What is Subletting?

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Definition:

Subletting is when someone leasing a property rents it out to a third party while keeping their name on the lease and without adding the subtenant’s name.

🤔 Understanding subletting

Subletting is when a tenant in an apartment, condo, or house rents it out to someone else. It most commonly occurs when someone leases a property only to find out mid-lease that they need to move for a new job opportunity or any other scenario that would prevent them from finishing out the term of the lease. Subletting helps people in this sort of situation save money by allowing them to move away without breaking the lease agreement. Subtenants also get the benefit of renting a (typically) furnished home with essential home amenities.

Example

A number of listings on Airbnb are (not necessarily legal) sublets. When you rent an apartment from Airbnb, there is a possibility that you’re not actually renting from the owner. Instead, you’re renting from another renter. When you pay your rent, the current tenant then uses that money to pay back their own rent to the apartment owner — and perhaps make a profit as well.

Takeaway

Subletting is kind of like rent-ception...

It’s a rental agreement within a rental agreement. First, a property owner finds a renter. Then, that renter finds another renter to rent their rental — a real tongue twister. In short, you should remember that a sublease is a rental from another renter — not the property owner, like in a regular lease contract.

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Tell me more…

What is subletting?

Subletting is a type of rental situation in which a tenant, who leases a property directly from the owner or property manager, rents it out, aka sublets it, to a new tenant. Subletting is also referred to as subleasing — The two terms are interchangeable.

When subletting, the original tenant is called the sublessor, and the new tenant is called the sublessee. Sometimes, an explicit sublease agreement is signed, but not always. Sublessors can choose to simply collect monthly rent payments without a contract, but this is riskier for both parties.

A key feature of subletting is that there are two leases in play. First, there is the master lease between the original tenant/sublessor and the property owner. Then, there is a sublease between the sublessor and the sublessee.

The sublessee is never added to the master lease. In fact, the property owner may have no idea that their property is being sublet. Generally, however, subletting requires the landlord’s permission to stay on the right side of the law.

How does subletting work?

In a conventional sublet, a tenant, who has a lease agreement with a property owner, rents out the property to a subtenant. The subtenant usually does not have any interaction with the owner, and never signs a contract with them.

Instead, the sublease agreement is solely between the original tenant and the subtenant. The subtenant is not added to the original tenant’s lease agreement (the master lease).

Sometimes, an explicit sublease agreement or contract is not signed. Sometimes, the agreement may be casual or verbal, but this offers less protection to both parties.

In other cases, such as with sites like Airbnb or Vrbo, booking the property online may be considered a sublease agreement in itself, with terms set out by the hosting company. However, not all Airbnb or Vrbo rentals are sublets — Many homeowners list their properties on the site. That said, there are tenants who rent out their homes (the home they rent) out as well — Those are sublets.

Many lease agreements note whether a tenant is allowed to sublet the property. In many states, a tenant will need to get their landlord’s permission before subleasing the property. In some states, the sublessee must adhere by all rules set out in the master lease, and the sublessor may be held liable for any damage caused by the sublessee.

What are the steps to subletting?

Sublets are similar to rentals in some ways, but there are some differences. For instance, when someone signs a sublet agreement, they’re signing a contract with the current tenant, not the property owner, and they likely don’t have as many protections as those signing directly with landlords. The tenant you sign with will usually have their own contract with the landlord, in which you will not be involved.

Before subletting, the original tenant will need the landlord’s permission. There may be a clause in their current lease agreement that states whether or not they are allowed to sublet.

Some state laws can supersede clauses that forbid subleases, meaning that even if someone signed an agreement saying they can’t sublease, he or she may still be able to — If they’re willing to go to court, at least.

It’s also important to make sure a renter’s insurance policy that covers subtenants can be obtained. If a policy doesn’t cover subtenants, it may be necessary to upgrade to a policy that does.

If all these conditions are upheld, a person could attempt to find renters in several ways. They can either rent to a friend, family member, or another social contact, or list the property on traditional rental websites like Zillow, Hotpads, Craigslist, etc. Alternatively, someone could list their rental on non-traditional rental sites like Airbnb or Vrbo.

In most cases, you’ll want the potential subtenants to fill out an application, and you’ll want to screen them with a background check. However, if you’re renting to someone you know or through Airbnb, you may not need to.

What considerations should be made before subletting?

Whether or not permission is needed to sublet varies depending on the location and current lease agreement. Every lease agreement is different, so if a person negotiates an agreement that states they can sublet, they do not need permission.

Other lease agreements may state that subletting is not allowed under any circumstances (the legal validity of this type of clause varies by state).

In most cases, a person will need to get permission from their landlord before subletting. Depending on the state, the landlord may only be allowed to reject a sublet under certain circumstances. In Alabama, for example, there are no specific laws regarding sublets, but courts have upheld the precedent that landlords cannot refuse subletters on unreasonable grounds.

What are the subleasing laws in the United States?

Subleasing laws vary from state to state. Here are a few examples.

In New York, all tenants in a building with four or more units have the right to sublease their rentals, and the landlord is not allowed to “unreasonably” refuse a sublessee.

Alabama does not have any explicit laws regarding sublets. Instead, subletting disputes are resolved based on court precedent.

Similarly, the Utah Tenant’s Rights Act doesn’t specify whether sublets are allowed or not, so tenants must follow whatever is stated in their lease agreement.

In Alaska, tenants need consent to sublet their rentals, but landlords can only refuse based on specific grounds, such as insufficient credit standing, unwillingness to abide by the master lease terms, or too many people under the age of 18. If the landlord rejects the sublet request for any other reason, the tenant can still sublet the rental.

When does it make sense to sublet an apartment?

There are many circumstances under which a tenant may want to sublet their rental. Usually, tenants sublet properties when they are unable to occupy the property for the full duration of their lease.

For example, imagine a tenant signs a year-long lease for an apartment in Phoenix, Arizona, only to find out three months later that their employer wants to transfer them to the Burlington, Vermont office. If this scenario were to occur, the tenant would have a few options.

First, the tenant could break the lease agreement. Depending on the contract and how understanding the landlord is, they may let the renter off scot-free, or they can try to make the renter liable for all the payments remaining for the duration of the lease. If the landlord is able to find a new tenant before the original tenant’s lease has ended, the original tenant is no longer responsible for making payments. Second, the tenant could keep renting the apartment, leaving it unoccupied most of the time, but using it as a vacation home.

Finally, the tenant could sublet the apartment to another tenant. In this case, they would rent the apartment to a subtenant, who would make monthly rent payments to the original tenant. Then, the original tenant would use those payments to cover some or all of their own rent payments. In other cases, the tenant may choose to sublet an apartment simply because they want to move elsewhere outside of any external pressure. Or, they may want to have two apartments in different cities, move between them every few months, and rent them out whenever they’re not there.

What are the pros and cons of subletting?

Here are some pros of subletting:

  • Move without breaking your lease: Subletting a property lets you move without breaking your lease or paying rent for two properties. When you sublet, the subtenant will cover your rent through their rental payments.
  • Get a housesitter: If you’re planning to be away for an extended period of time, it can be useful to have someone in the property to keep an eye out for urgent repairs and to prevent robberies.

Some of the cons of subletting include:

  • Risk of theft: When you sublet a property, you may leave some of your personal items in the rental. If you sublet it to an untrustworthy subtenant, they could steal your property.
  • Risk of damage: Subtenants can damage the property either by mistake or on purpose. Since you are the original tenant, you will be held responsible for any damage.
  • Late rental payments: If your subtenant is late on rent payments, and you don’t have any extra money on hand to cover it, you can be hit with late payment fees.
  • Hard to remove: If you sublet to an unreliable subtenant who doesn’t pay rent, removing them while you’re not in the local area can be very difficult. If your subtenant signed on as a co-tenant, for example, you may have very little power (if any) to evict them from the property. Even if you are legally your subtenant’s landlord, you’ll still have to file eviction notices and take the proper legal channels, which could be a lengthy process.
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This information is educational, and is not an offer to sell or a solicitation of an offer to buy any security. This information is not a recommendation to buy, hold, or sell an investment or financial product, or take any action. This information is neither individualized nor a research report, and must not serve as the basis for any investment decision. All investments involve risk, including the possible loss of capital. Past performance does not guarantee future results or returns. Before making decisions with legal, tax, or accounting effects, you should consult appropriate professionals. Information is from sources deemed reliable on the date of publication, but Robinhood does not guarantee its accuracy.

Robinhood Financial LLC (member SIPC), is a registered broker dealer. Robinhood Securities, LLC (member SIPC), provides brokerage clearing services. Robinhood Crypto, LLC provides crypto currency trading. All are subsidiaries of Robinhood Markets, Inc. (‘Robinhood’).

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© 2022 Robinhood. All rights reserved.