Occupancy Duration with Month-to-Month vs. Fixed-Term Leases

David Jones · 2022-11-11T18:15:00-08:00

There seems to be a general assumption that longer occupancy durations can be achieved by using fixed-term leases (e.g. 1 year) as opposed to month-to-month leases. However, despite spending quite a bit of time on Google Scholar, I haven't been able to find any published studies that prove this assumption to be correct.In most cases, fixed-term leases will create artificial inflection points in tenants' lives, forcing them to make housing decisions at arbitrary times. Although these inflection points may cause some tenants to stay longer, it seems just as likely that they would cause other tenants to leave earlier. Since month-to-month leases create no such inflection points, tenants are subject to a greater degree of inertia (i.e. "I guess I'll just stay another month...I can always move out next month."). The question is whether this inertia translates to longer occupancy durations (on average).I'm sure there's no shortage of anecdotal evidence (likely with conflicting conclusions), but is anyone aware of any studies on this subject that use large data sets?

Bjorn AhlbladPro Member

Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes

3y

@David Jones welcome to BP! I only have my own anecdotal evidence. Try as we might as landlords two things we can't control. When they pay and when they go. I have been a LL for too many years and have seen no difference in length of stay whether 1 year lease or MTM lease. I have several tenants in my apartment building who are MTM and have been there for more than 10 years.

I think what has more relevance is tenant class. Generally better class tenants stay longer in better class properties. I think most LL's will agree on that.

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Theresa HarrisPro Member

Member since 2019 · 15k+ posts · 11k+ votes

3y

Leases are done for a number of reasons. In one area where I have rentals, I do it so if I want I can get rid of the tenant when the lease is up. If they were month to month, it would be really hard.

The reality is if the tenant wants to break a lease early they can, but having a lease also gives you an idea of when the tenant may move.

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Bill B.

Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes

3y

MTM rentals have the same inflection point as yearly rentals, every time you raise the rent. If you’re saying you’re going to lease the property MTM and never raise the rent, ever. I agree, the tenant will probably stay longer.

With yearly or preferably 2+ year leases (with built in increases.) the tennant expects rent increases and knows it’s been a year since the last increase. I guarantee MTM tenants always think it’s been less than a year since the last increase (even if it’s been 18 months.).

Probably the property size, # of bed/baths, type and location have the most to do with duration. Outside of college towns I assume Vegas is as transient as any town. But I only rent out 4+ bedroom houses. I am literally surprised when a tenant moves out in 3 years. 5-12 is more common. These people have a kid or kids that have friends in the neighborhood they go to school with, a lot of STUFF scattered throughout the house, and lives they can’t disrupt to move everything.

If you’re renting out 1/1 condos, maybe target single seniors for the longest tenants. otherwise your tenant’s gone if they meet someone, or a bigger better deal comes along.

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David Jay

Investor · Reno, NV · Member since 2015 · 69 posts · 48 votes

3y

I’ve always done 1 year than month to month afterwards. Sometimes the tenant wants to renew the lease for their stability and I’m fine with that. I have a few student rentals and on those I always time the lease for June and make them sign another year if they plan to stay. That’s worked fine for me.

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Adam Martin

Rental Property Investor · Member since 2020 · 1k+ posts · 1k+ votes

3y

I don't know of any studies but this is a thought process I have considered as well. I like to start at a year to screen for people who plan to be there for a bit, I won't make any money doing a bunch of rentals under a year but after that point anything else is icing on the cake. After the year though I stay at M2M and have had tenants for several years with 4/5 turnovers due to tenants buying a house and the other moved for family reasons. I think people take the path of least resistance and a signed extension is just giving them reason to start looking vs. just paying rent on autopay another month like they do every month. People are going to move when they want to and collecting termination fees is hard but I value the ability to put a notice to terminate if the tenant becomes a pain. I also have written in my contract I require 60 days notice from them but 30 from me which makes terminating the lease a bit more difficult for that amount of notice. I just explain it as I just need time to plan for a turnover but as long as you are paying rent and not damaging the property it is in my best interest to keep you as long as possible so I'm not going to want to terminate the lease.

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Nathan GesnerBusiness Member

Moderator

Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes

3y

Quote from @David Jones:

Welcome to the BiggerPockets forums!

I'm not aware of any study of this nature. I know it really depends on the market, laws, Landlord temperament, and other factors. Some people swear by month-to-month and others by one-year leases. I prefer one-year and charge extra for monthly or other deviations.

It's always good to think about it and consider other options.

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Kenneth GarrettPro Member

Investor · Florida Panhandle/Illinois · Member since 2016 · 4k+ posts · 3k+ votes

3y

@David Jones

I don’t think there are any studies that lean one way or another. Your market probably has more to do with lease length then anything else. I started out doing two year leases, then one year leases. I know plenty of other investors who swear by mtm. In the Midwest with LTR, you don’t want a tenant moving out at Thanksgiving time through the end of February. It’s the most difficult time to find a tenant. This would be the downside of a mtm lease. Although, I’ve been able to fill units at those winter times, you might have to lower your rent a bit. There is no guarantee a tenant will stay the length of a lease, but for the most part most honor the lease length.

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Kevin Sobilo

Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes

3y

@David Jones, I like the way you put your post. Very analytical and without any apparent bias.

For me the decision is not only one of vacancy, but of fairness. A yearly lease sets the expectation for both sides.

It provides some certainty for both sides. For the tenant that they won't get booted sooner so the landlord can rehab and jack up rent or to rent the unit to a relative or whatever other reason. It allows the tenant to budget knowing there won't be any rent increases for at least a year.

For the landlord it provides some certainty that there won't be excess vacancy of course.

As to whether it decreases turnover, I would think it would. With a MTM agreement, the tenant can plan to leave anytime and start at anytime in their preparations. They might start saving and planning on and off for a while before purging unwanted belonging and starting to pack and only later give notice and start to look for a new unit. With a yearly rental, they need to do that at a specific point in time, not when they choose. When I approach them to sign a new lease they don't have that long to decide and likely weren't thinking of it ahead of time. So, their decision isn't at a time and pace of their choosing. I think that will make people choose to stay rather than think of moving more often. However, this is of course anecdotal.

In the end, I budget 5% for vacancy with a goal of tenants staying 2+ years on average. I well exceed that goal. If I am exceeding my budgeted target, then I am happy with what I'm doing especially if I'm giving the tenant a good value proposition by providing them a fair agreement and stability with regard to their housing situation.

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Wendy S.

Ellenwood, GA · Member since 2016 · 267 posts · 70 votes

3y

@David Jones not aware of any studies. However, in a fixed lease there is usually language for early termination so there is at least some guarantee the tenant will stay for the duration or at least provide adequate notice so you can prepare to rerent the property as well as possibly be compensated for early termination.

In Georgia a month to month requires a 60 days notice to the tenant while they can give you 30 days or simply leave.

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Jon KellyPro Member

Investor · Bethlehem, PA · Member since 2016 · 929 posts · 951 votes

3y

@David Jones awesome post. Decision making is so much easier when you have the right information. Unfortunately, I'm not aware of any studies on this topic. If you happen to create one, please let us know :)

Annual or MTM leases usually is market dependent. I prefer MTM in some of my "C" class areas because it's easier to move on from a tenant. However, in "B" or "A" class areas I prefer an annual lease because I want the security of 12+ months of rent OR a lease break fee.

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Wesley W.

Rental Property Investor · The Vampire State · Member since 2013 · 2k+ posts · 2k+ votes

3y

I've always found that the term leases (anything over 30 days) always obligate the landlord, but never the tenant - especially here in NYS. I only offer month-to-month (MTM) leases in my small multi-family C+/B- class 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.

Anecdotally - but I have had one MTM tenant stay for 26 years, and I can think of 10 or so that stayed for over a decade. The shortest stay I've had has been 10 months, but the average is about 3-5 years. My sample size is about 100.

I'd be wary of any study regarding this. As @Nathan Gesner mentioned, there are so many variables and dynamics that effect which lease model would yield the longest tenure (tenant class, property class, market conditions, landlord/tenant laws, business strategy), I am afraid the data in such a broad study would not be useful to you, unless your situation replicated the mean of each of the metrics. It's just like when the talking heads on mainstream media begin their pontification with "the U.S. real estate market is < insert broad, ignorant generalization here >." All real estate is local, and this effects your decision regarding the lease you offer there, too.

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Occupancy Duration with Month-to-Month vs. Fixed-Term Leases

Occupancy Duration with Month-to-Month vs. Fixed-Term Leases

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