Month to Month vs a Year lease?

Question

What are the benefits to have month to month vs a year lease? I have someone that wants to stay a year but I am not wholly sold on this prospect.  I would also collect 2x the security.  Thoughts please?

Michele Fischer · Answer

My area doesn't have a definite move out season, we deal in low income, and the tenant-landlord laws differ for M2M vs. leases, so we have elected to only deal with M2M.  If an applicant or tenant moving in expresses concern about wanting to lock in longer, I assure them that the only reason we serve notice is if they aren't keeping up their end, and we do not frequently or violently raise rents.  It usually appeases them.  I like the flexibility of M2M.

Bogdan Cirlig · Answer

Definitely great answers. The biggest issue with m2m is you will incur the advertising expense, deal with vacancy, get property ready again for rent. That's an overhead you want to incur as seldom as possible.

Depending on who you renting to (not race but asset class) a break clause might mean nothing to those that are hard to collect after / low income and care less of their credit. Normally, in a 1 year lease the tenant is responsible for FULL TERM and the way I write up my leases is to write the whole amount (mo rent x 12) as the amount they signed up for.

If they break the lease, and it's ok with you, they will pay rent until you put a tenant in. In most states the law says you must be very diligent to secure a new tenant.

Mark Ostertag · Answer

Disclaimer: I'm waiting hear back on an offer for my first owner occupied investment property, so I'm coming in with little experience. I'm also going to be operating in Western NY. However, my understanding is this:

In a month to month lease, if you have ANY problems with the tenant, you can give them a 30 day notice (to take effect upon the 1st of the following month) that you will not be renewing their lease. Do not deviate from this language and when you go to court, continue with the same sentiment. The judge will likely side with you because it is contractual and you have no obligation to keep them in your unit. During this conversation, the judge may find out that the tenant owes you back rent, or they smashed a window, don't keep the place clean, have a pet they're not allowed to have, or whatever problem it is that you don't like. But, THAT is not what you're in court for - you're simply not renewing the lease, as is your right to do so. If you open the can of worms about any of those problems, then the judge has to try to FIX those problems... things that you don't want to work out with the tenant, you just want them to leave, so you can get a new tenant who doesn't have these problems. If you stick to your guns about how you're simply not renewing the lease, there is no disagreement, you're just not renewing.

Theoretically, the same logic would apply to an annual lease, except you have to wait a whole lot longer to not renew the lease. If you have issues in month 3, you still have 9 months to go before you can not renew a lease. That means, if you want the tenant out right now, that you have to take them to court for the specific issue that you're having with the tenant, and the judge will do their best to judge correct the issue (this undoubtedly will take longer and may or may not work in compared to the tenant just leaving).

One last item, I'm told that the only reason that apartment complexes use annual leases is because they need to show reliable steady income when applying to the bank for loans. If they didn't have to deal with banks, then apartment complexes would likely be operating on month to month is the theory. Also, if somebody wants to leave your unit, early or not, they're probably just going to do it and you may or may not get your money out of them as per the agreed contract.

This is what I've been taught by other real estate investors and I have to side with their logic when compared to the annual lease, just based on the discussion. I'd love to hear more from other investors on here as to whether my understanding is accurate or not. Hope this helps!

Peter Fokas · Answer

State laws also have an impact. Based on my understanding in NJ even if you have a MTM lease you still cannot end the lease without a good reason.

Yvette Dietrich · Answer

Thanks to all for your timely responses.  Having this forum to pose questions and thoughts is a great resource. It allows one to refocus on the issues at hand and possibly develop a better strategy based on your varied experiences.

Thanks again, Yvette

Elizabeth Colegrove · Answer

We do a one year lease with a break out clause. This way if they break the lease, there is a plan. We do not do m-to-m leases because our area has definite moving seasons!

Mark W. · Answer

Here's my simple philosophy: a 1-year lease protects the tenant, a month-to-month rental agreement protects the landlord.

If the tenant really wants to leave, the lease won't stop them.  However, if you have problems and want to remove them, you're not getting anywhere with a 1-year lease.  With a month-to-month, you can terminate the agreement with 30 days notice.

This can be handy if the tenant stops paying and proves adept at navigating eviction court.  The one time I went with a year lease I got hosed by a professional tenant.  So back to month-to-month agreements, which work well for me.  I've had one tenant on a month-to-month for 15 years now.

Invariably I will have new tenants ask for minor updates (so far just color of paint) and I couch that with saying that I generally don't entertain those requests until they've been there for a year.  That sets the expectation.

Karen Rittenhouse · Answer

To begin with, why take a tenant you're not wholly sold on? I certainly wouldn't. Even one's you think will be great can prove you wrong. You're setting yourself up for unnecessary trouble accepting someone you believe will have issues going in.

As far as length of contract, either works. Month to month allows them to move sooner without repercussion. With a longer lease, they have to fulfill it or be penalized. We prefer longer leases because most of the tenant phone calls and issues come the first few months of tenancy as they get used to their new home and to you as manager. After that, as a rule, things level out and calls stop. Quicker turn over just means more repairs and time spent looking for new tenants.

Hope this helps!

Larry Turowski · Answer

@Yvette Dietrich Month to month can generally be cancelled anytime for any reason by either party with 30 days notice.  Also, you can change lease terms with the same 30 day notice (rent amount, policies, etc.)

A year lease obligates both tenant and the landlord to the terms of that lease for a full year.

Some landlords prefer mtm leases for the flexibility, though tenants could move out anytime.  Tenants may, however, want year leases for predictability.  Banks sometimes require year leases on investment property.

Collin Goodwin · Answer

What are your concerns? Opinions vary greatly, but IMO I think it comes down to strong contract language, proper screening, and a good relationship between landlord and tenant. If you have someone on the hook that you think you may need to boot in a month, they might be worth reconsidering. The benefits of a month-to-month would be that you have a little more control and do not have to renew the lease (with proper notice), yet at  the same time your tenant can pack up and leave, leavening you searching for a new tenant. Also, be sure to check you local laws about the 2x security deposit. SD only allows 1x monthly rent by law.

Month to Month vs a Year lease?

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