One of the largest expenses you will face as a landlord is tenant turnover. Every time a tenant packs up and moves, they leave a trail of dollar bills owing from your bank account. Therefore, we landlords want our tenants to stay forever. Sadly, that’s not going to happen, but we can have some influence over how long the tenant stays by signing the right kind of lease. However, does that mean you should put all tenants immediately on a long-term lease? Maybe not.
Your two choices when it comes to a lease are “term” and “month-to-month.”
- In a term lease, the tenant is required to stay for a certain length of time. is term is usually one year in length, but some leases are signed for six months or nine months.
- With a month-to-month rental agreement, the tenant is not required to stay for any length of time, but proper notice (as defined by state-law) must be given before they move out.
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The Major Disadvantage to Term Leases
It might seem obvious to use a term lease when renting to a tenant, but there is one major disadvantage to doing this: The landlord is also locked in to the lease. If you as the landlord don’t like the tenant, you have to wait until the end of the lease to get rid of them. With a month-to-month tenancy, you can simply give the tenant proper notice (as defined by your state) that you will not be renewing their month-to-month lease anymore, and the tenant has to move. This is a BIG stick to carry around and ensure your tenants are behaving, especially if you are new to landlording.
That said, if you do your screening correctly at the beginning, chances are your tenant is going to be just fine, so this probably won’t be an issue. Therefore, you will probably find it in your best interest to use term leases. For the first eight years of being landlords, we only did month-to-month leases with our tenants because we wanted the ability to ask tenants to leave if needed. Over those years, we’ve had to ask a very small handful to vacate, and most of them probably would have left anyway — with or without a lease. Now that we have mastered our screening techniques and are much more confident in our abilities to screen out the type of tenant who we would want the option to get rid of quickly, we have switched to term leases for most of our properties. Term leases also lower turnover of quality tenants moving elsewhere unexpectedly. If they know they are legally obligated to stay for a certain extended period, they (most likely) will, as opposed to having the freedom to move whenever they would like with a month-to-month lease.
How Long of a Term Should You Sign?
Now, how long of a term should you sign? To answer this, look at the seasons. Certain parts of the year are incredibly difficult for finding tenants, so why not use the lease terms to your advantage and make sure possible vacancies always take place when the market is perfect for a new tenant? Let’s say we needed to fill a unit on December 1st. There is no way we’re going to sign a one-year lease with that tenant because we know twelve months down the road we are going to have a tough time finding a tenant during the holidays. Instead, we’ll sign a six or nine-month lease to make the lease end in the summer or early fall, when units are easier to fill. Then, when the renewal time comes around, we’ll put the tenant on a 12-month lease from that point forward. It’s definitely our goal to make sure all our planned turnovers happen during prime moving season between June and September, so we work our leases around that goal.
[This is an excerpt from Brandon Turner’s The Book on Managing Rental Properties. To get more in-depth tips on property management and landlording, be sure to check out the full book.]
Do you prefer month-to-month or term leases? Why?
Let me know with a comment!