Everything You Need To Know About Rental Agreements

Many people only think about short term gains when they first start flipping homes. However, if flipping is done correctly, it has the potential to create a steady stream of income. The key is acquiring rental properties.

To rent or to flip

You should be able to decide which homes you should flip and which homes you should hold. You should also have a decent understanding of the different kinds of rental agreements.

Look at the existing market scenario. If prices are falling and you don't expect them to increase anytime soon, you should sell the property as quickly as you can. On the other hand, if prices are going upward, you should buy the property and hold it.

If you hold the property, you can rent it out while waiting for its value to appreciate. Value appreciation should not be your only marker for profit. If the property has the potential to generate income, it is worth buying. The rental income that the property generates will help you pay insurance premiums and property taxes.

If you are renting out your property, make sure that you have a proper contract in place. Basically three rental agreements exist.

Fixed Term Lease Agreement

This kind of lease agreement doesn't last more than 2 years. If the tenant signs a 2-year lease agreement, they have a legal responsibility to pay rent for 2 years. It doesn't matter whether they live in the house or not. However, if you are terminating the agreement and asking the tenant to leave, the tenant does not have to continue paying the rent. In this case, the tenant has the right to refuse to vacate the property before the term of the lease agreement ends.

Periodic Lease

This is typically a monthly or a weekly contract. You have no obligation to renew the contract at the end of the month and hence this kind of agreement is ideal for investors who want to flip the property whenever they get a good offer.

Tenant At-Will Lease

Since this rental agreement doesn't include any contracts, the tenants can leave anytime they want. You can also evict them without notice. This method isn't recommended because it is possible for the tenant to leave without paying the rent.

Lease Purchase Agreement

When you sign a lease purchase agreement with the tenant, the tenant has an obligation to buy the property after paying the rent for a specified period of time. If the tenant refuses to buy the property, you can drag them in court.

This agreement is quite popular with investors because it eliminates the need to relist the property or find another tenant at the end of the term.

Lease Option

The lease option is more flexible than the lease purchase agreement. In this case, the tenant doesn't have to buy the house at the end of their lease period. However, they need to pay what is called an 'option consideration' fee.

For a home valued at $100,000, the 'option consideration' fee can be around $10,000. The tenant needs to pay this amount upfront. If they plan to buy the home when their lease period ends, you will have to return this money. However, if they don't decide to purchase, you can keep this amount.

Subletting

In this method, you don't buy the property. You rent it from the owner and then sublet it to the tenant. When you sublet, you can charge a higher rent and make a profit.