Defining the term rent seems, on the surface, like an unnecessary exercise. Nearly everyone has rented something at some point in their lives. However, in the context of real estate, it’s important from a legal and financial perspective to have explicit definitions, even for the most rudimentary terms.

Online rentals became a popular living situation in the wake of the Great Recession. It provides flexibility, and a way to avoid the responsibilities of homeownership, like taxes and maintenance.

In this comprehensive guide, we’re taking a deep dive into the definition of rent. You’ll find out about how real estate laws apply to rental properties, and the intricacies of charging and collecting rent. We’ll also explore the responsibilities of the tenant and of the landlord in a rental agreement.

TL;DR

Rent is the fixed periodical payment a tenant makes to a landlord in exchange for having exclusive access to and use of a home. Economic rent is the amount of income a landlord makes from a rental property after paying the costs of ownership.

Landlords may charge any amount the market is willing to bear for rent, except in cities or states with rent control laws, which limit the amount landlords can charge for rent and how much they can increase rent.

Landlords are typically responsible for costs like property management fees, taxes, and property maintenance. Tenants usually pay utility bills, as well as renter’s insurance and penalties like late fees.

A rental agreement is a contract specifying the terms of a lease, including the amount of rent, payment method and due date. Other terms of a rental agreement include deposits, terms of property usage, and the duration of the lease.

What Is Rent? The Dictionary Definition

Merriam-Webster defines rent as “a usually fixed periodical return made by a tenant or occupant of property to the owner for the possession and use thereof.” In other words, rent is an agreed-upon regular payment that a tenant makes to the landlord to live in a home. The term comes from the Middle English “rente” for “payment.”

There are several key phrase components to this definition, so let’s break them down for extra clarity:

  • Fixed: The rent payment is a set amount that the tenant and landlord agree to in the lease agreement. However, with lease renewals, landlords can adjust rent in accordance with the cost of operating the property.
  • Periodical: Rent payments are periodic payments made in regular intervals, usually monthly, but sometimes weekly or bimonthly.
  • Return: The purpose of charging rent is to cover the costs of owning the property, like mortgage payments and taxes, plus a capital return on the investment in the asset. As with any investment, rental properties are subject to risk.
  • Tenant or occupant: This is an important distinction, and there is a difference. While tenants can be occupants, an occupant isn’t necessarily a tenant. The tenant is the person whose name is on the lease agreement, while an occupant is anyone who lives in the building.
  • Owner: The tenant may either pay the property owner (landlord) directly, or the property manager, who then processes the payment and transfers the landlord’s portion to them.
  • Possession and use: Although the tenant doesn’t own the property, it is still their home and mailing address, and they have the right to exclusive use of the premises.

For the purposes of property management, this is a good starting point for defining rent. However, even within the context of real estate, the term can have other meanings.

What Is Economic Rent?

Although related to the idea of rent, as in a tenant renting a house or apartment, “economic rent” has a distinct meaning. Let’s refer back to our friends at Merriam-Webster to define economic rent:

“The return for the use of a factor in excess of the minimum required to bring forth its service.”

So what does this definition mean? In essence, economic rent is the net profit a landlord makes when they rent out their property. Thus, we can define “rent” as the total payment the landlord collects from the tenant, and “economic rent” as the amount of the payment that exceeds how much it costs to own and operate the property. Here’s a basic example:

  • A tenant rents a home from the owner
  • Their monthly payments for rent are $1500
  • The owner’s monthly expenses for the home (e.g. mortgage, insurance, maintenance) total $1000
  • $1500 rent paid - $1000 costs = $500 income
  • In this situation, the rent is $1500 and the economic rent is $500

Another term associated with rent is “differential rent,” which arises due to differences in fertility and location of cultivated land.

How Much Rent Is It Legal to Charge?

Now that we have a textbook definition of rent, let’s dive deeper into some more practical aspects. As a landlord, your rental properties are investments, so it makes sense that your primary concern is maximising revenue production. It then follows that one of the biggest questions around rent is how much landlords can charge.

In most states, there aren’t actually many laws regulating how much landlords can charge. Most rental property regulations exist to protect the rights of tenants, like the right to a safe living space.

Laws that set legal limits on rent and rent increases are called rent control or rent stabilization. In the absence of rent control, landlords are more or less free to charge as much rent as the market will bear. Rental homes have a fixed supply, so price increases in accordance with demand.

Rent Control Laws

In states or cities that have rent control laws, the government dictates the maximum amount landlords can charge for rent. These laws may also establish limits on rent increase amount and frequency. For example, in Oregon, landlords may only increase rent once a year and no more than 7% plus consumer price index.

The only states with statewide rent control are California and Oregon. States that have rent control in certain cities are:

  • Maine
  • Maryland
  • Minnesota
  • New Jersey
  • New York

Most states ban all cities from establishing local rent control laws. Others don’t prohibit rent control, but also have no cities that have enacted it.

Setting Rental Prices

Without rent control laws, landlords set their own rental prices. Some of the factors that influence the appropriate amount to charge include:

  • Real property value: As a general rule, most landlords should aim to charge at least 1% of the property’s total value, including the home itself and the cultivated land, for rent.
  • Cost of ownership: Add up all the costs associated with owning the property, and then determine how much revenue you want to earn from renting it out. Adding these numbers together gives you a good idea of how much to charge.
  • Price of similar rentals in the area: If you aren’t sure, compare your property to other properties nearby with the same number of rooms to see what those are renting for.
  • Location and other natural resources: Consider how close the home is to things like schools, interstates, shopping, and public transit. Homes in a desirable area command higher prices.

How Do Landlords Collect Rent?

Once you set your rent pricing and approve a tenant, you need a reliable method for rent collection. Historically, traditional payment methods like cash and checks were common. While some landlords still use these traditional methods, most tenants use rent collection apps or other digital methods for paying rent.

Rent Collection Methods

Here’s an overview of the most common methods of rent collection:

  • Online portals: Setting up an online payment portal provides a secure, automated payment method that tenants can set to autopay.
  • ACH/direct deposit: ACH transfers use the tenant’s banking information to send funds directly to the landlord’s bank account.
  • Debit/credit cards: A secure digital payment method, but usually charge the tenant an additional processing fee.
  • Mobile payment apps: Some landlords prefer the convenience of apps like Venmo and Zelle, but they also have fees for instant withdrawals and require additional recordkeeping.
  • Checks: Paper checks are generally secure, but present the risk of bouncing from insufficient funds and take several business days to clear.
  • Money orders: A money order can’t bounce since the tenant pays directly for it, but they’re difficult to replace if they get lost.
  • Cash: Tenants without a bank account may prefer cash payments. While the funds from cash are immediately available, it can cause security concerns, and landlords need to issue receipts for money paid in cash to avoid legal disputes.

The best rent collection method depends on your arrangement with your tenant, the terms of your rental agreement, and your personal preference. That said, most landlords prefer online payment methods, since they’re secure, traceable, and automatic, which helps build good rent payment habits.

What Costs Are the Landlord and Tenant Responsible For?

In all rental agreements, the tenant pays rent to the property owner or the property manager. However, there are other costs associated with a rental property. Some of these are always the responsibility of one party or the other. However, sometimes the responsibility varies based on the lease agreement or specific situations.

Landlord Cost Responsibilities

Costs the landlord are almost always responsible for include:

  • Mortgage payments: The mortgage is usually the biggest cost associated with owning a home.
  • Maintenance and repairs: The landlord is responsible for repairs and maintenance that fall under normal wear and tear, like HVAC and plumbing repairs.
  • Property taxes: Taxes are another normal expense that comes with owning a home.
  • Property management fees: Landlords pay a fee to property management companies in exchange for handling the normal operations of a rental home.
  • Legal fees: Landlords have to pay legal fees for services like compliance inspections, writing up lease agreements, and evictions.

Tenant Cost Responsibilities

In addition to the rent payment, tenants are typically responsible for:

  • Utilities: In most rental homes, tenants pay for utilities like water, electricity, and internet.
  • Repairs for damages: While landlords are responsible for regular home maintenance, the lease usually specifies that tenants must pay to repair damages they cause.
  • Renter’s insurance: Many lease agreements require tenants to carry renter’s insurance.
  • Basic maintenance: Tenants handle daily maintenance like light bulb changes and cleaning.
  • Rental fees: Fees like security deposits, pet rent, and cleaning fees on moveout are the responsibility of the tenant.

When Cost Responsibility Depends On the Lease Terms

In some situations, the lease agreement may specify that the tenant or landlord is responsible for certain expenses. These varying costs include:

  • Specific utilities: Some landlords include certain utility costs in the rent and pay it themselves.
  • Landscaping: Some leases require the tenant to handle landscaping tasks like mowing the lawn or shoveling snow, while others require the landlord to cover these costs.
  • HOA fees: Rental homes in an HOA neighborhood have varying terms in the lease for who pays HOA fees.
  • Parking costs: While a rural home may have ample space for a vehicle, city apartments may require the tenant to rent a parking space for their car, which the landlord may or may not include in the rent.

How do Taxes Work for Rental Properties?

When you buy an investment property, it comes with the unfortunate responsibility of taxes. Landlords pay property taxes on their rental properties just the same as homeowners who live in their home.

In addition to property taxes, the IRS requires landlords to report all their rental income on their tax return. Rental income is included in your gross income. Any deposits you collect from tenants also count as income for the year they were collected, even those for the last month’s rent. Landlords should keep a rent roll to track income information for each property.

As with other income tax situations, landlords can claim certain deductions on rental income, such as:

  • Mortgage interest
  • Property taxes
  • Repairs and associated materials/supplies
  • Depreciation

What’s Included in a Rental Agreement?

When you draft a lease agreement, you need to include clauses for every situation to make sure you’re covered legally, and the responsibilities of both landlord and tenant are clear. Here are the major sections every rental agreement should include:

Term Length

This is how long the lease lasts, as well as the start and expiration dates. Most lease terms last for a year, but may be shorter or longer depending on the situation. Keep in mind that most states prohibit increasing rent during a lease term.

Rent Payments

For each lease term, the agreement needs to explicitly state how much the tenant must pay for rent. The lease should also specify the names of the tenant and landlord. A rental agreement typically refers to each party as “Tenant” and “Landlord” thereafter.

Payment Schedule

In addition to the rent amount, the agreement should clarify when and at what interval rental payments are due. For most fixed-term leases, rent is due on the first day of the month. This section should also specify at what point rent is considered officially late and subject to penalties, such as four days after the due date.

Payment Method

To avoid confusion and inconsistency, rental agreements should also specify what payment methods are acceptable for tenants to use. This could be one specific method, or a list of approved methods the landlord will accept.

Deposit and Fees

The agreement needs to lay out additional fees like late fees and check return fees, as well as security deposits. Other fees might include a cleaning fee if the property is in unacceptable condition when the tenant moves out.

Property Usage

Most lease agreements specify how the tenant is allowed to make temporary use of their personal property. This might prohibit modifications like painting or gardening, and allow the use of a garage or equipment on the premises. It could also lay out which utilities the landlord is responsible for, if any.

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FAQs

What is the legal definition of rent?

Rent is defined in the dictionary as “a usually fixed periodical return made by a tenant or occupant of property to the owner for the possession and use thereof.” For most legal purposes, this is an appropriate definition.

What is economic rent?

Economic rent is the amount of income a landlord makes from a rent payment beyond what is required to cover the costs of owning the rental property.

Does rent include utilities?

Rent generally doesn’t include utility bills unless specified by the lease agreement.

How much rent can a landlord charge?

In the majority of states without rent control laws, there isn’t a legal limit on how much landlords can charge for rent. Thus, landlords are allowed to set rental prices as high as they like. However, rent prices are naturally limited to what renters are willing to pay, which varies based on the home type and surrounding area.

How do landlords collect rent payments?

Most landlords use some form of digital fund transfer to collect rent. This includes online payment portals, ACH transfers, and mobile transfer apps. However, some renters pay with checks, money orders, or even cash.