Renting: Month Lease or Year Lease?

11 Replies

I think you can come up with pros and cons to both. For me personally, I see a better quality tenant in the year lease. While it is not true all the time, MTM leases carry a stigma (at least in my area) and may be more of a headache then it is worth. Yearly leases allow me to relax a bit more on my vacancy.

BUT it goes without saying if you lock in a year lease tenant, and they are a trouble maker...that creates a headache.

Hi Sean! I tend to prefer leases of at least one year, because it provides some protection against vacancy.  Generally tenants who commit to a one year lease will stay for a year or longer (or tend to be longer term tenants) and may face penalties if they break the lease, which help offset the vacancy penalties. I've had tenants ask for even longer term (2-3 years) which I think they want to have some guarantee of rent stability over time. However, I think it somewhat depends on the tenant and the market - I've seen month-to-month tenants stay for 15+ years, and they just like the flexibility of this type of lease. With month-to-month, I imagine it's also easier to get rid of troublesome tenants, but I haven't done any of these. I'm currently acquiring a property with a month to month tenant in place, and I'm hoping to convert her to a 1 year lease for more stability. 

There's another important reason for renting on an annual basis with leases:  you can use that cash flow in obtaining financing.  Month-to-month leases do not qualify in DI calculations for financing.

When purchasing a property with month-to-month tenants, I include the vacant possession clause in the contract and will not close until the tenants are gone. I always want to buy good properties - but not the seller's problems.  

We prefer long term leases (mostly 12 month, sometimes slightly longer or shorter).  This is what most places in our area do, mainly because of the proximity to colleges in my opinion.  We like our leases turning over in the summer since most of our renters either need to move in before the fall school term starts or because they already have a lease ending then.

Typically, we start marketing our summer openings in the spring, and have them all leased well before they are vacant.  We just schedule a bit of time between tenants to make sure the unit is clean and in good repair (some landlords don't bother with that part around here), and if updates are needed we build in time for that too.

Last 5 years it has all been MTM before that longer term. Much prefer the MTM. Tenants have less security and are more respectful. 30 notice of non renewal, or a 30 day notice of rent increase are powerful tools. 

I've always found that the term leases (anything over 30 days) always obligate the landlord, but never the tenant. I only offer month-to-month (MTM) leases in my properties. Here's why:

Let's say I sign a tenant to a one-year lease, and 3 months in, their personal/professional situation changes, and they break their lease and move out after a 30-day notice (or maybe less).

I am required, by law in most areas, to "mitigate my loss" by remarketing the unit, making it rent-ready, and starting up my lead generation machine to get applicants, funnel them into my screening system, identifying good candidates and ultimately leasing them up. This takes a LOT of my time.

If I went to get a judgement against this tenant for the balance of the lease (if I could even find them to serve court papers), the judge would tell me to go pound sand, absorb it as a business expense, go re-rent the apartment, move on with my life and quit bothering him with this "nonsense."

Another situation. Joe "pain in the a**" Tenant just signed a year lease. He is noisy and obnoxious and leaves trash in the common areas. I get numerous complaints from my "good" tenants, complaining about Joe. Joe's lease has provisions against this, so I properly serve him a "10 day notice to cure" using a process server ($$). He gets better for a bit, then goes back to his old ways. So, I serve him again ($$). This goes on.

I finally get so fed up that I serve him ($$) with an eviction notice for breach of lease. I spend time and money getting the petition and go to court. Joe tells the judge he "promises" not to do it again and shows receipts from all his on-time rent payment, so the judge gives him "one more chance. " Invariably, I'm back in court AGAIN. I may or may not get a warrant for eviction this time, but meanwhile two of my good tenants have moved out, exasperated by their neighbor, Joe.

Sure, my lease states that Joe is financially responsible for my expenses associated with the enforcement of the lease provisions, but good luck with that.

In each of these cases, the lease favors the tenants, and limits my rights as the landlord.

My month-to-month leases give me the right to terminate the lease for no reason or any reason, including being an "a**." If they don't leave, I get a holdover eviction warrant on them. I find this is a MUCH easier judgement to get than for breach of lease or even non-payment, since the tenant can "cure" his non-payment by showing up to court with the unpaid balance. Meanwhile, next month he starts neglecting rent payments all over again.

I always found that GOOD tenants love the flexibility that the MTM lease affords them if their personal or work situations changes. I tell them I don't want anyone living in my properties that doesn't want to be there, and that is precisely what would happen if they signed a year lease and their situation changed.

I explain to them I am not in the business of whimsically kicking people out, because that costs me money (see the lead generation paragraph earlier in my post), and my goal is to find really good people to call my properties home and then take good care of them so they want to stay a long time. In contrast, bad tenants don't like the MTM leases (another form of self-screening) because they know they'll be out on their ear in 30 days. So, if a tenant pushes back on the MTM, to me that's a red flag, because there really is no down side for them unless they are up to no good. If they are good tenants, they don't worry about it for a single second because they expect to follow the rules, and they rest easy at night knowing their neighbors will have to do the same.

Originally posted by @Chad Hale :

@Patricia Steiner   I have had not had month to month leases not being used in DI calculations for refinancing. FWIW

 Educate your lender that you actually have more security to protect your (their!) asset with the MTM.  They need to get with the times!  If not, find a new lender.

Originally posted by @Wesley W. :

I've always found that the term leases (anything over 30 days) always obligate the landlord, but never the tenant. I only offer month-to-month (MTM) leases in my properties. Here's why:

Thank you so much for this information. This makes a lot of sense. I will use this going forward.