Month-to-Month vs Term/Annual Leases

We’ve always been a proponent of term leases, so our viewpoint might be a bit biased, but hear us out.

Over the years we’ve met many landlords that are adamant about month-to-month (MTM) leases and believe they are the way to go. We’ve also taken over the management of many properties where the DIY owner had set their tenants up with MTM leases. So we’re definitely familiar with this style of renting.

The Case For MTM Leases

The consistent argument for using MTM leases that we hear over and over again is that they make it easier to get rid of a tenant. They don’t lock owners into a specific time period forcing you to have to put up with a less than desirable tenant who consistently pays late, isn’t taking care of your property or doesn’t get along with the neighbors or local code enforcement.

The other main reason for using MTM leases is that you can raise rents with the rental market and increase your profits. All you need to do is give your tenant proper notice that you’re increasing their rent — and thereby your revenue.

One last argument we’ve come across for MTM leases is the flexibility they allow for owners that are unsure of their plans for the property – whether it be selling or extensive remodeling, etc. This makes great sense if you’re waiting on city permit approval or some other timeline issue out of your control.

The Case Against MTM Leases

We’re going to preface our “con” argument with the fact we only operate in Michigan, and our argument is based on Michigan laws, but we would imagine that many states have similar laws. That being said, we see no logical reason an MTM lease makes it easier to get rid of a tenant!

Let’s look at the three main reasons you might want to get rid of a tenant:

1. Nonpayment – How does an MTM lease make it easier to evict a nonpaying tenant? If they aren’t paying, they aren’t paying whether their lease ends at the end of the month or end of the year. An owner that doesn’t start a formal eviction process against a tenant on an MTM lease because they believe the tenant will just move out at the end of the month when the lease “ends” better have money to burn. Most tenants behind on their rent milk their occupancy for all it’s worth, and if a landlord isn’t pursuing the formal eviction process they’ll stay and stay and stay.

If you ever want to write a book on excuses this would make a great form of research, although a bit expensive! In our experience, the few “nice” tenants who fall behind on their rent make arrangements to move out relatively quickly, and we haven’t observed any correlation to the type of lease for this behavior. Bottom line, there’s no difference in the eviction process between an MTM or term lease.

2. Damaging the Property – We’ve had our share of tenants who’ve left holes in the walls, broken windows, kicked in doors, etc. We’ve also had tenants that ruined stoves, fridges and lawns through neglect. If you want to get rid of a tenant to head off these issues so that they only cost you hundreds of dollars and not thousands, using an MTM lease for “protection” is a bit dramatic.

Your lease, whether MTM or term, should have language in it to allow you to evict for such issues. If it doesn’t, run, don’t walk, to the nearest expert real estate attorney you can find to correct this grave oversight ASAP! We’ve found that this type of tenant doesn’t just amicably agree to move or change their behavior. So again the type of lease has little, if any, impact on this issue.

3. Police or Neighbor Issues – If a tenant is causing issues that result in the police visiting your property, most judges will accept a police report as a reason for a landlord to evict a tenant and break a term lease. Again, your lease should have language that allows this and also gives a judge something to support their ruling.

The complaining neighbor is where an MTM lease may come in handy. Really though, we’ve never encountered it as an issue. If a neighbor has a real complaint, they can call the police or code enforcement, allowing you to have a reason to terminate a tenant’s term lease. If it’s just a nosy or “busy-body” neighbor issue, like the old man who doesn’t like the tenant street parking in front of his house, why would you want to get rid of a tenant over it? The point is, rarely would this be enough of an issue that you would actually want to get rid of a tenant, and therefore need the flexibility of an MTM lease.

The other main argument for MTM leases is the ability to increase rents with the rental market. The catch here is what goes up, often comes down. We just witnessed that with the bursting of the real estate bubble a few years back. Also, how many times do you realistically think you can increase the rent on a tenant in a 12 month period without upsetting them enough to cause them to move?

There are only a handful of areas in the country where you might be able to get away with it. It’s our opinion that if you raised the rent more than once every 12 months almost every tenant would react emotionally and move, even if it meant paying more rent somewhere else. No tenant likes having their rent raised, and this is a case of expectations — where every peer a tenant would discuss this with would tell them they should only put up with annual increases.

The unknown timeline issue where you may be waiting on city permit approval or something similar is the only reason we can see a true advantage for an MTM over a term lease.

The Case For Term Leases

This is a pretty simple argument, as landlords all want to keep tenants that pay on time. One of the easiest ways to do this is to lock them up with a term lease. People are creatures of habit and most of us aren’t the pure seat-of-the-pants, 100% of the time, adventurous type, preferring stability and routines. Just think about how you feel when your morning ritual is interrupted! For most tenants moving means breaking patterns and finding new ones, and they don’t like to do it.

Most tenants also expect to sign a 12 month term lease and offer very little resistance if you want to make it 10 months or 14 months, etc. to avoid moving in the winter. This gives a landlord more control over when their property might be vacant so they can avoid the worst times or seasons for a vacancy (in Michigan this is Oct –Feb). Add to that the ability to have more than 30 days to start marketing and preparing a property to be marketed because you know when it will be vacated.

Term leases also give a landlord better forecasting and control of their finances as you can statistically count on the rent being received for a set period of time.

Final Comments

After looking at both sides of the argument and trying not to be biased one way or the other, we feel that hands down, term leases are logically the way to go in almost every situation. A well-written lease with the proper clauses will address most of the alleged benefits of an MTM lease type, while providing more rent cashflow stability.

If you’re still set on using MTM leases, we hope you’re at least charging hirer rents. There’s a reason insurance companies will pay 25%+ over market rental rates for 3-4 month leases while a customer’s residence is rebuilt after a fire.

We deliberately didn’t cover ‘The Case Against Term Leases’ and would like to ask your thoughts on it.

Please also comment on other pros & cons we missed!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.