Posted about 6 years ago

Why Using A Lease May Be A Bad Deal For Landlords

Normal 1468367990 Tenancy Agreement

If you're like most landlords, you'll probably choose to use a lease to rent out your property. The advantages are obvious: A lease locks your tenant into the rental contract for a period of time (usually a year)for a specific amount of rent. A lease also allows you to control the time of year turnover can occur; Spring is a much better time to rent than the dead of winter. However, using a month to month agreement may be a better deal for landlords in the long run. If you compare the two options , you can see why doing a rental agreement vs a lease does more to preserve your rights as an owner. 

Expiration Date

When your tenant signs a lease, it has a specific expiration date. A tenant can choose to vacate the property the day the lease expires without giving you notice. With a rental agreement, the tenant usually must provide a written 30 day notice prior to the move-out date which gives you the time you need to market the property. Moreover, by using a rental agreement, as long as you provide proper notice (usually a 30 day if occupied for less than a year and a 60 day if occupied one year or more), to your tenant, you can opt to not renew the agreement for any reason.

Rent Amount

Sure, it's comforting to know there is a guaranteed amount you'll receive in rent over a period of time and the tenant must pay it. Don't forget, however, you are also bound to that rent amount for a specific time, even if rents start to escalate in your area which means loss in potential revenue. Many areas of the country, including Sacramento, have had rent increases spike as much as 17 percent in a two year period. With a rental agreement, and use of proper notice, you can do as many increases as you wish, instead of having to wait until the lease expires. As long as your increases are predictable and reasonable, most tenants will pay the difference rather than move.

Changes of Terms

Suppose you didn't know until after your tenant moved in, he enjoys practicing the French horn for four hours a day causing aggravation and creating a noise nuisance for the neighbors. To make matters worse, you failed to include a clause in your lease requiring noise generated by the tenant be contained within the walls of the property. As long as that tenant pays rent and follows the terms of the lease, you may be stuck with that him until the lease expires. If a condition or clause is not in the original lease, it is unlikely you can change it without the tenant's consent. If you had chosen a rental agreement, you could correct your oversight by changing the agreement with proper notice and your tenant would have to abide by it or move.

Early Termination

Using a month to month agreement is your best insurance against poor tenant selection and protects you from a tenant who displays bad behavior after moving in. Even if you're an experienced landlord, there is always the chance that tenant you placed was dishonest, for example, about the number of dogs that would be occupying the property, or failed to disclose an eviction in another state. Similarly, that tenant with the 750+ credit score and perfect rental history may decide to use your rental's backyard to grow a pot farm. Although you can reduce your risk by thoroughly screening applicants, no landlord's system is foolproof. Using a rental agreement provides you with some protection to end the contract early if the tenancy doesn't work out.

Keep in mind, all leases eventually revert to a month to month agreement when additional rent is accepted after its expiration date.

If you still want the security a lease offers, start somewhere in between: Put all your new tenants on a six month lease and when that expires, switch them to a yearly lease.

Whether you choose to use a lease or a month to month rental agreement, make sure you put the contract in writing and that it is reviewed by an attorney who specializes in landlord tenant law.

Comments (6)

  1. Well said, Rick! Thanks for the comment!

  2. My experience has been that renters are going to leave when they are ready to leave.  A long term lease only obligates me to keep someone I may not want to keep.  If someone leaves early is it really going to be worth my effort to try to collect the balance of the lease from someone who probably doesn't have the money anyway?

  3. Great points you made, Landis. The length of lease shouldn't matter if both parties honor its terms.

  4. I actually started putting all my new tenants on month to month rental agreement for some of the very reasons you mentioned.  I want to be able to get a bad tenant out ASAP!  I just recently had a tenant who was 2 months behind on his rent and had only been there 4 months.  With a month to month lease, I had the option of going through the eviction process or terminating his lease.  I did both and had him out in about 6 weeks, which is fast for Baltimore.  

    My thinking with a month to month lease is, if I am a good landlord who takes care of my property and my tenants and they are a good tenant what difference should the length of the lease make?  As long as we are getting what we both want and need from that business arrangement, they aren't going to move.

  5. Thanks Abigail for your comment! As long as both parties stick to the terms of the agreement, there's really no difference except it provides a quick exit for either one if it doesn't work out.

  6. One of my concerns with renters has been that I really don't want to keep a tenant who either doesn't want to or can't pay rent and wants to move out, but is locked in by a lease. Really, leases aren't as much protection to a landlord; as being able to re-rent a space is. I will be looking into this.