Lease

A lease is a contract under which a tenant pays rent for the right to use a property for a set term. For an investor it turns projected rent into contracted rent. The rent and term written in the lease are the starting point for the income side of cash on cash return.

A signed 12-month lease at $5,200 makes the first year's gross income more predictable than a vacant unit with an estimated rent. Buyers of occupied rentals should read the existing leases rather than rely on a listing sheet, since below-market leases can hold down cash flow until they expire.

Lease terms also shift costs. Clauses on who pays utilities, lawn care or minor repairs move money between tenant and owner. Turnover between leases brings vacancy, cleaning and leasing fees, which is why longer leases and good renewals usually raise the real cash on cash return.

Further reading: Lease on Wikipedia.