Pros and cons of month to month lease vs. long term lease

11 Replies

I've been reading through past discussions on this but would love some advice from seasoned property managers on my particular situation. I have one single family rental with a long term tenant and it's worked out great. My new property is a triplex (or will be when we get done building out the two garage units). The front cottage is going to be long term and my plan is to do short term rentals out of the garage units. I'm obviously going to make the long term tenant aware of the situation but was thinking that a month to month rental agreement might be best in case they decide they don't like the whole Airbnb thing going on behind them. I'm new to STR's but I get that reviews are huge and want to make sure my long term tenant feels free to leave if needed vs harassing guests. I'll add I'm in Colorado and our market is very hot right now so I'm not concerned about getting stuck with an empty unit in the middle of winter. I read one poster on here said that the power shifts from the owner to the tenant when you go to month to month, but I don't really get that. As landlords we would have a much more difficult time with an eviction than simply giving notice to a tenant in a month to month agreement that we aren't going to renew, correct? Would love to hear what some of your thoughts are on the best way for me to go in this situation!

Robin, when we had rentals in CA the tenants were always on leases. Then we moved to WA and leases just are not the norm here. We sometimes have tenants ask for a lease; but we do not offer them. I think MTM gives the LL more power; but the market sets the rules for who has the power. I like the flexibility that MTM gives both parties; but it does not seem to have any effect on term. We have tenants in our apartment building who have been there for eons and are on MTM. I think in your situation you are making the right decision going with MTM. 

@Robin Searle Great advice by @Bjorn Ahlblad . Lease dynamics - MTM vs. long-term lease - are governed by the market more than anything else. 

E.g. I didn't even think MTM was favorable for the landlord before I moved from Canada because it would (in my mind) create havoc in terms of predicting your future cash flows. 

But living in Texas has showed me that MTM can allow for greater operational flexibility for the landlord and more freedom for the tenant. 

@Bjorn Ahlblad you don't put tenants on a lease? Or you don't put tenants on a long term lease? even if you only do MTM you should always use a lease. Otherwise you're just leaving yourself wide open to anyone and anything. How do you prove that a tenant didn't pay rent? There's no lease saying they have to pay rent, or how much rent is. How do you outline rules and policies? you just have people move in, say 500/mo rent, see ya. and everything is honkey dorey from then on?

@Robin Searle . If you are in a Market with High Demand M-T-M might be workable.  If demand is slower then a Month or two of vacancy wipes out much of your cash flow for the year. 

I personally prefer the stability of A Longer Term lease.  

@Robin Searle

I love the idea. I think I've seen you on the Facebook page for the Colorado Springs Short-Term Rental Alliance, so I know you already know of the proposed ordinance down there. For those who might be reading this and don't know, the proposal would prohibit owners from operating more than one Airbnb/VRBO/short-term rental on a property. So just be ready with your two garage units, should that proposal go through. 

(I'm not happy about the ordinance, but it's a lot less strict than Denver's Airbnb law, so I guess we can savor that small win.)

I think in your situation, the STRs are the real money makers, so keeping those going strong with good reviews is the priority. Therefore giving yourself the out to remove an unhappy long-term tenant is a good idea.

@James Carlson Hi James - Yes, I'm the one who started the Change.org petition requesting removal of that section. In case you didn't know, there is a meeting scheduled with all STR owners and hosts at The Platinum Group Realtors at 6 pm on July 2. If the ordinance goes through (which I'm going to do my best to fight against!), I plan on applying for a variance. If that fails, I'll do the studio as a long term rental but that's not my preference.

Everyone is going to say month to month is ideal for the landlord and that is true but wait till you do a cash out refi . The issue is The bank ( atleast anyone I talked to) wants to see year long leases NOT -month to month . The bank views a year lease as less risk for them and a form of stability which as investors we know doesn’t equate to security in the real world .

A lot of the larger apartment complexes where I live have varied rates based on length of lease. This always seemed like a great idea to me. They basically add the risk into the price. For example - 

- Month to month - $950 

- 6 month - $875

- 1 year - $815

Interesting approach at least. 

I bought my 8-plex a little over a year ago. I did 3 month leases with MTM after that. I have found that it didn't work well for me. I had a tenant move out on Dec. 1 after their 3 months were up. That unit sat there until June 1 because I'm in MN and the only people that usually move in the winter are people who are getting kicked out of where they are. Not necessarily who I want to have move in.
I thought the advantage of the MTM was if I had bad renters or renters who didn't like to pay it would be easier to get rid of them, but there are ways to get them out without the MTM if it's THAT bad. Now I do a lease that ends either in May, June, or July. That way I can get it filled quickly.