The traditional method of renting includes a fixed, 12-month lease. However, that’s not the only option. Month-to-month (M2M) leases appeal to those who need added flexibility in their housing. Tenants sign a monthly rental agreement with the option to renew or terminate at the end of each month. Below are the five primary benefits of offering M2M leases to your tenants.
1. Flexibility
It can be difficult enough to find tenants who are interested in your property. When you add in the difficulty of scheduling times to tour that work for both the potential applicants and your current renters’ schedules, it can feel impossible to fill units. With a month-to-month lease, it’s more likely that you will have time in-between renters to show that unit and gain more interested applicants.
You also have more opportunity to inspect the rental periodically and check for any maintenance needs. Sometimes required repairs go unchecked for months or even years in a fixed-term lease, often worsening the problem. Inspecting your property consistently and making repairs and renovations is much easier with an M2M lease, allowing for better upkeep of appliances, carpets, paint, and the like.
2. Adjustable Rent
As you know, real estate investing can be extremely lucrative in a growing market. In an annual lease, you have to wait much longer to cash out. However, when your tenant renews monthly, you have a chance to increase rent and keep up with the competition.
Although you could capitalize on a good market by raising rents on a month-to-month lease, you can’t be consistently raising rent on your tenant. Besides the obvious moral issue with doing so, there are legal limits on the timing and amount of rent you can increase. Most states require “reasonable” notice for rent increases, and some cities have rent control ordinances that limit the amounts of increases as well. These rules vary by state but be sure to keep that in mind.
3. Renting at a Premium
Similar to the ability to adjust rent, renting at a premium is another financial benefit to month-to-month leases. Because renting month by month is somewhat unsteady and does not provide the same consistent occupancy that an annual lease does, many landlords will enforce premiums. Tenants will pay a slightly higher rate than those who rent on a fixed timeline to allow for that possibility of inconsistent cashflow.
4. Non-renewability
Any good landlord has a vigorous tenant screening process that reduces the amount of unpredictability when renting to someone new. However, no screening process is perfect, and you can sometimes get stuck with a tenant who is not a good fit.
Evicting a bad tenant can be costly and time consuming. However, with an M2M lease, it may be easier to simply wait out the lease and find another person to rent to rather than dealing with the tedious eviction process.
5. Ease of Long-Term Conversions
So, what happens when you have the opposite problem, and a tenant you really like has a lease coming to an end? When a renter is already moved in and comfortable, even if they are currently on a month-to-month lease, they may feel inclined to sign a fixed contract to stay in their current home. This would be ideal for their landlord since the tenant-landlord relationship is already strong, and you can be confident you will house a great tenant.
Also, if you have a quality tenant with an annual lease coming to a close, you can use the option of a month-to-month lease to keep them for a little longer. Sometimes people like where they are staying but can’t commit to another full year. The offer of a more flexible option could keep a great tenant in your unit, and you can delay the new-tenant acquisition process for a bit longer.
There can be some downsides to M2M leases as well.
High turnover, lack of forecasting, and the possibility for increased maintenance needs are some cons of offering a month-to-month lease. High turnover requires the timely process of looking for new tenants, showing them units, and screening them. You lose the ability to accurately predict your earnings for an extended amount of time, since you cannot be confident as to who will occupy each unit the next month. And finally, you are more likely to have to furnish a monthly rental, and those properties tend to have higher costs for repairs and maintenance. Make sure you do thorough research and decide whether month-to-month is best for your business.