Why Annual/Term Leases Win Out Over Month-to-Month (Almost) Every Time

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We’ve always been a proponent of term leases, so our viewpoint might be a bit biased, but hear us out.

Over the years we’ve met many landlords that are adamant about month-to-month (MTM) leases and believe they are the way to go. We’ve also taken over the management of many properties where the DIY owner had set their tenants up with MTM leases. So we’re definitely familiar with this style of renting.

The Case For MTM Leases

The consistent argument for using MTM leases that we hear over and over again is that they make it easier to get rid of a tenant. They don’t lock owners into a specific time period forcing you to have to put up with a less than desirable tenant who consistently pays late, isn’t taking care of your property or doesn’t get along with the neighbors or local code enforcement.

Related: Excerpts From Our Best Lease Clauses

The other main reason for using MTM leases is that you can raise rents with the rental market and increase your profits. All you need to do is give your tenant proper notice that you’re increasing their rent — and thereby your revenue.

One last argument we’ve come across for MTM leases is the flexibility they allow for owners that are unsure of their plans for the property – whether it be selling or extensive remodeling, etc. This makes great sense if you’re waiting on city permit approval or some other timeline issue out of your control.

The Case Against MTM Leases

We’re going to preface our “con” argument with the fact we only operate in Michigan, and our argument is based on Michigan laws, but we would imagine that many states have similar laws. That being said, we see no logical reason an MTM lease makes it easier to get rid of a tenant!

Let’s look at the three main reasons you might want to get rid of a tenant:

1. Nonpayment – How does an MTM lease make it easier to evict a nonpaying tenant? If they aren’t paying, they aren’t paying whether their lease ends at the end of the month or end of the year. An owner that doesn’t start a formal eviction process against a tenant on an MTM lease because they believe the tenant will just move out at the end of the month when the lease “ends” better have money to burn. Most tenants behind on their rent milk their occupancy for all it’s worth, and if a landlord isn’t pursuing the formal eviction process they’ll stay and stay and stay.

If you ever want to write a book on excuses this would make a great form of research, although a bit expensive! In our experience, the few “nice” tenants who fall behind on their rent make arrangements to move out relatively quickly, and we haven’t observed any correlation to the type of lease for this behavior. Bottom line, there’s no difference in the eviction process between an MTM or term lease.

2. Damaging the Property – We’ve had our share of tenants who’ve left holes in the walls, broken windows, kicked in doors, etc. We’ve also had tenants that ruined stoves, fridges and lawns through neglect. If you want to get rid of a tenant to head off these issues so that they only cost you hundreds of dollars and not thousands, using an MTM lease for “protection” is a bit dramatic.

Your lease, whether MTM or term, should have language in it to allow you to evict for such issues. If it doesn’t, run, don’t walk, to the nearest expert real estate attorney you can find to correct this grave oversight ASAP! We’ve found that this type of tenant doesn’t just amicably agree to move or change their behavior. So again the type of lease has little, if any, impact on this issue.

3. Police or Neighbor Issues – If a tenant is causing issues that result in the police visiting your property, most judges will accept a police report as a reason for a landlord to evict a tenant and break a term lease. Again, your lease should have language that allows this and also gives a judge something to support their ruling.

The complaining neighbor is where an MTM lease may come in handy. Really though, we’ve never encountered it as an issue. If a neighbor has a real complaint, they can call the police or code enforcement, allowing you to have a reason to terminate a tenant’s term lease. If it’s just a nosy or “busy-body” neighbor issue, like the old man who doesn’t like the tenant street parking in front of his house, why would you want to get rid of a tenant over it? The point is, rarely would this be enough of an issue that you would actually want to get rid of a tenant, and therefore need the flexibility of an MTM lease.

The other main argument for MTM leases is the ability to increase rents with the rental market. The catch here is what goes up, often comes down. We just witnessed that with the bursting of the real estate bubble a few years back. Also, how many times do you realistically think you can increase the rent on a tenant in a 12 month period without upsetting them enough to cause them to move?

There are only a handful of areas in the country where you might be able to get away with it. It’s our opinion that if you raised the rent more than once every 12 months almost every tenant would react emotionally and move, even if it meant paying more rent somewhere else. No tenant likes having their rent raised, and this is a case of expectations — where every peer a tenant would discuss this with would tell them they should only put up with annual increases.

Related: 17 Vital “Rules” Your Rental Lease Should Cover

The unknown timeline issue where you may be waiting on city permit approval or something similar is the only reason we can see a true advantage for an MTM over a term lease.

The Case For Term Leases

This is a pretty simple argument, as landlords all want to keep tenants that pay on time. One of the easiest ways to do this is to lock them up with a term lease. People are creatures of habit and most of us aren’t the pure seat-of-the-pants, 100% of the time, adventurous type, preferring stability and routines. Just think about how you feel when your morning ritual is interrupted! For most tenants moving means breaking patterns and finding new ones, and they don’t like to do it.

Most tenants also expect to sign a 12 month term lease and offer very little resistance if you want to make it 10 months or 14 months, etc. to avoid moving in the winter. This gives a landlord more control over when their property might be vacant so they can avoid the worst times or seasons for a vacancy (in Michigan this is Oct –Feb). Add to that the ability to have more than 30 days to start marketing and preparing a property to be marketed because you know when it will be vacated.

Term leases also give a landlord better forecasting and control of their finances as you can statistically count on the rent being received for a set period of time.

Final Comments

After looking at both sides of the argument and trying not to be biased one way or the other, we feel that hands down, term leases are logically the way to go in almost every situation. A well-written lease with the proper clauses will address most of the alleged benefits of an MTM lease type, while providing more rent cashflow stability.

If you’re still set on using MTM leases, we hope you’re at least charging hirer rents. There’s a reason insurance companies will pay 25%+ over market rental rates for 3-4 month leases while a customer’s residence is rebuilt after a fire.

We deliberately didn’t cover ‘The Case Against Term Leases’ and would like to ask your thoughts on it.

Please also comment on other pros & cons we missed!

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About Author

Drew is the manager of Royal Rose Property Management, a fairly high-tech solution for Detroit Metro area property owners & investors.

20 Comments

  1. I looked up how many properties were available month to month, in the past year, within a 5 mile radius of one property I have up for rent. I looked in MLS. Of about 1000 rentals offered over that year, there were only 15 offered month to month. Looking at the history of those rentals, I could see that quite often those properties were again available less than a year from being rented.

  2. I have found that many tenants do not pay much attention to a year’s lease. They move when they feel like it and just do not pay the final months rent. Courts in my area of Ohio are unlikely to hold tenants responsible for those remaining months of rent. And our courts are very reluctant to allow an eviction for damage or nuisance issues. MTM makes it much easier to get rid of bad actors.
    And a year’s lease just means that a good tenant has to make a decision as the end of the lease approaches, while a MTM agreement does not do that.

  3. I always do a 12 month lease for new tenants. Once the original lease term is up and it’s been established that they are desireable tenants, I’ll switch it to a month to month lease. It’s not just about the flexibility for me, it’s that forcing the tenant to commit to another year will make them think a little harder about whether they want to stay. Maybe there is a minor thing that bugs them about the apartment that would make them move if they had to commit for another year, but if you don’t force them to make that long term decision they will likely stay.

  4. I have always used month to month leases except where 1 year leases are required (e.g., section 8). It us easier to remove a bad tenant with Month to month. One tenant took me to court but the judge threw it out saying “Under a month to month lease, Mister Johnson can give you notice to vacate even if he does not like the color of your shirt.”. Under a lease, I would need to document in detail why the tenant needs to be evicted.

    I have had tenants leave (usually for a good reason such as buying a house) in winter which is a disadvantage of a M to M. But overall M to M has worked well for us over the last 16 years.

  5. In the book “Property Managment Kit for Dummies” (3rd edition) there is a recommendation for a blend of MTM and a lease. You use a MTM agreement in conjunction with a “Rental Rate Guarantee certificate” so that way the tenant has a stable, consistant, knowable rent payment while not restricting the landlords ability to change the other rules or asking the tenant to leave.

    Say you have HOA fines that are predicted to increase or a water conservation laws are pushing the price for laundry up. Instead of setting these fees in stone at the time of the lease, you can increase them as they happen.

    Lastly, if the market is tough offer this arrangement as a concession. Point being, you are can offer such an agreement to mitigate fears on both sides.

  6. I think reason #1 is kind of flawed because (even as you stated in your case for M2M) M2M makes it easier for you to get rid of tenants who constantly pay late, not easier to evict a completely non paying tenant.

    In my area it takes a little over 2 months to complete an eviction. So take for example, I have a bad tenant move in on Jan 1, who is going to milk it and pay as late as possible. I can go thru the eviction process and on eviction day ,roughly March 10th, they can pay Januarys rent they can stay. Then come Febs eviction, roughly April 10th, they can pay Feb rent and stay. Them come March’s eviction, roughly May 10th, they can pay march rent and stay. So forth and so on until the lease is up.

    If the same tenant is on month to month I can send them the move out notice in January and likely have them out much sooner than I would if they were on 12 month lease.

    • CHRIS: good points if that’s the way the legal system works in your area. In our area of Michigan, on the court date we’re allowed to update the amount owed and that’s included in the judgment. Then, they have to pay the entire judgment to avoid eviction. Of course, there’s still the issue of collecting the rent accumulating AFTER the judgment date.

      • Yes in my area they also have to pay the entire judgement amount to avoid eviction. The difference is on a month to month lease you can immediately give notice to vacate to the tenant who decided they’re going to milk it and wait till the sheriff comes to pay you, on a 12 month lease this tenant can drag you thru that process over and over because they have a 12 month lease.

        • CHRIS: our lease contains several provisions that allow us to terminate immediately for tenant payment abuses. We’ve only invoked it once and the tenant moved, so we haven’t tested it with a judge yet.

  7. Drew, thanks for the thought provoking article. I tend to use leases as you do, and then renew each year. I also like them for the reasons you’ve outlined here.

    My question for you is what penalty you build in for a tenant breaking a lease? I’m sure every state has different laws related to that, but I’d be interested specifically in what you use and how you explain that to your tenants up front to make sure they understand it’s not an easy thing to break their lease with you.

    • CHAD: thanks for reading and commenting. We don’t have a penalty in our lease as Michigan statutes hold the tenant liable for the term of a broken lease. The landlord is required to make an effort to find a replacement tenant for the same amount ASAP, which then negates the remainder of the broken lease.

      We do have an early termination agreement that we send tenants who request to get out of their lease early. They basically have to agree to pay a one month penalty, a showing schedule (too much work to schedule each showing individually with them) and are responsible for the rent until we find a replacement tenant.

  8. I use both. A term lease only locks in the landlor, it does not lock in a tenant. If you think it does, try and collect more than a couiple of months of rent after a tenant leavews.

    That said, solid tenants honor their commitments. Proper screening and screening criteria is the way to prevent most rental issues.

    • ERIC: thanks for commenting on both sides! We agree with you. Picking an arbitrary percentage for illustration, if 80% of your tenant population honors their 12 month commitment, than it’s probably worth it.

      On the other hand, if 80$ of your tenant population is consistently breaking a 12 month lease, than an MTM would be beneficial. Hopefully, much of this could be cleaned up with better tenant screening, but it’s not always that easy. An investor may have rentals in an area where they realistically can’t raise their screening requirements. In these cases the investor has to either deal with it as best as possible or sell out.

      Each investor needs to find what works for them and we’re glad there’s been so much discussion on this topic:)

  9. I actually mostly use term leases so I’m not coming from the MTM is best from my experience camp. But reading though this article unbiasedly I don’t see any strong argument to use term over monthly leases.

    You point out a bunch of points where you say there is no advantage to MTM, but there is no advantage for term either. Also as pointed out for all the things other than not paying even if you should be able to evict for these issues there is a burden of proof that will be higher on a term lease. You did make the point, which is in favor of MTM, that you can get rid of someone who is a nuisance but doesn’t rise to the level of breaking lease clauses.

    For the advantages you only point out that many tenants “expect” to sign a 1 year lease (Weak advantage at best) and the one solid one that you can control when the lease ends so if you have a tenant the respects the lease they won’t move out over the winter.

    Hahaha… If anything your article made me think why DO I use term leases most of the time. :)

    (FYI it is because most of my places draw a caliber of tenants that DO respect the lease so it does keep the winter vacancies down to zero)

    • SHAUN: thanks for the assessment. Eric posted a comment right before yours where we agreed that Term vs MTM really boils down to what works for area your property is in and the landlord. For us, term works better, for others we’re sure MTM is more appealing.

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