Tell me if I'm wrong... Month-to-month vs 12-month term

[Chris Gantz]

Tell me if I'm wrong...

Our company has approximately 1,000 units under management, and we have a couple of our smaller clients that we have that present concerns with having tenants on month-to-month leases. I'm sure this topic has been covered a thousand times before, but wanted to refresh the topic.

The way we operate we require a standard 12 month lease on move in and our leases all automatically convert to month-to-month leases at the one year mark once this 12 month term is fulfilled. We send lease renewals with higher rates, typically between 3-5% increases at this time, and we send these leases as month-to-month. We've found this typically incentives people to stay in their units after an increase, as they have time to try it out to see if the new rates fit their budgets, as opposed to having to make that commitment to paying the higher rate for a full 12 months. 

From an operational stand point this also gives us the ability to non-renew any tenants for any reason once they're month-to-month, as opposed to having to build up 5 day notices, 14 days, and going through with evictions if we have an issue arise with a tenant. 

The argument I hear most often in favor of additional 12 month terms at lease fulfillment is avoiding turn over costs, and vacancy exposure since "all the tenants could leave at once," but I find that even if the tenants leave we are typically able to refill the units immediately anyway, so that shouldn't really be that big of a concern. Also, we find that the more often we're able to turn units, the more often we can make incremental updates and raise rents toward the higher end of market rates.

In my opinion month-to-month makes up for any loss-to-vacancy since it's making up for it with higher rates and therefore helps avoid loss-to-lease.

As a side note, we allow short term rentals of 3-6 months on new leases at rates of 125% of the 12 month market rate and have had great success with these options as well.

Other options we've done are allowing tenants to choose their renewal rate on buildings we're aggressively raising rents on by say they can pay 3% increase for signing for another 12 month term, or 5% increase to stay moving forward on a month-to-month lease. 

Are there other people out there that operate in favor of going month-to-month after 12 month terms? What's everyone's opinion?