1-year lease or month to month?

Question

Bought my first property: end unit condo class A and looking for first tenant.  My cousin who has 3 rental properties manages his own units and has all rental agreements on month to month and has all long-term tenants. His reasoning: easier eviction should tenant default.  Knowing the rental increase in California is regulated, I am not intending on raising the rent for at least a year if at all.  Does is make sense to structure rental agreement as MTM or 1-year lease??

Joe Homs · Answer

@Jennifer Wong I have changed my leases to 11 months to avoid locking them in as permanent tenants after 1 year. If there are any issues with the tenant during this time you can evict easier. Most tenants may not accept a month to month lease.

Good Investing...

Jennifer Wong · Answer

I guess the real question is, "would it be easier to evict a MTM tenant or 1-year lease tenant" or would it be the same?  My cousin's POV was MTM would be 3-day notice to pay/quit as opposed to chasing after 1-year lessor for defaulting.

MTM tenant would not need to worry about rental increase as it is regulated on annual basis in California capped at 10%.

Manny Vasquez · Answer

Jennifer - If you have vetted the prospective tenant thouroughly (i.e. credit check, income qualifications, etc.), you shouldn't have to worry whether or not you sign them up for a 1-year lease or a month-to-month.  Typically, in A-Class neighborhoods you end with a prospective tenants that are a little better off financially than most.

I also own an LTR in Orange County (Costa Mesa) and I have had good tenants thus far.

For a true month-to-month tenant, you should be able to charge a lot more than what you would normally charge for a 1-year lease. The reason for this is that the month-to-month tenant will leave the property sooner and thus you will have to come out of pocket to prep the property for the next tenant (i.e. clean it up, repairs, paint, etc.) You also have to take into consideration any length of time that that property will sit vacant while the next tenant moves in (although in OC properties never sit vacant for long).

I hope this helps and good luck!

Dave Kush · Answer

I don't see an issue with that if the tenant is willing. My first concern as a tenant would be that you are going to increase the rent in month 2.  I usually do 1 year, then go m2m after that. Where I am at, I only need to give 30 days notice on rent increases or lease terminations on M2M, so that is nice.  Then I try to give a 90 day notice on rent increases.

I recommend small rent increases every 6-12 months rather than large ones less frequently. Tenants will adjust better to the small increases.

1-year lease or month to month?

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