Why Would You Do A Month To Month Lease?

General Landlording & Rental Properties
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Why Would You Do A Month To Month Lease?

Zach Simpson
New to Real Estate · Ogden, UT · Member since 2017 · 23 posts · 29 votes

Hey everyone!

My wife and I are very young (both 21) and we have our first baby due in October. To make a long story short: I am wanting to get a headstart on real estate investing. As of now, I am really thinking it is what I want to pursue as my career. I'm REALLY new to all of this and I am just now starting to learn the basics. One common piece of advice I hear on the BP podcast, forums, articles, etc. has to do with "house hacking." So far, it all seems like a great idea. I was looking at a duplex on Zillow and the description mentioned that the tenant living in one of the units was on a month to month lease. My question is why would you (the investor) have someone on a month to month lease rather than a 6 month/1 year lease? Wouldn't signing them on a longer-term lease help avoid vacancies and then having a unit that produces zero income? Is there any advantage to the investor to have tenants on a month to month lease?

I apologize if this question has been asked a ton. I looked around for an answer and I didn't find anything that really answered my question. Thank you all in advance. Any and all advice means a ton to me!

-Zach

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Thomas S.
Member since 2016 · 13k+ posts · 12k+ votes
8y

A landlord, in signing a lease with a tenant, hands over the keys and places the tenant in control of the property for the term of that lease. The relationship can go bad at any time for many reasons even with what could be considered "good tenants". When it does as a landlord your only options are threats, intimidation and ultimately eviction. If they have stopped paying rent this can result in months of lost income which most landlords view as unrecoverable. 

The primary reason landlords choose a term lease is to lock a tenant into a specific time frame of occupancy. Unfortunately, because tenants move when ever they choose, regardless of a lease, this usually results in tenants not giving notice to break their lease. The end result is a unexpected vacancy.... zero notice. This also creates a situation where tenants look at the end of a lease as a time to move rather than to resign a new lease. It can actually motivate tenants to move. A lease has zero impact on when tenants move it simply forces a tenant to break their lease when they must move or choose to move. Bottom line a lease is false security.

Many say it prevents move outs in bad times like the winter. Reality is if a tenant needs to move in the winter they will move regardless. However tenants do not like to move in the winter and will not do so without good reason. A lease does not control when tenants choose to or need to move.

A M2M on the other hand keeps control of the property in the hands of the landlord. When things go bad you simply non renew and find a new tenant. This limits your losses and avoids evictions in most cases. It has no impact on when a tenant decides to move and creates a communication situation where by, because they are not breaking a lease, they are much more forthcoming with their intended plans and they are likely to stay longer depending on their personal life situations.  

All my tenants are on M2M from day one, many for decades, and we are all very happy with the arrangement. No tenant ever needs to do a midnight run, they all know it and give me a heads up well in advance of needing to move. Vacancies as a result are minimal. Far below industry averages.

Landlords that believe term leases control tenant movement are only fooling themselves. If you do not believe me do a search on "my tenant is breaking his lease".

Mike makes a valid point about rent increases. Some investors are incompetent when it comes to the management of their investment. Rent increases need to be done annually without exception to maintain market rent and insure a full valuation on your investment. A rent 10% below market has devalued your property by 10%. I do mine annually without exception. If a landlord is not comfortable doing annual increases they are obviously not comfortable being a landlord. They need a PM that will professionally manage their investment if they are not capable of doing it themselves. This should have nothing to do with their choice of lease trerm. 

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  • Rachel H.
    San Antonio, TX · Member since 2009 · 3k+ posts · 1k+ votes
    8y

    @Zach Simpson It depends on the investor and their comfort level. Have known others to have month-to-month leases just because they want peace of mind if anything goes wrong they can file for eviction the next month. Others have done it because that's the way they've always done it. I've also known other landlords to have verbal leases. Everyone has a different way of doing things. Don't assume someone's a bad tenant just because they're on a month-to-month lease. There are explanations for everything. And you just have to handle it on a case-by-case basis. Hope that helps! 

    2Reply
  • Account Closed
    Kansas City, MO · Member since 2017 · 21 posts · 5 votes
    8y
    I inherited tenants whose lease goes month to month after their year is up. Things have been somewhat ok.. they pay rent, although usually late, but I don’t feel totally comfortable with them. I wanted to replace the inherited lease with my own, which I got from BP, but for now I have a little peace of mind knowing I can give a notice to not renew the lease. This is for my first house hack by the way.
    0Reply
  • Nick C.
    Investor · Tampa, FL · Member since 2011 · 2k+ posts · 3k+ votes
    8y

    Because some tenants are a pain in the butt. A month to month lease gives you the flexibility to move on right away if they're high maintenance, instead of waiting 12 months. I can think of a couple right now I wish we had on a month to month lease... 

    6Reply
  • Mike McCarthy
    Investor · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
    8y
    Some people like the reliability of a year lease. Others like the flexibility with a month-to -month. Neither really has any bearing of the quality of the tenant. The biggest problem I see with mtm leases is it makes it easy for no one to talk about rent increases. The feeling is ‘they are a decent tenant, I won’t rock the boat’... and 5 years later the rent is the same while your carrying costs (insurance, taxes, repairs, etc) have all gone up. It takes some diligence to keep having the rent discussion every 12 months.
    0Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    8y

    A landlord, in signing a lease with a tenant, hands over the keys and places the tenant in control of the property for the term of that lease. The relationship can go bad at any time for many reasons even with what could be considered "good tenants". When it does as a landlord your only options are threats, intimidation and ultimately eviction. If they have stopped paying rent this can result in months of lost income which most landlords view as unrecoverable. 

    The primary reason landlords choose a term lease is to lock a tenant into a specific time frame of occupancy. Unfortunately, because tenants move when ever they choose, regardless of a lease, this usually results in tenants not giving notice to break their lease. The end result is a unexpected vacancy.... zero notice. This also creates a situation where tenants look at the end of a lease as a time to move rather than to resign a new lease. It can actually motivate tenants to move. A lease has zero impact on when tenants move it simply forces a tenant to break their lease when they must move or choose to move. Bottom line a lease is false security.

    Many say it prevents move outs in bad times like the winter. Reality is if a tenant needs to move in the winter they will move regardless. However tenants do not like to move in the winter and will not do so without good reason. A lease does not control when tenants choose to or need to move.

    A M2M on the other hand keeps control of the property in the hands of the landlord. When things go bad you simply non renew and find a new tenant. This limits your losses and avoids evictions in most cases. It has no impact on when a tenant decides to move and creates a communication situation where by, because they are not breaking a lease, they are much more forthcoming with their intended plans and they are likely to stay longer depending on their personal life situations.  

    All my tenants are on M2M from day one, many for decades, and we are all very happy with the arrangement. No tenant ever needs to do a midnight run, they all know it and give me a heads up well in advance of needing to move. Vacancies as a result are minimal. Far below industry averages.

    Landlords that believe term leases control tenant movement are only fooling themselves. If you do not believe me do a search on "my tenant is breaking his lease".

    Mike makes a valid point about rent increases. Some investors are incompetent when it comes to the management of their investment. Rent increases need to be done annually without exception to maintain market rent and insure a full valuation on your investment. A rent 10% below market has devalued your property by 10%. I do mine annually without exception. If a landlord is not comfortable doing annual increases they are obviously not comfortable being a landlord. They need a PM that will professionally manage their investment if they are not capable of doing it themselves. This should have nothing to do with their choice of lease trerm. 

    20Reply
  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    8y

    What @Thomas S. said.

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    3Reply
  • Mark Hughes
    Rental Property Investor · Aurora, CO · Member since 2018 · 288 posts · 117 votes
    8y
    I prefer longer lease terms but often they fall into M2M and many states have different laws surrounding this....for example, they sign a 1 year lease that states after the lease term they automatically fall to a M2M after the lease term if neither party renews new lease term or notifies to terminate the term. So the owner/landlord is hoping they will renew for another year but the tenant says, nah, I’ll just stay month to month. At this point the landlord can jack up rent but that might piss them off and send them away anyways to initiate vacancies....or they can say, alright we’ll just see how long they stay as is until they give notice. Depending on your state regulations, you might be able to put a rate increase regulation that every so often (ie each year) rent increases by x% so this way you have some leverage.
    1Reply
  • Zach Simpson
    OP
    New to Real Estate · Ogden, UT · Member since 2017 · 23 posts · 29 votes
    8y

    @Thomas S. Thanks so much for all that detail. You really opened my eyes to a lot of things I didn't ever think about. It seems that a M2M gives the investor more control on their investment than I had thought.

    You mentioned that refraining from annual rent increases devalues your property. How is that?

    1Reply
  • Terrell Garren
    Rental Property Investor · Concord, NC · Member since 2016 · 1k+ posts · 3k+ votes
    8y

    I use a 12 month lease for the first year then default to month to month with 30 days notice required to terminate for either party.  Tenants will generally move when they need to move regardless of a lease, so a long term lease more so handcuffs the owner. I keep my rents a little lower than market so my residents don't want to leave. If the relationship goes south for whatever reason, I can give a 30 day notice (and they know it). It allows me good leverage in dealing with property management issues. 

    3Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    8y

    Zach purpose built income properties are valued based on the rental income. Investors look for properties that have rents below market so as to pay below market prices then increase the rent to force equity growth. Investors will generally target hobby landlords that have not kept up with market rents or intentionally hold their rent below market with the belief it will retain tenants longer. When it comes time to sell they generally lose market value.

    This is not the case for SFHs since their price is driven by home buyers. They are generally over priced for investment purposes.

    5Reply
  • Sam Shueh
    Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes
    8y

    Some is expired lease. A few can be verbal lease. They can go or come and you are in control.


    1Reply
  • Fred Heller
    Real Estate Agent/Property Management · Houston, TX · Member since 2014 · 1k+ posts · 827 votes
    8y

    Whenever you see a house occupied with a tenant on an MTM, chances are they've been there for years and the landlord is just kind of lazy (or in a comfort zone) and doesn't want to deal with it and is happy to just let things roll along. Most likely he hasn't done any improvements and deals with maintenance on a must do basis. The tenant is also paying well below market rent because the landlord has never raised the rent. That's my experience.

    3Reply
  • Zach Simpson
    OP
    New to Real Estate · Ogden, UT · Member since 2017 · 23 posts · 29 votes
    8y

    @Thomas S. Thanks so much for all your advice. I didn't know any of that.

    0Reply
  • Zach Simpson
    OP
    New to Real Estate · Ogden, UT · Member since 2017 · 23 posts · 29 votes
    8y

    @Fred Heller Thanks, Fred. I wouldn't have known those things otherwise. I appreciate you sharing your experience.

    0Reply
  • Chris Martin
    Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
    8y

    When I actively managed, my M-M and 3 Month leases were about 25% higher in rate than a 12 month lease. Higher turns, higher costs. Not many people offered M-M and 3 Month lease where I managed, so I literally had very little competition. With both M-M and 3 Month leases, I required the : "security deposit shall not exceed an amount equal to ... one and one-half months' rent if a tenancy is month to month, and two months' rent for terms greater than month to month." People wanted M-M and 3M leases and I complied. They generally didn't stick around. Most were new to the area and had no plans to stick around for long. 

    People can pick up and leave without notice, but most played by the rules because they wanted their 2 month's security deposit back.

    0Reply
  • David S.
    Rental Property Investor · Larkspur, CO · Member since 2018 · 198 posts · 179 votes
    8y

    @Nathan Gesner I have to laugh, though your input is very much appreciated as you have a lot of good advice, are you stiving to post in every thread by chance?? 

    @Zach Simpson I think the notion that having a longer term lease to prevent vacancies in the dead of winter is fooling oneself is rather simplistic thinking. That tenant knows they’re giving up their security deposit on top of the fact that they probably don’t want to move in winter... that deposit is often a decent deterrent to moving out early, and come to think of it, it may be wise in a place like Idaho to structure a lease based on early spring... that way if they want to break the lease early and it’s winter, their loss of the security deposit is that much more significant if they only have two or three months left and even if they do break the lease early, now you’ve gotten last month and the security deposit to offset any vacancy time. So in a four season environment I do believe it’s enough deterrent to make a difference in vacancy. 

    Now if you’re on the lower end of the market spectrum in a place like FL, I would totally go month to month. You have to consider your tenants carefully however... if they’re holding a job with a local employer that they’ve had for a long time, odds are they’ll stick around. If they’re moving to the area fresh, well, odds are your month to month lease might be a intended segway for then, especially if they have a history of owning rather than renting. 

    Hope that helps! 

    2Reply
  • David S.
    Rental Property Investor · Larkspur, CO · Member since 2018 · 198 posts · 179 votes
    8y

    @Thomas S. What market are you located in? Thanks

    0Reply
  • Jill F.
    Investor · Akron, OH · Member since 2016 · 2k+ posts · 4k+ votes
    8y

    A lease doesn't stop a person that really needs to move. It provides the tenant WAY more protection than it provides the landlord. In Ohio, if a tenant breaks a lease you can only charge him your actual vacancy losses and you have to prove that you were actually making a real effort to re-rent. A Tenant with bad credit doesn't care if you get a judgement, you can just get in line. A Tenant with good credit that really needs to move will still move but they will probably leave your unit nice so you can quickly re-rent and they will likely pay until you do to protect their credit.

    On the other hand if you sign a lease, the tenant has a right to your property for the term of the lease and if they turn out to be a major PITA you are likely STUCK with them as long as they pay rent. If they are M2M and turn out to be a pain you can do a 30-day non-renew.

    I only offer leases to people with good credit and a great rental history-- and then only because they expect it.

    1Reply
  • Michaela G.
    Investor · Atlanta, GA · Member since 2013 · 3k+ posts · 3k+ votes
    8y

    When tenants want to move, they move, regardless of the length of the lease. The better the area and the higher the rent, the fewer people will think that way. 

    So, I'd rather a tenant be able to move, so that they worry about getting back their deposit, because they only have to give me 30 days notice, than having a tenant that wants to move, knows he still have 6 months left on the lease and feels that he's screwed anyway, so, he might as well not give a damn about the condition of the house. 

    3Reply
  • Jill F.
    Investor · Akron, OH · Member since 2016 · 2k+ posts · 4k+ votes
    8y

    @Zach Simpson I said above what everyone else already told you-- should've read the thread first. 

    There is one other reason you might want a lease in place and that is financing. The bank, sometimes won't count rent or won't count as much rent towards income without a lease...They fear (I've been told) that the seller might fill up the units with unqualified/short-term tenants at the last minute to "goose" the numbers. But I bet if the tenant has been there a while it they might be convinced to count the income. Check with your lender. I still like M2M.

    2Reply
  • Dennis M.
    Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
    8y
    Originally posted by @Thomas S.:

    A landlord, in signing a lease with a tenant, hands over the keys and places the tenant in control of the property for the term of that lease. The relationship can go bad at any time for many reasons even with what could be considered "good tenants". When it does as a landlord your only options are threats, intimidation and ultimately eviction. If they have stopped paying rent this can result in months of lost income which most landlords view as unrecoverable. 

    The primary reason landlords choose a term lease is to lock a tenant into a specific time frame of occupancy. Unfortunately, because tenants move when ever they choose, regardless of a lease, this usually results in tenants not giving notice to break their lease. The end result is a unexpected vacancy.... zero notice. This also creates a situation where tenants look at the end of a lease as a time to move rather than to resign a new lease. It can actually motivate tenants to move. A lease has zero impact on when tenants move it simply forces a tenant to break their lease when they must move or choose to move. Bottom line a lease is false security.

    Many say it prevents move outs in bad times like the winter. Reality is if a tenant needs to move in the winter they will move regardless. However tenants do not like to move in the winter and will not do so without good reason. A lease does not control when tenants choose to or need to move.

    A M2M on the other hand keeps control of the property in the hands of the landlord. When things go bad you simply non renew and find a new tenant. This limits your losses and avoids evictions in most cases. It has no impact on when a tenant decides to move and creates a communication situation where by, because they are not breaking a lease, they are much more forthcoming with their intended plans and they are likely to stay longer depending on their personal life situations.  

    All my tenants are on M2M from day one, many for decades, and we are all very happy with the arrangement. No tenant ever needs to do a midnight run, they all know it and give me a heads up well in advance of needing to move. Vacancies as a result are minimal. Far below industry averages.

    Landlords that believe term leases control tenant movement are only fooling themselves. If you do not believe me do a search on "my tenant is breaking his lease".

    Mike makes a valid point about rent increases. Some investors are incompetent when it comes to the management of their investment. Rent increases need to be done annually without exception to maintain market rent and insure a full valuation on your investment. A rent 10% below market has devalued your property by 10%. I do mine annually without exception. If a landlord is not comfortable doing annual increases they are obviously not comfortable being a landlord. They need a PM that will professionally manage their investment if they are not capable of doing it themselves. This should have nothing to do with their choice of lease trerm. 

    That is some great wisdom . Thank you for posting that Thomas . I’ve learned a lot from your posts as well as Nathan g’s

    0Reply
  • Sean Lambert
    Investor · Pacific City, OR · Member since 2016 · 174 posts · 123 votes
    8y
    If the tenants don’t work out, it’s easier to give them notice on a M2M. It also makes it so the tenant doesn’t feel trapped. I used to do year leases, but will always do M2M now.
    0Reply
  • Shea SpinelliPro Member
    Rental Property Investor · Tyler, TX · Member since 2016 · 198 posts · 89 votes
    8y

    We have 15 and all except 3 are on M-M leases. The 3 that aren’t asked for a long term and we agreed. @Thomas S. lines out the best info I’ve read on this above. Well put. 

    1Reply
  • Will Fraser
    Real Estate Broker · Salt Lake City & Oklahoma City · Member since 2018 · 3k+ posts · 2k+ votes
    8y

    Month-to-month AFTER the initial lock-in period of . . . .a year or so, can be a useful tool for the Landlord and the tenant.  For the Landlord, it may allow you to more easily end the tenancy in case rental-rates are volatile (in the positive way) or the tenant proves to be less than ideal.  For the tenant it can seem like such a low bar of commitment that it doesn't provoke them to reconsider, which is an interim state that can last for a LONG time! 

    0Reply
  • Account Closed
    Property Manager · Northeast Indiana · Member since 2013 · 46 posts · 38 votes
    8y
    Originally posted by @Jill F.:

    @Zach Simpson I said above what everyone else already told you-- should've read the thread first. 

    There is one other reason you might want a lease in place and that is financing. The bank, sometimes won't count rent or won't count as much rent towards income without a lease...They fear (I've been told) that the seller might fill up the units with unqualified/short-term tenants at the last minute to "goose" the numbers. But I bet if the tenant has been there a while it they might be convinced to count the income. Check with your lender. I still like M2M.

    FINALLY SOMEONE MENTIONED FINANCING! 

    Long term leases on the books carry much more weight with lenders. Even if some or all of the other advice here is good advice, if you move past a duplex or tri-plex financing, and get into commercial level multifamily property, you need to show a lender history of being able to sign long term leases. A MTM lease might as well be a vacancy if you are trying to obtain financing - or trying to sell, and hoping your buyer can obtain financing. The appraiser will take length of lease into account as well. But again, I am coming from the perspective of larger commercial multifamily. 

    I would also mention security deposits. I dont think anyone has said it yet, but the bigger the deposit, the less willing a tenant is to lose it...and more willing to comply with a lease break provision your lease might have (for instance we have a 2x rent penalty if you move mid lease. People comply because they will lose their large-ish security deposit anyway and want a chance at a good LL reference, which we will usually give if they comply with the lease break penalty). Some states this type of provision may be governed by state law.

    Finally, if your lease is strong enough and you have house rules on the books for how tenants are expected to conduct themselves you can evict someone in a 12+ month lease in their 2nd month if they break the rules too many times - even if they still are current on rent. Keep a good paper trail of warning letters and fines for rules violations and a judge will side with you.

    2Reply
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