Month to Month vs. Leases

21 Replies

New to the game and seriously considering purchasing a 5 family.  The current land lord has not been using leases, so the tenants are all month to month.  Curious what people think of this approach vs having year long leases in place.

I used to do year long leases.  Now I do only month to month.  A long lease binds the landlord more tightly than the tenant.  If the tenant wants to leave, they will.  in most cases you'll never see a penny other than the deposit.  OTOH, with a month to month they can give notice and leave on good terms.  Which usually results in a clean unit.  And if they're troublesome, but not easily evictable (e.g., long term guests, unauthorized pets, troubles with neighbors, etc.) the landlord can terminate the lease.  Then, if they refuse to leave, they're easier to evict.  

And, if they are troublesome, but not awful, and you choose to keep them, its your choice.  You're not stuck with someone you really want gone.

I agree with @Jon Holdman  .  We too do month-to-month rental agreements. They give you the landlord much more flexibility. People move at all times of the year and we have never had difficulty renting units during the holidays or in the winter, which is why some landlords prefer to time their unit turnovers by using leases. I don't believe in locking tenants into long term leases. Our tenants usually stay long term anyway, the longest tenancy to date being 26 years! Treat your tenants well and they will want to stay.

I agree with Jon. I use a year lease that defaults to month to month, but mostly for the sake of trying to guarantee a year's worth of income for my clients. I have had great tenants on a month to month lease for years and years, but as he said if someone wants/needs to leave they will leave regardless of the term of the lease. 

@Marcia Maynard  For future loans, does having month-to-month agreement reflect poorly in the eyes of a bank when trying to show future income? Or do the banks always use two years of property management history to show future income?

Originally posted by @Angelo Behar :

@Marcia Maynard  For future loans, does having month-to-month agreement reflect poorly in the eyes of a bank when trying to show future income? Or do the banks always use two years of property management history to show future income?

 Angelo:

Lenders here (Canada) prefer to see annual leases when crediting rental income, but most accept month-to-month tenants: especially if they have been in-tenancy for a considerable period.  We have encountered a couple who will discount month-to-month leases as they consider them to be a higher risk and one who would not count the income from month-to-month leases at all.

I prefer yearly leases. There is a definite moving season in my location. While it is true tenant can get out of the lease. The way I have found that is to create a buy out clause. This allows people to get out of the lease with a 2 months break lease fee and 2 months notice. This has reduce this problem greatly. If people want to get out they pay, otherwise they fulfill their requirement. 

@Roy N.  Thanks for the heads up. The deal I just finished in December got held up because the underwriter wanted to see a one year lease before the deal could get approved. So I had to find a tenant before I had possession of the property. Exciting.

I know from info on BP that banks usually only grant 70% of your rental income. I'm curious how much less month-to-month agreements yield compared to year leases, 50% of rental income granted? 

@Elizabeth Colegrove I suppose a buy out clause is one of the benefits of being an A/B property type gal :)

I think in my case they would just leave....

Originally posted by @Angelo Behar:

I know from info on BP that banks usually only grant 70% of your rental income. I'm curious how much less month-to-month agreements yield compared to year leases, 50% of rental income granted? 

 Generally rent is either counted at 70 to 75% or not at all in terms of qualifying.

@Angelo Behar  

You are probably right. That or any group that cares about the credit/rental history and/or has assets to go after. 

Originally posted by @Angelo Behar :

@Marcia Maynard For future loans, does having month-to-month agreement reflect poorly in the eyes of a bank when trying to show future income? Or do the banks always use two years of property management history to show future income?

We have never been asked to produce our property management history, rental agreements or rent registers. Our tax returns speak for themselves and the data the banks gain from those trumps other data they may collect. 

Perhaps it is because we go in with at least 20% down, maintain an excellent credit score and can shop for good rates. My husband is self-employed as a full-time pianist/entertainer and I am employed full-time with W-2 income from my sign language interpreting work, so I'm sure that factors in.  We even buy some properties all cash or on contract from sellers. Our acquisitions are in the residential arena only. 

Even our 8-plex (four duplexes grouped together) was purchased with two conventional loans because the units sat on two tax lots, 2 duplexes on each. If we go into a commercial property with a commercial loan, that might change the game.

Originally posted by @Marcia Maynard :

We have never been asked to produce our property management history, rental agreements or rent registers. Our tax returns speak for themselves and the data the banks gain from those trumps other data they may collect. 

Hmm...very good point. That's why I follow you on BiggerPockets. Unfortunately, I don't think that will be the case for me since I have so much less experience than you, plus my W-2, since I'm a contractor, reflects only a 1/3 of what I take home since I am tax free (330 days overseas a year) and the majority of my income, the rest of the 2/3 is not taxable so it doesn't appear on my W-2.

Originally posted by @Angelo Behar :

@Roy N. Thanks for the heads up. The deal I just finished in December got held up because the underwriter wanted to see a one year lease before the deal could get approved. So I had to find a tenant before I had possession of the property. Exciting.

I know from info on BP that banks usually only grant 70% of your rental income. I'm curious how much less month-to-month agreements yield compared to year leases, 50% of rental income granted? 

 Angelo:

The inclusion rate varies between lenders, but, in our experience, is typically in the 65% - 75% range.  We did have a lender who changed their policy on residential lending to 50% a while back.

The lender who discounted month-to-month leases, included them at 50% (as opposed to 70%).

The rent inclusion matters most when you are trying to get the balloon off the ground and acquire a few properties fairly quickly.  

Once you have been operating for some time, our experience aligns with that of @Marcia Maynard above and the rental inclusion is less of a consideration.

@Jason Young

To get back to your original question.   As we age and gain more experienced as landlords we have gravitated toward a preference for month-to-month leases. 

That said, in our student rentals we typically request either an annual lease or a term lease for the academic year (9-months) as we have found it to be a more effective way to deal with the loose social cohesion that comes with a group of students renting a house or flat.

@Angelo Behar  no problem!  Appreciate you participating in the thread... got some great feedback.

@Jon Holdman  @Marcia Maynard  Thanks for taking the time to weigh in.  I can see the benefits of going with month to month... flexibility can be a win-win for both the land lord and the tenant.

@Roy N.  thanks for that tip on using a varied approach based on the type of tenant.  The rental i'm targeting is right on top of a college campus so I will likely come across some students looking to rent, so using the annual or academic term lease is a great suggestion.

Although I use year leases pretty much exclusively, the post by @Jon Holdman has me thinking I should suggest month to month more often.  That was an awesome breakdown.

He is right, if the tenant wants to leave, they just leave.

Originally posted by @Elizabeth Colegrove:

I prefer yearly leases. There is a definite moving season in my location. While it is true tenant can get out of the lease. The way I have found that is to create a buy out clause. This allows people to get out of the lease with a 2 months break lease fee and 2 months notice. This has reduce this problem greatly. If people want to get out they pay, otherwise they fulfill their requirement. 

Elizabeth, do you mind sharing what you charge for them to get out of the lease? My situation lends itself to being safer with year leases (I was even considering trying for 24 month lease) but providing a solution to the a tenant that may need to get out early for unforeseen reasons could be a good marketing when looking for new tenants.

@Jake Landry   I require 2 months notice and a two mknths break lease fee. I have found that this has been a life saver. I have had "life" affect my tenant a bunch so this way it's a "clear" policy and it become business. There were no feelings left, and it compensated me to deal with it no matter the time of year. Also after working with tenants it have them a clear way out with define costs.

@Jason Young  

I typically do one year leases.  The banks like the one year lease, though as @Jon Holdman  

said tenants will leave when they want to.  I'm looking for tenancy that ends in months that are not Nov to Feb.  Its cold, snowy, icey, and dark at 5 pm, not to mention the holiday season and faux holidays.

I will do shorter than 1 year or longer than one year to get expiration in the Mar to Oct times.  Many of the tenants are families with school kids and they like the june 30 end dates.

I will do month to month is absolutely necessary.  Tenants wrongly presume that the month to month is a one way street and only they can terminate the month to month lease.  They are quite surprised and taken aback when I tell them they can be terminated with 30 days notice.  Good for the goose....

After the first year lease, I do give tenants the option of up to a 3 year lease, and many avail themselves of that option.

And I do have several 30 year tenants currently and have other long term tenants, so something must be working.

In Bigger Pocket Podcast #82, I also talked about my tenant "Self Management Program"  where they take care of all utilities, lawn, snow and minor maintenance for reduced rent and a 3 year lease.  

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