By default, most landlords consider offering only fixed term leases. Fixed term leases are the most common type of lease, providing stability and predictability to both the landlord and the tenant. Typically covering a period of one or two years, these lease agreements form the backbone of the rental property world.
But there’s another option available to you: the month-to-month lease. How exactly do these leases work and should you consider using one in your rental property?
What Is a Month-to-Month Lease?
As the name suggests, a month-to-month lease allows you to maintain the lease agreement on a month-to-month basis, rather than adhering to certain terms. For as long as the tenant continues paying rent and abiding by the rules outlined in the lease agreement, they have a right to continue occupying the property. They can terminate the lease at any time, provided they give you advance notice, and likewise, you can terminate the lease at any time.
Month to month leases work differently in different areas. Some states and some municipal areas have specific guidelines for how month to month leases work and what you can and can’t do with them; for example, there’s likely a law that stipulates a minimum advance notice you must provide your tenant before forcing them to leave.
Because these laws vary, month to month leases function somewhat differently from area to area. But broadly speaking, there are some significant advantages and disadvantages you’ll need to consider.
Advantages of a Month-to-Month Lease
Let’s start by looking at the biggest advantages of a month-to-month lease:
- Appeal to many tenants. For starters, offering a month-to-month lease increases the number of people who might be interested in your property. Not everyone is ready to make a yearlong commitment to their new residence. Not everyone is ready to enter into a long-term, legally binding agreement. By offering a more flexible lease, you can increase the number of interested tenants in your property and ultimately fill your vacancy faster.
- Automatic renewals. Unlike fixed term leases, month to month leases renew automatically by default. You’ll never have to hit your tenant with a new round of paperwork; instead, everything will continue by default. It makes the active management of your rental property somewhat easier.
- Flexible termination dates. Another advantage of month-to-month leases is the availability of flexible termination dates. Fixed term leases usually end on a specified date, making that the fixed end point for the arrangement. This can be limiting for both landlords and tenants, so having a more flexible opportunity to end the lease agreement can work out in your favor.
- Potential to increase rent prices. When you sign a fixed term lease agreement, you’re essentially setting your rent in stone for the duration of the agreement. You won’t be able to increase rent during this time, since the rate is locked into place. But with a month-to-month lease, you have the potential to increase rent, provided you give enough advance notice.
- Landlord termination options. As the landlord of a month-to-month lease agreement, you have the option to terminate the agreement at your discretion, again, provided you give enough advance notice. If you want to sell the property or if you want to remove the tenant without cost, this can be a great option.
- Improved tenant retention. A month-to-month lease is also at the power to boost your tenant retention, at least slightly. Instead of being forced to make a yearlong commitment to continue a lease agreement at its termination date, tenants have the option of occupying the property longer, until they’re fully ready to move. Assuming you can find good tenants, who pay their rent on time, this can add up to be a massive advantage.
Disadvantages of a Month-to-Month Lease
However, there are also some disadvantages you’ll need to think about:
- Appeal to certain types of tenants. Unfortunately, month to month leases have a tendency to appeal to certain types of tenants, many of whom are not advantageous for your rental property strategy. Tenants with inconsistent income and those who are highly uncertain of their future may be more interested in this type of lease, meaning you may not be able to generate rental income as consistently.
- Less reliability and stability. Month to month leases is inherently less reliable and less stable than their fixed term counterparts. Because the tenant can terminate the lease at any time, you might be left in a difficult position.
- Shorter notice for move outs. With a fixed term lease, you know what to expect. If the tenant is planning on moving out, they can let you know well in advance. But with month-to-month leases, you might have much shorter notice for move outs.
- More difficult transitions. Transitions between tenants can also be more difficult if you have month to month leases in place. You may have to scramble to recover from an unexpectedly departing tenant.
- Potential vacancy issues. In line with this, you might have to deal with more unexpected vacancies, which can eat into your rental income and profitability.
Should you adopt a month-to-month lease for your tenants? For some landlords, this is a massive advantage; it gives them more appeal, more flexibility, and potentially more profitability. For others, it’s simply too much of a risk to tolerate.
Making these types of decisions as a landlord is tough, which is why so many landlords turn to the help of a property management company. Your property management partners will help you with every step of the process, from generating new lease agreements and finding tenants to evicting problematic tenants when you start losing money because of them.
If you’re interested in learning more about property management, or if you need help getting set up with your first rental property, contact us today!