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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  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    8y
    Originally posted by @Fred Heller:

    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.

     I always let my leases become m-m.  Why remind the tenant that another year has passed?  Hey, good paying tenant minding your own business- time to decide whether you want to stay or not. Hey, wake up and make a decision...

      Unless of course you don't own the place and get a 'renewal fee' for reminding them... and you win again with a new placement fee when they leave. Oh well, right?

    Not all of us are lazy or stupid for having m-m people. I have several m-m people that have been that way since the Clinton administration. I keep my places up and give annual increases, small ones that also come with a 12 month rate guarantee, a 'discount' for paying on time and a great big I appreciate you.

    I give leases in the beginning to the strongest applicants only, otherwise I keep control with a  m-m, 6 month min for deposit back if they leave voluntarily.  The deposit is gradually more refundable at month 4+. Check your state law about that though. Most of the time I have strong tenants and offer 12 month leases at first but I do not bother them to 'renew'.

    2Reply
  • Mike Anderson
    Investor · Glendale, AZ · Member since 2015 · 25 posts · 9 votes
    8y

    One reason I went month to month is that with renters is that I live in an area with a changing market place.   

    Price are fluctuating fast and I want to keep all options open (Buy, Sell, release).   

    Also, I want to coordinate taking two pieces of property and exchanging for on grandeur property on a 1031 tax exchange.

    1Reply
  • Don SpaffordPro Member
    Investor · Idaho Falls, ID · Member since 2016 · 912 posts · 629 votes
    8y

    @Zach Simpson First off, welcome to BP! Its awesome that you are starting so young on this to set yourself and your family on a secure financial future. Many people have made many great points for both sides. Another thing to consider are the state laws. I only use long term leases, start with 1 year, then extend to longer if I like them as a tenant, or just keep them on annual leases if they are just so-so. In Idaho, the laws are very landlord favorable. As long as you have a strong lease, if the tenant doesn't pay and you need to evict it can be done pretty quickly. At the most you are looking at a month before they are out. Of course, it also may depend on the area and the property you are dealing with. I stay away from properties and areas that attract lower quality tenants and do pretty thorough background and credit checks. Of course that doesn't necessarily always get you perfect tenants but you do as much as you can to avoid bad ones. If you would like to meet up sometime and discuss some options for our area, PM me and I'd be happy to talk with you. I know a lot of favorable lenders in the area as well that can help you as a first time buyer.

    0Reply
  • Julie MarquezPro Member
    Investor · Skagit County, WA · Member since 2016 · 1k+ posts · 807 votes
    8y
    We do m2m on our apartments, and as you’ve read, I think it has to do with the class of people. Our C class residents would just ghost anyway before a year if they needed, and we can terminate the agreement in less than a year if we need. Our agreements have a non refundable fee that covers the turnaround if they leave early. If they stay longer than a year, that fee goes towards the refundable deposit.
    3Reply
  • Bjorn AhlbladPro Member
    Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
    8y

    When I lived in CA we did 12 month leases for our renters. Then when I started investing in WA I was shocked when the PM said we only do month to month. Once the rationale was made clear I was still dubious but went along. Now I would not offer a 12 month lease, period. I recently had a tenant offer an incentive; she wanted to paint the entire unit and a few other things in exchange for a 12 month lease, and I said ‘no. MTM is the way to go in my duplexes and apartments, and it has zero effect on how long the tenant stays.

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

    I like what @Julie Marquez does, but wonder if it's possible/reasonable to adapt such a turnaround fee in a seasonal manner, where you'd refund the fee for a tenant if they moved during X months, and charged it if they move in say Nov, Dec, Jan, Feb, or March. 

    Of course you'd market it as a "permanent fee" where you're willing to omit it out of the kindness of your heart if they happen to move during a warmer month. This model is adaptable to both MTM and long term leases. 

    1Reply
  • Travis Rasmussen
    Realtor · Murrieta, CA · Member since 2016 · 373 posts · 203 votes
    8y

    @Zach Simpson

    Congratulations! Looks like a lot of people gave great answers here. Nothing really to add here but just want to say good job on getting started young :)

    0Reply
  • Jacob Villalobos
    Whittier , CA · Member since 2013 · 176 posts · 96 votes
    8y

    M2M=THE BEST

    I don't like my tenant, I give them a 30 day notice at any point. BYE BYE!!! 

    Most people don't like to move much. My first rental has a the original tenant from 10 years ago. He is on a month to month... 

    0Reply
  • Nancy P.
    Naperville, IL · Member since 2018 · 330 posts · 357 votes
    8y

    All but one of  our properties are condos.  All of the associations DEMAND one year or longer leases as they want stability in the property.  So we have no choice.  Half of them  also charge move in/move out fees of $200 or $300,  which also discourages having MTM leases.   And I completely disagree with the assertion that it devalues your property come time to sell.  It is possible that the seller did have longer term leases but went MTM to put it on the market.  Buyers are far happier to have a tenant they can almost immediately get rid of or raise the rent on than a tenant they are stuck with for a while.

    0Reply
  • Nicole Heasley Beitenman
    Investor · Youngstown, OH · Member since 2017 · 2k+ posts · 2k+ votes
    8y

    I rent the spare bedrooms out of my primary residence. I keep tenants on mtm as an extra level of security. If a tenant is creating a toxic living environment, I want to be able to get them out ASAP. 

    0Reply
  • Luka Milicevic
    Real Estate Agent · Nashville, TN · Member since 2015 · 2k+ posts · 2k+ votes
    8y

    I might have read this one time ona. Blog post or heard it somewhere and it made me completely re-think leases.  A lease binds the landlord for the duration of the lease, not the tenant. If a tenant signs a 2 year lease you might think that’s great as they are going to stay there for 2 years. Well, if they get a job across the state 3 months later, I assure you they are going to break the lease. Yes, you can keep their deposit but that’s it.

    Now let’s say you are in a 2 year lease with this tenant and amazon announces they picked your city as their HQ2. Your market rent just went up. You can’t raise the rents on your tenants and you can’t get them out. You have no choice but to honor the lease. This is just an example, but you get the point?

    In conclusion-a lease binds you the landlord and not the tenant 

    0Reply
  • Ian WalshBusiness Member
    Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
    8y

    In our area month to month allows the attorney to evict on time and most likely lack of payment.   Time can't be disputed.

    0Reply
  • Carlton Wood
    Insurance Agent · Piscataway New Jersey · Member since 2017 · 33 posts · 12 votes
    8y
    M2M leases are also appealing for potential owner occupant buyers. If they want to move in and house hack the seller can give a tenant 30 day notice and have them out before closing, this gives the seller a larger pool of buyers. If all his tenants were on long term leases he would have to sell solely as an investment property as the buyer would inherit the tenants and their long term leases. Also if u inherit tenants on long term leases you are stuck with those tenants and their leases. M2M tenants u can give 30 day notice and get them out if they don’t work out for you.
    0Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    8y

    @Zach Simpson yes and no. Leases are an illusion of security. I have had two tenants that stayed over 5 years on month to month leases. One stayed in a property over 10 years on month to month. I have also had a tenant break a one year lease after three months. People generally stay in the property if they are happy. They only move when they perceive another better option or if they have to relocate. If your property is kept in good condition at fair rent, people will stick around. Who wants to move if they don't have to?

    I do try to keep better tenants in leases, but my point is that a month-to-month doesn't mean the tenant wont stay long term. 

    0Reply
  • Mike Hanneman
    Investor · Coeur d'Alene, ID · Member since 2016 · 551 posts · 218 votes
    8y

    A landlord does a M2M lease because it protects the landlord. If a tenant is going to break a lease, they are going to break a lease and not much stops them. Yes you can have fees but one has to fight them for the fees, most likely in court. With a M2M a landlord has more say. In order to get a tenant out all one has to do is give them a 30 day, (depending on state) warning. No eviction is required. 

    Sorry this was quick and rushed.

    1Reply
  • Rebecca R.Pro Member
    Real Estate Agent · MD · Member since 2016 · 107 posts · 27 votes
    8y

    Thomas S.

    I like your expanation you provided for having a month to month lease with your tenants. As a new investor who is corrently renting an apartment in an apartment complex, I can see the occasionally need for a month to month lease with tenants that are disruptive and a nusense to other tenants.  

    Do you add specific or particular wording in your m2m leases that are not included in general leases?  Thank you for your reply. 

    0Reply
  • Andrew Jones
    Insurance Agent · Sacramento, CA · Member since 2017 · 45 posts · 33 votes
    8y

    House hacking is great, but one thing you must keep in mind is that you are living next to your tenant(s).  Their cooking, their TV shows, their romantic proclivities...you are going to hear, see and smell a lot of it.  You can't just evict someone because they eat curry every night, but you are under no obligation to renew their lease if you'd prefer a new neighbor.  You can always swap tenants and go to a longer lease if you move into a new property.  Just my two cents...

    0Reply
  • Kevin Sharp Jr
    Indianapolis, IN · Member since 2016 · 21 posts · 6 votes
    8y

    If you want to get a head start, you can bird dog for experienced investors and feed off other people to find out what is working in your market. Property management could be outsourced so you can focus on producing income for early financial freedom. Wholesaling is a good way to leverage other people if you are fearful of getting started because you don’t need money or credit to start raising capital to invest 

    0Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    8y

    @Rebecca R. If I chose to use a term lease it would be identical to my M2M lease. Rental rate would be the same. My lease is based on our Landlord Tennat Regulations which trumps any language a landlord may choose to put in their lease in my jurisdiction..  

    0Reply
  • Rebecca R.Pro Member
    Real Estate Agent · MD · Member since 2016 · 107 posts · 27 votes
    8y

    Thank you @Thomas S.   Looks like I'll have to get a copy of the latest Landlord-Tenant Regulations info for my area, thanks. 

    0Reply
  • Steve Bracero
    Real Estate Agent · Westboro, MA · Member since 2016 · 1k+ posts · 471 votes
    8y

    @Zach Simpson

    Month to month gives the tenant and the landlord more flexibility. 

    A long term lease, may help avoid vacancies but tenant screening is everything. 

    If you inherit tenants you want to screen them. 

    Vacancies are a killer. If you can turn a unit (once a tenant moves out) quickly, you will keep more money in your pocket. 

    0Reply
  • Julie MarquezPro Member
    Investor · Skagit County, WA · Member since 2016 · 1k+ posts · 807 votes
    8y

    @David S. You could probably structure the fee to be whatever you wanted. You could give back to deposit 50% at 6 months and 100% at one year, or something based on duration, or whatever months worked for you.

    It's nice to see so many people liking m2m agreements, I don't know why they aren't more standard.

    0Reply
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