during off-peak periods, they might have vacancies, which can impact their overall rental income.
  • Tenant screening: In the residential space, shorter leases mean the landlord needs to conduct tenant screenings often. This is a time cost to check each new tenant's background, credit, and rental history. If a landlord fails to screen tenants properly, they might end up with tenants who cause problems, damage property, or don't pay rent.
  • More maintenance costs: Maintenance costs are higher. Every time a new tenant moves in, the property needs cleaning, repairs, and preparation for occupancy. This can include repainting, replacing carpets, and addressing wear and tear issues. These costs can add up quickly and cancel out the extra income from higher rent.
  • Higher furniture costs: If the rental unit comes with furniture, short-term rentals might be pricier to maintain. This is because the furniture gets worn out quicker with many different tenants. You may need to regularly fix or replace items to make sure the property stays nice for new tenants.
  • Fewer concessions for commercial tenants: You won't receive any special concessions with a short-term lease, like free rent or reserved parking.

What is a long-term lease?

Residential long-term leases are typically one year, while a long-term commercial lease can be 5 to 10 years.

Long-term leases for residential properties are suitable for tenants who want to establish roots in a community and have a steady living situation. They're also a good choice for those who need a place to call home for an extended period without the commitment of purchasing a property.

In the commercial space, these leases are good for business tenants who need interior or exterior modifications to the rental unit to suit their business's needs. Long-term leases are also beneficial for businesses that prefer stable rent costs over the duration of their lease to better forecast and manage their finances.

Pros of long-term leases

Long-term standard leases offer benefits, such as:

  • Steady income flow: Long-term leases give a landlord rental income at a regular rate. This makes it easier to plan and budget finances.
  • Reduce the vacancy risk: A long-term contract reduces the chance of the property being empty.
  • Lower maintenance costs: When tenants stay for a long time, they tend to take better care of the property, because they feel like it's their own. They're more likely to report problems early, which means landlords can fix them before they escalate and become costly repairs. This saves landlords money on maintenance in the long run.
  • Stability for commercial tenants: Long-term leases provide businesses with a stable location to establish their presence and grow their customer base. This stability can be helpful for the success of the business.

Cons of long-term leases

There are some disadvantages of long leases, such as:

  • Lower rent prices: Long-term leases can mean lower rental rates than short-term rentals. Landlords might have to charge less in exchange for tenants to commit long-term, which could affect overall rental profitability.
  • Tenant turnover: While having tenants stay for a long time is usually good, it can be a problem for landlords who often want to change rent prices. With long-term leases, landlords can't change the rent until the lease expires, even if the market changes. This means they might miss out on making more money when the demand for rentals increases or the property becomes more valuable.
  • Lack of flexibility for commercial tenants: Long-term leases can be restrictive for businesses that may need to adapt quickly to changing market conditions or to a failing business.

Finding the right length of lease

When it comes to choosing a lease length, it's all about figuring out what works best for your unique situation. If you're the type of person who values flexibility and wants the ability to adapt to life's changes, a shorter lease term might be the way to go. If stability is your top priority and you'd rather avoid the hassle of moving frequently, a longer commitment could be the perfect fit.

The best lease duration is one that aligns with your specific circumstances and goals. By taking the time to consider your needs and preferences, you can make renting a positive and fulfilling experience that works for you. Remember, there's no one-size-fits-all answer — it's all about finding the lease length that feels right for you and your unique situation.

Lease length options FAQs

Can you break a lease term?

A lease is a legally binding contract, so you can't just break a lease term before the agreed-upon time unless your reason is valid. Usually, you'll have to pay a penalty or fee, like a few months' rent or losing your security deposit, if you break a lease early.

Is leasing the same as renting?

Yes, leasing and renting mean the same thing. You pay money to use something you don't own for a certain amount of time. The main difference is that leases typically last for a longer period compared to renting agreements.

Important Note: This post is for informational and educational purposes only. It should not be taken as legal, accounting, or tax advice, nor should it be used as a substitute for such services. Always consult your own legal, accounting, or tax counsel before taking any action based on this information.

Nichole Stohler

Nichole co-founded Gateway Private Equity Group, with a history of investments in single-family and multi-family properties, and now a specialization in hotel real estate investments. She is also the creator of NicsGuide.com, a blog dedicated to real estate investing.

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