Changing a property from month-to-month lease to a year long lease?

Question

Hi,

I am wondering about how to change a 4plex that currently rents on a month-to-month lease into a regular 12 month lease property. I was wondering if anybody has any experience with this and was curious of the risks involved with it. The property I'm asking about is a lower income property where the market rents are around $500 a unit. Thanks.

Johann Jells · Answer

At least around here there's specific verbage to doing it. You must state in writing that the previous month to month agreement is void before you request the tenant sign a new lease.  Check your state's guidlines on "renter's rights". Usually there's no guidlines on "landlords rights",  I wonder why....

Sharon Tzib · Answer

Hey Taylor. You should be able to verify the vacancy rates w/ the due diligence documentation the landlord gives you (rent roll, bank statements, tax returns, etc). If they don't seem unusually high, then you may want to leave things the way they are (i.e. the way the tenants are used to) after purchase and take six months initially to decide if these are, in fact, tenants you want to keep. If not, then you'll have flexibility with being able to get them out w/ 30 days notice.

Also, you should be aware what the "customs" in the area are. If almost all other landlords do this, it may be hard for you to be the exception (and, you could draw some assumptions as to why they are doing it that way). On the other hand, if you are ok with the current rents and don't mind locking them in for a year, then the tenants may not mind signing a lease if they were planning on staying anyway, and now know their rent won't be raised at least for one year. If nothing else, you may find out who's planning on staying and going.

As with many things in REI, there's not always one clear cut answer. You will have to look at what is normally done in that area, what each buildings specific situation is, and what your comfortable with, and make a decision from there.

Taylor Green · Answer

@Sharon Hiebing Great response....

I have not bought a multi-family property yet, just single-family, I keep having my offers turned down... I'm getting close though I can feel it! Most of the multi's I have looked at are in lower income locations. It's the only way I can find that the numbers work for the cash flow I'd like... I was about to start a thread on month-month vs 12 month leases for low income properties, so thanks for answering before I even asked!

Many of the properties I have looked at have been month-month agreements and that has scared me off because I felt that the vacancy rate would be substantially higher. Do you think that this is true? I know dealing with lower income tenants, the vacancy rate would be higher to start with, but I just figured if they had a lease agreement it would make them be a bit more inclined to stay...

Thanks for your input, again...

Yiv L. · Answer

Sharon Hiebing gave good advices.

Sharon Tzib · Answer

Did you just buy this building? What are the current rents being charged? Why do you feel you want to convert to one year leases? Also, typically with month-to-month tenants there is either a signed rental agreement in place and/or nothing at all - not sure what your situation is.

Sometimes with lower income units, month-to-month tenacies are used because it is much easier to get a tenant out (this allows either side, landlord or tenant, to give 30 days), and many times lower income tenants can be more problematic with not paying rent on time, following rules, etc., so landlords employ this strategy.

Just because you don't have a lease with a tenant, it does not mean that you can't raise their rent. Check your state law to find out how much notice you must give before raising the rent, and if there is a cap on the % you are allowed to raise at any given time. Also, make sure none of the tenants are Section 8 (although if they were, you'd probably have a lease), and I'll assume you're not in a rent control jurisdiction.

Lastly, if you feel a rent increase is warranted, be prepared you may lose tenants. You'll have to weigh the pros and cons of that.

If you do go the lease route, I would also take this opportunity to have them fill out a rental application to have on file as well, especially if you're a new owner, and especially if the old owner didn't have one. This kind of paperwork is extremely important in case a tenant ever decides to sue you.

Chris Martin · Answer

The simple answer is to get the tenant to sign a new 1 year lease agreement. The risk is that once the lease is signed, you can't easily raise rents or give a 30 day notice to vacate without cause.