When you buy an investment property, you want that property occupied. If it sits vacant, it isn’t going to be making you money. If anything, it will cost you money. That’s why you must be strategic when putting together a leasing strategy.
Many landlords like to sign 12-month leases. Some even ask tenants to sign 24-month leases. The benefits of a longer lease are more income stability and predictability.
But that’s not your only option. It may work to your benefit to offer your tenants a month-to-month lease instead. Let’s review how a month-to-month lease works, its pros and cons and whether it might be a good solution for your rental property.
What Is A Month-To-Month Lease?
A month-to-month lease is a rental agreement between a landlord and a tenant that continues every month until one party provides proper notice to end the contract. Unlike a traditional rental agreement, like a 12-month lease, a month-to-month rental agreement does not have a set end date.
It’s common for a month-to-month lease to require the landlord and tenant to provide the other with 30 days of notice to end the agreement. However, you can write a different notice period into your contract. For example, you may prefer that your tenant give you 60 days’ notice.
Generally, a month-to-month lease is used to extend an existing lease agreement. It’s less common for a rental agreement to start off as a month-to-month lease. However, it is possible to sign a month-to-month lease from the beginning.
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How Does A Month-To-Month Lease Work?
With a month-to-month lease, a landlord and tenant enter into an agreement where the tenant can occupy the property until notice is given by either party calling for the termination of the lease.
Let’s say you and a tenant enter into a month-to-month rental agreement that requires 30 days of notice. If your tenant pays on time and sticks to the lease terms, they can continue occupying your property each month. If you decide you’d like to sell the property or use it for something else, you provide 30 days’ notice for them to vacate.
Similarly, if your tenant decides to move to a new home, they provide 30 days of notice on their move-out date and pay their final month’s rent. From that point on, they will have no financial obligation to you.
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Benefits Of A Month-To-Month Lease
There are a number of benefits to signing a month-to-month lease.
Flexibility
With a month-to-month lease, you’re not locked into a 12-month or longer rental agreement. This gives you more flexibility with your property.
If you’re hoping to sell your property, for example, but don’t yet have a buyer, a month-to-month lease allows you to collect rental income while you wait to find one. Then, once you have a buyer, you can give your tenant 30 days’ notice (if that’s what your agreement requires) and move forward with the sale.
Potential For More Rental Income
It may be that you expect rents to increase in your area because it’s being built up. With a month-to-month lease, you’re not locked into an extended contract. If rents start rising in your area four months into a month-to-month rental agreement, you could terminate that contract with 30 days’ notice (or whatever notice period your agreement allows for) and then find a new tenant who’s willing to pay a higher amount of rent.
That said, do be aware that month-to-month leases typically have a notice period. Because of this, you may lose a month’s rent in the process of terminating a lease to get someone to sign at a higher rate. You’ll need to make sure the math works.
Protection Against Problem Tenants
When you have a problem tenant who’s locked into a 12-month or longer lease, it can be tricky to get them out. Granted, if the tenant refuses to pay or violates the terms of your lease, you’ll generally have grounds to terminate the contract early.
With a month-to-month lease, there’s a clear path to ending the contract sooner rather than later. That could be beneficial to you if you have to go through an eviction process.
Means Of Retaining Good Tenants
While a month-to-month lease could help you more easily rid yourself of a problem tenant, it can also be a great way to retain a good tenant. If you have a tenant who’s always paid on time and never given you any problems, you may want them to stay. But they may not want to commit to a 12-month or longer lease.
On the other hand, if they aren’t quite ready to move, it could work to your benefit to extend their stay with a month-to-month lease. That way, you’ll continue collecting rent until they decide officially that they’re ready to vacate.
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Drawbacks Of A Month-To-Month Lease
A month-to-month lease also has some disadvantages you should know about.
Less Predictable Income
When you sign a 12-month or longer lease, you can anticipate steady income unless your tenant violates the terms of their agreement. With a month-to-month lease, your rental income is less predictable, since your tenant could choose to terminate the agreement at any time.
Potential For Vacancies
Vacancies can be a problem for rental property owners. If you sign a month-to-month lease, you might be more likely to wind up with vacancies, if you can’t find a new tenant in time due to your contract’s short notice period.
Higher Turnover Costs
It costs money to prepare a rental for a new tenant. As a landlord, you’re usually responsible for inspecting the unit and making sure it’s clean. If you have a month-to-month lease that leads to more tenant turnover, you’ll have to bear the cost of preparing that unit each time.
Potential For More Work
Not only does it cost money to turn over a rental property from one tenant to another, but it can take time to vet potential tenants and put new lease agreements in place. With a month-to-month lease, you might be repeating that process more frequently than with a longer-term lease.
Potential For Property Damage
If you have someone renting out your home on a short-term basis, they might not care so much about keeping it in good shape. You may find yourself with extra repairs to handle that a tenant’s security deposit doesn’t cover.
Who Should Consider A Month-To-Month Lease?
If you’re a real estate investor and landlord, you may encounter a few scenarios where you might want to consider a month-to-month lease.
Your Property Is In A Market With High Demand
If you own a rental property in an area that tends to be highly in demand, a month-to-month lease could work to your benefit if the area doesn’t have legal limitations on short-term rentals. It could give you the flexibility to raise rents frequently, adding to your profits, and you likely won’t have trouble finding new tenants quickly. However, landlords also must be aware of laws in their city or state that limit rent increases; PolicyLInk reports that rent stabilization laws have been enacted in more than 180 jurisdictions.
You’re Not Sure What Plans You Have For Your Property
You may be thinking of selling your rental property or doing renovations that would require it to sit vacant for a period of time. A month-to-month lease gives you an opportunity to collect rental income while you figure out your plans.
Your Property Caters To Corporate Clients
If you have great relationships with corporate clients, it could pay to offer them month-to-month leases. That way, they can use your property on a short-term basis to help employees relocate. You, in turn, may be able to get repeat business by being flexible.
How to Minimize The Risks of A Month-to-Month Lease
A month-to-month rental agreement may not offer as much stability or predictable income as a 12-month or longer lease. So it’s important to do what you can to minimize the risks of a month-to-month lease.
To that end, make sure you have an airtight lease agreement that spells out the terms clearly. The laws concerning month-to-month leasing can vary from state to state. Work with a real estate attorney to create a lease agreement that follows local rules and offers the right protections in case you end up with a tenant who violates the lease agreement.
You may also want to charge a bit more for rent than the going rate in your area to compensate for months when your rental might sit vacant.
Since short-term tenants may be less interested in keeping your property in good shape, you may want to ask for a larger security deposit to help cover potential damage.
The Bottom Line On Month-To-Month Leases
A month-to-month lease offers the benefit of more flexibility, and can be a great way to retain a reliable tenant. As long as you understand the drawbacks involved, offering a month-to-month lease could be a strategic tool for meeting your rental income goals.
Ben Shapiro
Ben Shapiro is an award-winning financial analyst with nearly a decade of experience working in corporate finance in big banks, small-to-medium-size businesses, and mortgage finance. His expertise includes strategic application of macroeconomic analysis, financial data analysis, financial forecasting and strategic scenario planning. For the past four years, he has focused on the mortgage industry, applying economics to forecasting and strategic decision-making at Quicken Loans. Ben earned a bachelor’s degree in business with a minor in economics from California State University, Northridge, graduating cum laude and with honors. He also served as an officer in an allied military for five years, responsible for the welfare of 300 soldiers and eight direct reports before age 25.
