Month to month or year leases?

17 Replies

I am under contract for an 8-plex closing at the end of the month and am wondering what folks like to do when inheriting new tenants. Should I have everyone sign month to month leases or try to get them to sign year leases. My instincts tell me month to month but am curious what others opinions are?

Thanks in advance!

If they are in a year lease already you have to honor that. You can't change the terms of their tenancy when you take ownership. I'm in favor of month-month rentals.

@Nick Bleser I would keep it month to month until you get to know them and their habits better. You may find some are great but others not so great. Plus, if you anticipate raising rent, month to month will allow you to do that.

I don't think having a M2M lease will make people stay for fewer months than they originally intended. In fact, to me, it allows people to be honest about their desires and intentions, and feel less pressure about moving in the right season, subletting, etc. It allows both parties an easier out if things go wrong for either party.

Hello Nick,


I think you can look at this question in many directions but only you know your long term intentions.  One thing to think about is if you plan on doing a refi on this property most lenders would like to see long term leases that show contractual income versus M2M with no guaranteed time frames .  Just a thought.  

First, you have to honor their existing lease! At renewal time you can make that decision. If they are currently MTM, leave them alone for a few months and see how it goes. After you have some experience with the tenants and their lease is expiring then you can decide and if they are good I always go for 12 months and if they insist on MTM it will be at a higher rate.

I only use M2M leases and recommend all landlords only use M2M. I have tenants that have been on M2M for over 20 years.

Tenants move out when ever they choose regardless of term or M2M lease. Personally  believe a term lease encourages tenants to think about moving when ever their lease is up. If you want tenants to stay longer use M2M and remain in control of your property if/when things go sour. 

Check with the local laws/regulations pertaining to lease length. In some areas of the US a lease less than 12 months is treated as short term and fall under hotel regulations rather than housing.

Keep them on a month-to-month for 90 days. If they pay on time, keep the units up, and communicate well, lock them in before the summer season slows down. If they suck - in any way - get rid of them and find new tenants.

@Thomas S. I use one-year leases with a hefty fine for breaking the lease. If someone moves in August 1st and then breaks the lease two months later, they have to pay two months of rent as the termination fee. I usually find a replacement tenant before the old tenant is gone so that termination fee is extra income. The other option is for the tenant to remain on the lease until I find a replacement tenant but they usually opt to pay a fee which results in more income for me.

Originally posted by @Nathan G. :

@Thomas S. I use one-year leases with a hefty fine for breaking the lease. If someone moves in August 1st and then breaks the lease two months later, they have to pay two months of rent as the termination fee. I usually find a replacement tenant before the old tenant is gone so that termination fee is extra income. The other option is for the tenant to remain on the lease until I find a replacement tenant but they usually opt to pay a fee which results in more income for me.

 Nathan, that is really interesting. In Washington state when I worked for a PM, if a renter moved out but was still on the hook due to lease, we could only charge them up until the date that the new renter moved in. Are you able to get around that because you are charging a fee that "happens" to be the same amount as 2 months rent? Sounds like a good way to protect your bottom line.

@Patrick Daniel the law (in every state I know of) says the Tenant is obligated for the full term but the Landlord must make an effort to find a replacement tenant. Once a new tenant starts paying rent, the old tenant is released from their obligation.

HOWEVER, I don't tell the tenant that unless they ask!

If the Tenant signs a lease on January 1st for 12 months, they've obligated themselves to that term. If they decide to leave in April, they can pay my "fee" of two months rent, or they can hope I find a replacement tenant sooner. The benefit of the fee is that they are no longer obligated to the terms of the lease. If it takes me six months to find a new tenant, the original tenant doesn't have to keep paying rent until the new tenant takes over because I've agreed to release them when they paid the fee.

Again, it's extra money in the Landlord's pocket in most cases. In some cases, you'll have a hard time finding a replacement tenant and the fee only covers two months of vacancy. In both cases, it's better than the tenant disappearing into the night.

Originally posted by @Patrick Daniel :

I have used a M2M lease that states if they stay less than 6 months, they forfeit their security deposit. This keeps the renter from wasting our time.

Every single time I think I *finally* have everything I need in my lease I see something else on BP that I should add. I hope this is legal in Ohio, I can't think of anything in the ORC that would prohibit it... Any Ohio lawyers know?

Thanks!

I vote for keeping them all M2M. This puts you in the best position to get rid of them if they are a problem.
Here is an interesting thought for future leases: My CPA is an investor as well, and he does 6-month terms because it limits the time frame for bad tenants, but locks good ones in for a decent amount of time. Something to think about...
I plan to try to structure my contracts so that they do not expire in the middle of winter!

Couple thoughts here to try and add to other posts.

1.) Careful you don't end up with an an empty building -highly unlikely butIwould not have all the leases expire in the same month.

2.) We never do a 1 year lease - if credit is suspect because of medical vs phone bills utilities etc...we then write a 6 month lease that states if they pay on or before the first we will renew it for 1 year.

3.) Finally, we never ever have any of our leases expire between 10-31-thru 1-31 of any year. Our vacancy rate or 2016/17 and YTD is averaging 1.06% and that is with 60+ doors. In the rare instance someone breaks a lease ( also use the 2 month lease break penalty ) during those months we still will have an expiration date of 10-31-year or extend it another month or 2 make it a 13 / 14 month lease.

Congrats on your venture!

With 8 units, this is more tricky than just a duplex. I like the ideas of people saying give the current tenants a test run of 2-3 months. But, nobody addressed the location where you are at. Cold weather equals less moving in the winter. I wouldn't want to have MTM leases in the middle of winter. And, despite some people stating leases do not keep people from moving whenever they want, I 100% think it does. You could always give those tenants options, much like many apartment complexes do. MTM at $800 a month, 6 months at $775, 1 year at $750, for example. I give two options on my duplex. 1 year and 2 year lease prices. I have leases locked in on both options right now.