The pros & cons of month-to-month lease agreements
As a landlord, you may find yourself wondering what type of lease agreement should you offer your tenants. Is a shorter-term lease, such as a month-to-month lease, the best fit for you? Or would a longer one, such as a one-year lease, more suitable for you?
To arrive at the right answer, it’s helpful to know the advantages and disadvantages of each option. In this post, we’ll cover the pros and cons of being on a month-to-month lease. Knowing this information will help you make the right decision for you.
What is a month-to-month lease agreement?
A month-to-month lease agreement is a type of lease where your tenant will rent for 30 days and reextend their stay each month. If this arrangement needs to be discontinued, you need to provide your tenant with a minimum of 30 days’ notice.
This notice will state that the lease will no longer be renewed. A month-to-month lease agreement automatically renews each month unless the arrangement is discontinued by the tenant or landlord.
Advantages of a month-to-month lease agreement:
1. Provides a flexible housing period for tenants
Sometimes tenants need temporary housing if they’re waiting on a job relocation or for a new home to finish construction. A month-to-month lease agreement provides them with this flexibility.
As a landlord, this will help you avoid running into the issue of having a tenant break their long-term lease agreement when you’re unprepared to remarket the property.
2. Adjustable rent pricing
As a landlord, a month-to-month lease agreement provides you with the perfect opportunity to adjust your rental price with the market as it fluctuates. You can take advantage of this and increase your opportunities to maximize your returns.
It’s fairly standard that month-to-month leases are subject to the landlord’s discretion. This means that you won’t receive a lot of protest from your tenant when you do change the rent price.
3. Flexible rent policies
Similar to the adjustable rent prices, you’ll also have flexibility in regard to the lease policies. You can quickly adjust these based on your observations of each tenant. For example, you may decide to allow your tenant to have pets after just one-month of accommodation.
You can also make modifications to clauses that don’t apply to month-to-month agreements. These include things like subletting.
4. Rapid tenant replacement
Having a month-to-month lease agreement allows you to filter out tenants who are not ideal for your property. If a tenant’s behavior is unacceptable, then you won’t have to wait long to remove them from your property.
Tenant screening, while thorough, may not always show specific difficulties of particular tenants. However, with a short lease agreement, you won’t get stuck with them for long periods of time. Terminating a relationship with a tenant is much easier.
5. Quicker turnover to a new owner
If you sell your property, it’s much easier for you to ask your tenant to leave in 30 days than to transfer them to the new owner. When you have a fixed, long-term lease, you’ll have to send a notice and transfer the security deposit.
You’ll also have to inform your tenants about the change in ownership and provide the new owner’s contact information. You can skip this complicated process when you have a month-to-month lease agreement.
Disadvantages of a month-to-month lease:
1. Income instability
Since the nature of a month-to-month lease is temporary, it can sometimes result in unstable income. Some months your property will be vacant while others will be occupied. Tenant turnovers are more frequent in this setup and unfortunately, there’s not much you can do to prevent that.
Not having to pay penalties can incentivize renters to leave anytime their situation changes. You cannot control when a tenant decides to move out.
This type of lease makes income earnings unpredictable month to month. When your rental space is vacant, you’ll also be paying for maintenance expenses. So as a landlord, you need to prepare yourself for this kind of scenario and make sure you have the funds set aside.
2. Increased marketing pressure
Once a tenant gives you notice that they’ll be leaving in 30 days, you’ll have to double your efforts to remarket your property. You’ll want to avoid a vacancy to make sure you have consistent income, but you have the risk of not finding a new tenant in time.
You may feel pressure to accept less-than-ideal tenants especially if you don’t have enough money saved to cover the costs. Make sure you have a thorough marketing strategy so that you’ll be prepared if this takes place.
3. Increased tenant screening efforts
Every time a tenant decides to end their month-to-month lease agreement, you’ll have to remarket your property and screen more prospective tenants. This can be a timely process.
Additionally, you may have less time to focus on your other responsibilities if you’re constantly remarketing your property. You may also have to pay more for the costs of marketing.
Determining whether or not to offer your tenants a month-to-month lease agreement is up to you as a landlord. Before making this decision, you need to figure out if you have the flexibility in your schedule to do so.
If frequent tenant turnovers exhaust you and you don’t have the resources to deal with them, a fixed-term lease agreement is probably your better option. The important thing to do is properly evaluate your needs before coming to a decision.
You can also hire a professional property management company, like McCaw Property Management, to handle all of this work for you. Contact us for more information!