Pros & Cons of Month-to-Month Rental Agreements vs. 12-Month Leases
Have you ever paused to think about the length of your lease terms? Landlords don’t have to choose traditional 12-month lease agreements for their income properties. Some landlords prefer multi-year lease agreements, and others prefer to go month-to-month from the beginning.
First, a note on nomenclature: in some regions, landlords refer to a “lease agreement” as being 12 months or longer, and a “rental agreement” as being short-term or month-to-month. Call them what you will, it makes no difference legally; a lease can be either monthly or for a ten-year term, and can be called names ranging from rental agreement to tenancy agreement to rental contract.
Flexible for renters. Flexibility is the biggest advantage of choosing a short-term lease agreement. It benefits tenants who don’t want to commit for an entire year. They don’t have to worry about breaking a lease agreement, which can be expensive and difficult. Tenants are still required to give proper notice before moving out. Depending on the state landlord-tenant laws, 30-60 days’ notice is usually required.
Flexible for landlords. Flexibility can also be an advantage for landlords. You may need to rent out a unit for a short period of time and can’t accommodate a tenant for a full year. Or maybe you want the flexibility to have an empty unit when you need one; you can issue a non-renewal notice to your month-to-month tenants at any time (with proper notice of course). And speaking of flexibility, you can raise the rent more often. Once per month, you have the right to make changes, effective after the usual 30 or 60 day period. You may also change other parts of the rental agreement, such as deposit amounts or services offered.
Faster to deal with problem tenants. If you’re not happy with a tenant, you don’t have to wait a full year to ask them to vacate. You can just send them a non-renewal notice, and if they fail to vacate by the end of the 30 to 60 days, then you are within your rights to evict them.
Charge higher rental rates. In most rental markets, landlords can charge renters more for the flexibility of month-to-month rentals. Tenants who only need an apartment for a few months know they need to pay a premium to do so. The higher rents can offset some of the risks and costs of a vacant apartment.
May attract more tenants. Students, for example, may prefer a short-term lease agreement since they may be in the city for four to eight months at a time. Certain employees, such as consultants or temporary workers, may also prefer a monthly agreement as their work contracts are short, sometimes renewed every month or so.
Perfect for vacation homes for rent. If your income property is in an area popular with tourists, a month-to-month rental agreement can be useful. You can get much higher rental rates if your property is fully furnished and used as a vacation property or executive rental.
More turnover. Turnovers are extremely expensive for landlords, between clean-up costs, fresh paint, carpet cleaning or replacement, even mandatory inspections in some jurisdictions. It costs money and time to advertise a unit and perform tenant background checks. It also takes time to prepare new rental agreements and show the unit to potential tenants.
Higher vacancies. With higher tenant turnovers, there’s the potential for more vacancies. Your unit could sit empty for weeks, even months between each short-term tenant. That can represent a high opportunity cost as your unit isn’t making you any money when it’s empty.
More wear and tear. If your unit becomes a revolving door of monthly tenants, you’ll need to deal with higher than normal wear and tear. Moving in an out can cause damage to floors, doors and walls. Tenants that are only staying a few months might not care for the unit as they would if they were staying long-term. You may need to paint more often, and spend more on maintenance than with a year-long tenancy.
Potential for lower quality renters. The kind of tenant attracted to short-term lease agreements is often a temporary, “just passing through” sort, without long-term ambitions or commitments. Some tenants may worry the landlord may send a non-renewal notice at any time, and avoid your rental property in favor of the stability of a long-term lease contract.
Depending on your rental market, it may be better to have established, longer-term tenants, therefore using yearly rental agreements. Or it may be best to go with month-to-month leases for their flexibility and potential for higher rents.
Just remember that you still need to give proper notice to your tenants should you need them to leave, and tenants are still accorded the same basic rights under landlord-tenant laws.