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What Is a Sublease Agreement? Easy Guide to Benefits, Risks, and How to Avoid Troubles
2025.06.30
When outsourcing the management of a rental property, there are generally two types of contracts to choose from: a property management contract and a sublease contract. In this article, we’ll explain the characteristics, advantages, and precautions of a sublease agreement in a way that’s easy to understand.
What Is a Sublease Agreement?
A sublease agreement is one of the contractual methods used when entrusting rental property management to a third party. There are two main types of contracts used in such cases: property management contracts and sublease contracts.
A property management contract involves outsourcing tasks such as tenant screening, rent collection, and handling of tenant-related issues to a real estate management company. In this arrangement, the lease contract is made directly between the property owner (landlord) and the tenant, while the management company acts on behalf of the landlord to handle various operations.
On the other hand, a sublease agreement involves the property owner entering into a lease contract with the real estate company, which in turn subleases (re-rents) the property to tenants. This creates two layers of lease agreements: one between the property owner and the real estate company, and another between the real estate company and the tenant. The tenant pays rent to the real estate company, and the real estate company pays a set rent to the property owner. The rent charged to the tenant is typically slightly higher than the rent paid to the property owner, and this difference becomes the real estate company’s profit.
Benefits of a Sublease Agreement: Less Work, No Vacancy Risk
Since the real estate company contracts directly with the tenant under a sublease agreement, the property owner doesn’t have to deal with tenant interactions, even in cases such as equipment malfunctions. Unlike property management contracts, the real estate company takes full responsibility for decisions and actions, reducing the burden on the owner. This can be a particularly effective option for owners who reside overseas or find frequent communication with the management company difficult.
Another advantage is stable rental income. In a sublease arrangement, rent is paid directly by the real estate company to the property owner, regardless of whether the property is occupied. This ensures a consistent income stream. However, it’s important to note that not all sublease plans guarantee rent during vacancy, depending on the company and the terms of the contract. To avoid issues, property owners should carefully review the agreement details in advance.
Drawbacks of a Sublease Agreement
While vacancy risk is mitigated, the downside of a sublease agreement is that the rental income for the owner tends to be lower.
In sublease agreements, the difference between the rent paid by the tenant and the rent received by the owner becomes the profit for the real estate company. Since tenants don’t receive any particular benefit from renting a subleased property, they may choose not to rent if the price is higher than the market rate—resulting in vacancy. In such cases, it is the real estate company—not the property owner—that bears the risk of vacancy.
To minimize this risk, the real estate company usually sets the tenant’s rent at market price while offering a rent guarantee to the owner. In return, the rent paid to the owner is often lower than market rate. In contrast, a property management contract requires the owner to pay the management company a fee—usually around 5–10% of the monthly rent—but the owner retains more of the rental income overall.
Additionally, key money and renewal fees may not be passed on to the owner under many sublease contracts. It is also common for the guaranteed rent to decrease over time due to property aging.
If the property is located in a desirable area with low vacancy risk, opting for a property management contract instead of a sublease agreement may be more beneficial for the owner.
Choosing the Right Management Style
For property owners, managing all rental operations on their own—from advertising and tenant screening to lease renewal—is often too demanding. As a result, most owners choose between property management contracts and sublease agreements, or alternatively decide to sell the property.
Regardless of the chosen option, the key to preventing problems lies in working with a trustworthy real estate company and thoroughly reviewing the contract terms before signing.
This article aims to help property owners better understand sublease agreements so they can make informed decisions that suit their property’s characteristics and their own management needs.
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