Why Would You Do A Month To Month Lease?

[Zach Simpson]

Hey everyone!

My wife and I are very young (both 21) and we have our first baby due in October. To make a long story short: I am wanting to get a headstart on real estate investing. As of now, I am really thinking it is what I want to pursue as my career. I'm REALLY new to all of this and I am just now starting to learn the basics. One common piece of advice I hear on the BP podcast, forums, articles, etc. has to do with "house hacking." So far, it all seems like a great idea. I was looking at a duplex on Zillow and the description mentioned that the tenant living in one of the units was on a month to month lease. My question is why would you (the investor) have someone on a month to month lease rather than a 6 month/1 year lease? Wouldn't signing them on a longer-term lease help avoid vacancies and then having a unit that produces zero income? Is there any advantage to the investor to have tenants on a month to month lease?

I apologize if this question has been asked a ton. I looked around for an answer and I didn't find anything that really answered my question. Thank you all in advance. Any and all advice means a ton to me!

-Zach

[Thomas S.]

A landlord, in signing a lease with a tenant, hands over the keys and places the tenant in control of the property for the term of that lease. The relationship can go bad at any time for many reasons even with what could be considered "good tenants". When it does as a landlord your only options are threats, intimidation and ultimately eviction. If they have stopped paying rent this can result in months of lost income which most landlords view as unrecoverable. 

The primary reason landlords choose a term lease is to lock a tenant into a specific time frame of occupancy. Unfortunately, because tenants move when ever they choose, regardless of a lease, this usually results in tenants not giving notice to break their lease. The end result is a unexpected vacancy.... zero notice. This also creates a situation where tenants look at the end of a lease as a time to move rather than to resign a new lease. It can actually motivate tenants to move. A lease has zero impact on when tenants move it simply forces a tenant to break their lease when they must move or choose to move. Bottom line a lease is false security.

Many say it prevents move outs in bad times like the winter. Reality is if a tenant needs to move in the winter they will move regardless. However tenants do not like to move in the winter and will not do so without good reason. A lease does not control when tenants choose to or need to move.

A M2M on the other hand keeps control of the property in the hands of the landlord. When things go bad you simply non renew and find a new tenant. This limits your losses and avoids evictions in most cases. It has no impact on when a tenant decides to move and creates a communication situation where by, because they are not breaking a lease, they are much more forthcoming with their intended plans and they are likely to stay longer depending on their personal life situations.  

All my tenants are on M2M from day one, many for decades, and we are all very happy with the arrangement. No tenant ever needs to do a midnight run, they all know it and give me a heads up well in advance of needing to move. Vacancies as a result are minimal. Far below industry averages.

Landlords that believe term leases control tenant movement are only fooling themselves. If you do not believe me do a search on "my tenant is breaking his lease".

Mike makes a valid point about rent increases. Some investors are incompetent when it comes to the management of their investment. Rent increases need to be done annually without exception to maintain market rent and insure a full valuation on your investment. A rent 10% below market has devalued your property by 10%. I do mine annually without exception. If a landlord is not comfortable doing annual increases they are obviously not comfortable being a landlord. They need a PM that will professionally manage their investment if they are not capable of doing it themselves. This should have nothing to do with their choice of lease trerm.