M2M vs. Annual Leases: Which Protects Landlords?

When renting out property, many landlords want to lock in a new tenant as soon as possible, and they want to lock them in for as long as possible. It makes sense — until you begin to look at all of the commitments that you are making and how little of a commitment the tenant is making.

What are the advantages of a month to month lease vs. annual leases?

As soon as you know you are going to have a vacancy, you want to begin marketing. If your existing tenant is a slob, a hoarder, or being evicted, it is extremely difficult to attempt any turnover until you have a vacant unit. If it was a long term tenant, you just need to factor in a bit of vacancy time to clean up and repair, as well as some down time until you find a tenant.

If it was a one year (or less) tenant and you have to wait for the tenant to move out to show it, you can look in the mirror for your issue. You should have bypassed this tenant.

Get a Commitment Early

Once a new tenant has committed to a unit, you need to get a Holding Fee Agreement signed. You also need to get a holding fee of at least a month’s rent, the deposit, or possibly $1,000, whichever is less. You want this Holding Fee Agreement signed as soon as you get an application — or even sooner if possible.

You will continue to show the unit until the new tenant passes the background check. Once the tenant passes the background check, you notify them that they passed. If they do not pass, refund their holding fee money. You can tell them they are preliminarily approved right away to keep their interest, but since they have money down, they are not continuing to shop.

Do Not Commit Too Soon

If you are showing an apartment that has a tenant, you need to be aware of the risks of signing a lease too early. If your tenant doesn’t move out, or if for any reason the rental is not ready, the new tenant has an agreement with you that basically states the following: “The landlord will provide the rental on a certain date, at a certain price.” If you cannot deliver it for any reason, you are in default of the contract or lease. You may be liable for any damages or hotel costs the tenant might have.

If you remember nothing else from this post, remember this: “A lease obligates the landlord; a holding fee agreement obligates the tenant.”

Having good tenants will pay off here; if you have good tenants, they will likely not only vacate the rental on time, but they will also leave it clean and ready to go. Sometimes tenants leave early, especially if they have a job transfer or are buying a house. Often, their new landlord will not be as savvy as you; they might offer to let them move in early, as they had a vacant unit, rather than a one-day turn.

Challenges with Evictions

If you have ever been to court for a lease violation, you know that it is nearly impossible to evict for a lease violation if the tenant contests it. A judge will determine if it is a “material” violation. Generally, the judge will also give the tenant a chance to rectify the issue, maybe even 30 days to clean up their act.

Scenario #1: Pets

If your tenant was dog-sitting for a few weeks and you have a no-pet lease, the issue is resolved before it ever gets to court. You have nothing to evict over. You have a damage deposit for any damages. The dog is now gone. You have wasted time and money with an eviction.

Or maybe the tenant gets a new dog for a family pet. You saw the dog on several occasions, and you told the tenants to get rid of it. You accepted rent for the next couple of months, and each time, you reminded the tenants to get rid of the dog.

A judge will never evict over either of these scenarios. Once you notice a lease violation and you do not act decisively to evict over it, you have implicitly given permission for the violation. You have set precedence by taking rent knowing a pet was there. And if the pet suddenly becomes a therapy dog, you are at risk of being sued.

Scenario #2: Extra Occupants

Your tenant moves in a boyfriend. He doesn’t have a lease anywhere, but has a driver’s license that has a different address. He is possibly the father of the tenant’s kids. Maybe he is on probation or just got out of jail. As long as the lease signer is not on any kind of program where they are not supposed to be living with anyone else, you will likely not be able to evict over that scenario.

A judge knows kids need parents, that there is no cause for you to be concerned, and that you have a damage deposit for any damages. If the person gets in trouble, their probation gets revoked. You will likely have a hard time convincing a judge that you are being “harmed” by the extra person. A judge will likely not remove a child’s parent who is trying to “reconcile” with their spouse.

Scenario #3: Short Notice Move Out

Your tenant is just six months into a yearlong lease. They decide they want to move across town — or across the country. They pack up and move and tell you that they left and are not paying rent anymore. If you are lucky, they give you the keys, turn off the utilities, or send you a letter terminating the lease. All these items indicate that the tenants are giving up possession of the unit.

Otherwise, you might have to evict a vacant unit.

If the tenants have not provided any evidence of termination of possession, maybe you got lucky, and they gave you a forwarding address or other contact information, so you can get an official change of possession if they neglected to explicitly give you one.

Regardless of possession, you have a contract, so you take them to Court for lost rent. The damage deposit covers damages and a month’s worth of rent, but you want the remaining six months of rent. After all, a vacant unit is easy to manage if you can keep collecting rent.

A judge might award you two months’ worth of rent, one of which was paid by the deposit, but only after the end of the lease or after you have it re-rented. They cannot grant any damages for months that have not passed, as you have not suffered damages for those future months yet. And if you go six months being vacant, whose fault is that? A judge might say you should have tried to get the place rented sooner.

And what happens if the original tenant suddenly returns and expects to get back in the unit that you have already re-rented? They have a lease that runs concurrently with your new tenants. If they take you to Court, you could have an issue.

Month to Month Lease vs. Annual Leases

The first defense against these scenarios is to get better tenants. The second defense is to have a month-to-month (M2M) lease, not an annual lease. A M2M lease will protect you, the landlord. With a M2M lease, you can issue a notice to move out and not even give a reason.

As a matter of fact, no reason is the best reason. No one can infer any illegal lease termination reason(s). If you evict for staying after a lease termination, or a holdover, there is no defense for the holdover. The tenants were given plenty of notice to move, and they stayed.

Only use yearlong leases for tenants who have proven their ability to honor commitments. A tenant with a 620+ credit score is a “C” grade, which is the starting point to begin to offer a longer term lease. In addition to having a decent credit score, a tenant worthy of a longer term lease would have income of at least 3.5x the rent. And they would have job stability — at least two years in the same job or occupation. If you have ever tried to garnish wages, you know that you cannot get anything from a job hopper.

The landlord game is not hard, but it is a continuous exercise in risk mitigation. Lowering your risk with better tenants, larger deposits, and faster evictions or move-outs is the key to success.

What experiences have you had with short vs. long term leases? Have you ever known anyone who took a long time to get a tenant out?

Let me know your experiences and lessons learned in the comments section.

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