Tenant looking to move to month-to-month... Considerations?

Question

Hi BP friends!We have a family (2 parents + 1 kid) who are renting from one of our SFRs. Their lease is currently expected to end in mid-May but they are also building a house (we knew this coming into the lease) which they are expecting to move into in October / November.They have asked that when their lease ends to move to M2M and we're trying to decide how best to respond.- They are paying a bit below what we think the market rate would be (we are/were expecting to raise rents ~ %8 when they left)- Them leaving in the fall makes the property harder to rent- They have been perfect tenants with great credit / etc. Zero complaints about themOptions as I see it:a) We could ask them to sign a one year lease at market rate (that feels super unfair)b) We could allow them to keep paying at their current rate and allow the month-to-monthc) We could ask then to sign a lease until a safe / known date (maybe December 1?) and charge them market rate. We then carry the risk of the December rental which feels high-riskd) We could charge them market rate + 1mo vacancy risk amortized over 6mo (that would look like a considerable rent raise for them but I think the tenants could handle it)e) Something else I've not yet thought of...Any thoughts / ideas? What seems the most fair?Thanks everyone!

Nathan Gesner · Answer

This happens all the time. Tenants want you to deviate from your policy for their convenience with no expectation of compensating you for the additional risk. You need to develop a win-win situation.If they stay month to month and leave in the dead of winter, it may be difficult for you to find replacement tenants and it may be difficult to get mark at rate like you could in the summer.when I have situations like this, I allow the tenant to continue on a month to month with a significant increase of 20 to 25%. If the rent is already 8% below market, a 20% increase would only be a 12% increase over market. That's a pretty fair deal for them and the additional income would help reduce your risk of loss should have vacancy occur in the winter time.Another option is to sign them for another one year lease, as you had planned to do. Give them the option of terminating the lease early with 30 days notice, and a termination fee equal to one month's rent payable on the day they give notice. Again, this mitigates the risk of loss during a turnover in the middle of winter or any other time of year.

Mary M. · Answer

I would just go MTM at the current rate.... its expensive to have a vacancy and my bet is their house wont be done when they think it will. Also, FWIW I always do my best to work with tenants - especially the good ones. Your 90 day notice period is kind of harsh - If you cant re lease your place in less than a month your rent is way too high. How can someone who is building their home know 90- days in advance when it will be done? Not likely. I believe happy tenants treat my assets with care.... and that is meaningful for me.

Scott M. · Answer

As they are building a new house they are leaving regardless, just a question of when. You think Oct/Nov but building a house rarely happens on a tight timetable and things often get delayed. I don't think you said where the home is, you are in WI so if your home is in WI you know about winters and how difficult it can be to rent homes in the winter (weather dependent of course). If there was a possibility of you saving/keeping them as a tenant my answer may be different but as they are leaving 100% I would say to time it so you are not stuck with a midwinter lease. I would talk to them and come up with a plan that works for both parties if you can. If not, they can leave in May or June. It is not uncommon for people to move into a hotel in between homes, I have done it before, stayed in a hotel for 2.5 months while the builder putzed around (this is when I was a kid). I would set an end date that they need to be out by and stick to it. If the builder is done, great, if not, they need to move to a hotel until it is. Either that or as @Nathan G. said you raise the rent and charge extra fees in order to make it worth your while. I think anything in between is shooting yourself in the foot. They either agree to get on the date that works for you or May forward they pay extra for the convenience to say so you protect your downside. They will either pay a hotel extra or you so make sure both ways you are covered. You need to speak up for yourself.

Michael Noto · Answer

The only part of your post that matters is they have been perfect tenants. Raise the rent a little bit because they are month to month, but don’t do anything drastic to scare them off. The odds of a new build home going completely as planned is not likely, they may not vacate until Spring of 2023. Who knows. I know it’s tough but take it month by month. A lot can change in 6-9 months, and keep the good tenant as long as you can.

Bob E. · Answer

You said it yourself they are good tenants. Let them go MTM. that is better than having them move out and taking your chance on a new tenant.

Melody R. · Answer

@Brandon Palmer Hi! We charge an additional fee for MTM terms. It’s usually market rent + $100 per month. You could also extend their lease until February at market or their current rate. Extending until Feb/March will ensure that you won’t have a vacancy during the slow season.

Tim Johnson · Answer

They've been perfect tenants. Switch to M2M with a moderate 4% (or full 8%) rent increase and the requirement that you be able to show the apartment to prospective renters as soon as they give notice (written into new M2M contract). Then, with new renters, you can bring the rental rate up to market.

Theresa Harris · Answer

How long have they been there? If they've been there for a few years and you think you can rent it in the fall, I'd do it. Ask for 60 days' notice, and them to keep it in good shape for showings and allow showings (which you can group to minimize disturbance). I'd up the rent, but might add a small premium if you think you are likely to have a vacancy (and you wouldn't if you did a turn over in June). You can explain that there is more risk for you with a month to month as it is harder to rent in the winter.

John Leake · Answer

@Brandon PalmerI usually do 1 year at whatever rate is fair a 6 month lease at 10% higher and month to month 15 percent higher those are rough numbers i usually round. I also try to explain that the most time spent as a property manger is turn over so we try to incentivize staying longer periods and also avoid winter vacancies. Who wants to move in the cold! In the end your reputations is important and a few months empty hopefully wouldn’t be the end of the world. Good luck

Chris G. · Answer

@Brandon PalmerIf the value of the property has increased or the rent you could raise it based off of that and explain to them the market value has gone up. In our leases once the tenants year lease ends it states the lease will automatically go month to month but charge an additional 10% rent. So a yearly signed lease may be $1000 per month but once month to month starts we charge $1100 due to the risk of not knowing when they'll leave. If they are good tenants like you said I wouldn't lose them over that though.