Tell me if I'm wrong... Month-to-month vs 12-month term

12 Replies

Tell me if I'm wrong...

Our company has approximately 1,000 units under management, and we have a couple of our smaller clients that we have that present concerns with having tenants on month-to-month leases. I'm sure this topic has been covered a thousand times before, but wanted to refresh the topic.

The way we operate we require a standard 12 month lease on move in and our leases all automatically convert to month-to-month leases at the one year mark once this 12 month term is fulfilled. We send lease renewals with higher rates, typically between 3-5% increases at this time, and we send these leases as month-to-month. We've found this typically incentives people to stay in their units after an increase, as they have time to try it out to see if the new rates fit their budgets, as opposed to having to make that commitment to paying the higher rate for a full 12 months.

From an operational stand point this also gives us the ability to non-renew any tenants for any reason once they're month-to-month, as opposed to having to build up 5 day notices, 14 days, and going through with evictions if we have an issue arise with a tenant. 

The argument I hear most often in favor of additional 12 month terms at lease fulfillment is avoiding turn over costs, and vacancy exposure since "all the tenants could leave at once," but I find that even if the tenants leave we are typically able to refill the units immediately anyway, so that shouldn't really be that big of a concern. Also, we find that the more often we're able to turn units, the more often we can make incremental updates and raise rents toward the higher end of market rates.

In my opinion month-to-month makes up for any loss-to-vacancy since it's making up for it with higher rates and therefore helps avoid loss-to-lease.

As a side note, we allow short term rentals of 3-6 months on new leases at rates of 125% of the 12 month market rate and have had great success with these options as well.

Other options we've done are allowing tenants to choose their renewal rate on buildings we're aggressively raising rents on by say they can pay 3% increase for signing for another 12 month term, or 5% increase to stay moving forward on a month-to-month lease. 

Are there other people out there that operate in favor of going month-to-month after 12 month terms? What's everyone's opinion?

Just my opinion - M2M all day long. In fact, it's the only option I offer. I've had several residents on M2M for 8+ years. Residents will leave when they need to leave, regardless of agreement terms. A long lease only locks the landlord in. With M2M, I can deal with misbehaving residents immediately, and they know it. I've never had an applicant decline an agreement due to M2M, once I explain my desire is long term residency.

It can be harder to find tenants at certain times of the year in some markets.  With the rent increase after 1 year and going month to month, in a year's time do you increase the rents again? If not, I can see that being a problem.

I do year long leases because I have places in tenant friendly areas and the only way to get them out (short of evicting them) is not renewing their lease. If they are month to month, it is much harder to get them out.

My answer will not scale to the size of your business. I only have 20 or so SFHs so I can easily manage differences. Some I raise the rent on every couple years based on expenses and market rates. I have a others that I have not raised rent on in 5 plus years. Many factors to consider like - Can the residents afford an increase, are they great residents, am I getting a decent ROI, do I want to create the risk of turnover, etc. In my world there is a balance between maximizing ROI and generating a decent income with minimal headaches. I will trade $100/month for rent on time/every time, care of my property, long term occupancy and no phone calls all day long.

@Jonathan Steiger @Theresa Harris

We raise the rents on all month-to-month leases annually on their anniversary. We assure our tenants that they will only receive one increase per 12 month period, and we are transparent that we always raise at a minimum of 3%. This is how we've always operated, though we have adjusted some of these rental increases currently due to Covid.

@Terrell Garren

I agree with everything you're saying, and I like how you put it being that "the long term lease locks the landlord in." Most of my problems come from the leases that are locked in, especially non-payment as they'll just stop paying and tell us to take them to court or send them to collections at times. That's another perk of month-to-month is we can get them out much sooner minimize the loss since we still have their security deposit.

We also have the similar strategies on our client's that are more affected by vacancy being that they have lower total unit counts. In those situation we may stagger the increases on the month-to-month to be sent one at a time as to gauge whether the tenant is going to move out immediately upon receiving the increase. 

@Bjorn Ahlblad

Agreed, the tenants are better behaved when they know we're able to remove them more easily for any lease violations. 

Here in Las Vegas/Henderson NV I send lease renewals out 60 days in advance.  The lease renewal offers include the notice of rent increase (0, 3, 5% etc...depends on the market) and the date the month to month rate begins (typically a much higher rate than current rent).  If the tenant does not take action and contact me to prepare the renewal then the rate automatically goes month to month.  The key is the tenant must take action.  I prefer to have the tenant renew so the lease expirations can be better managed and better predicted.  But at the same time, the more tenants that stay on month to month the higher the rent growth. I like to offer both options so tenant also has more flexibility with their plans. 

@Terrell Garren I'm exploring using month-to-month leases. One of my properties is in FL, and anything less than 6 months lease, must be charged sales tax, so I won't do it there.  I just bought a property in KY, and have a good 1 year lease I was planning on using.  In what ways does a lease fundamentally change if it's month-to-month?  Do you charge a full months rent for security deposit? 

We generally do 12 month leases for new tenants and then let them roll into M2M beyond that. Leases that are written after 10/1 will be less than 1 year and end the following summer, and then go M2M. We have no hard rule on rent increases. We only do renewal 1 year leases for good tenants. Anyone else either stays M2M or gets their walking papers. Almost nobody asks to renew a lease for a full 1 year term. Occasionally a good tenant will ask to renew a lease for some specific reason - we had one that had to have signed proof of fixed residency for a certain period of time for their medical profession - but virtually everyone stays on M2M.

As mentioned, tenants that really want to leave will leave. If you have an early termination setup most decent people will take that - we do one month plus the deposit if there's no damages, and they walk without taking care of utilities, lawn care, etc. or we can re-rent and they can be held responsible for costs until re-rented. Only a few have ever left early and all chose the early termination route as it's cheap and a clean break. Bottom line anyway is you really don't want to keep a tenant that doesn't want to stay. 

@Chris Gantz overall sound approach. We do offer term lease extensions to our best tenants. That prevents them from making an opportunistic move. All our other tenants are M2M and most our longest term tenants are M2M. 

I think your clients have a false sense of security with 12 month leases. Leases do much more to protect tenants. Especially in the age of COVID, it can actually hurt a landlord more than help. As far as all tenants moving at once, I guess that could happen if you had just one property, haha. Seriously vacancy isn't that big of a deal. We try to minimize it, but it is part of the business. When someone is ready to move, they move. 

@Terrell Garren

I could not agree with you more. A lot of people think theres a lot of turnover with M2M, but the truth is if you have a great rental and have a good relationship with the tenants they stay longer anyway. My tenants love the flexibility and i enjoy it as well. Win-Win

Originally posted by @Jason Morris :

@Terrell GarrenI'm exploring using month-to-month leases. One of my properties is in FL, and anything less than 6 months lease, must be charged sales tax, so I won't do it there.  I just bought a property in KY, and have a good 1 year lease I was planning on using.  In what ways does a lease fundamentally change if it's month-to-month?  Do you charge a full months rent for security deposit? 

I read somewhere that in legal speak, a lease is for long term and a rental agreement is for short term, so I refer to my contract as a rental agreement. The only other change I made to the former lease is the term, from 12 months to M2M.