As a landlord, when you sign a lease with a tenant you will have two different routes you can go down. You can have your tenant sign a long-term lease (usually for the duration of a year at a time) or you can have your tenant sign a month-to-month lease. For many landlords, deciding between the two can feel like a tough call. Today we are going to look at month-to-month leases and the pros and cons of signing your tenant to a short-term lease.
The Pros Of Month-To-Month Leases
For many landlords, month-to-month (M2M) leases are their chosen method of operation. These landlords would cringe at signing a year-long lease with a tenant, particularly a tenant they have just acquired. The reason why some landlords swear by M2M leases is that they offer a unique set of benefits. Some of the pros of M2M leases include the following:
- Get Rid Of A Troublesome Tenant Faster: One of the number one reasons landlords opt for M2M leases is because it makes it easier to get rid of a troublesome tenant. If a tenant turns out to be an annoyance, you can simply end the tenancy. With a year-long lease, you will be forced to put up with the tenant so long as they do not violate their lease. For some landlords, they want the peace of mind that they can end the relationship at any time.
- Easier To Raise Rent: A M2M lease also means that a landlord has the opportunity to make changes, such as rent increases, at will. They are not forced to wait for a 12-month lease to expire before raising the rent. They can raise it as they see fit.
- Charge A Premium: In some high demand towns, having a M2M lease may allow you to charge a higher rate in rent. Because the tenant is at the same liberty as you are to end the tenancy, it can provide an added appeal.
- Flexibility: For some landlords, they need the flexibility a M2M lease offers. This is often helpful for landlords who might be moving back into the property themselves at some point or who might be selling the property soon. A M2M lease makes it easier for you to move tenants out and yourself back in or for you to schedule a major renovation to the property.
Due to the above reasons, many landlords find M2M leases a home-run. However, while the above list may seem like a solid case for M2M leases, these short-term leases do come with their own set of drawbacks.
The Cons Of Month-To-Month Leases
Before you throw your annual leases out the window in lieu of a M2M lease, consider the flip side of these short-term leases. The following are some of the drawbacks you might encounter from a M2M lease:
- Higher Rate Of Turnover: One of the number one drawbacks to a M2M lease is that it can open you up to a higher turnover rate. Not only can you face frequent gaps between tenants due to this turnover, you will spend more time and energy on the turnover process than with a year-long lease. Higher turnover equals loss of revenue.
- Poorly Timed Vacancies: Not only can you wind up having a constant turnover of tenants, you might have tenants leave when the market is at its worst. For example, if you live in a college town and a tenant leaves mid-February, you might have a difficult time filling that vacancy.
- Less Appealing To Quality Tenants: As a landlord, you hope to find a qualified tenant who pays rent on time, takes care of your property, and is around long term. Many such tenants will find M2M leases off-putting. They want to have the peace of mind of having a home for the next year at the same price with the same policies. You could lose out on a qualified pool of tenants by only offering a M2M lease.
- Cutting Corners For Screening: When you run M2M leases, it can become tempting to cut corners during the screening process. If you have had a lot of turnovers and the unit has been vacant for a while, you may be looking to fill the property quickly and wind up lowering your screening standards. This can lead to troublesome tenants. Even in a matter of a months time, a tenant can do a lot of damage and cost you a lot of your time.
In conclusion, both long term and short term leases have their pros and cons. Deciding which lease type is best for you will depend on the type of market you are renting in, how well you manage tenant screening and other factors.
Mitigating Risk With Screening
Ultimately, if you find a great tenant, a long-term lease is the most beneficial for both parties involved. If you are using a M2M lease as a means of protecting yourself from bad tenants, you should improve your tenant screening process instead. If you screen tenants thoroughly and choose qualified applicants, you will not need to rely on M2M leases for solving tenant problems.
Run a tenant screening report that includes:
- A detailed credit report
- A criminal background check
- An evictions history report
You can pair a solid screening report with your own pre-screening questions to build a rounded view of a potential tenant.