Juggling multiple investment properties can be a bit stressful, especially when investing in residential rental units. For every property, investors need an airtight lease agreement—even when choosing a month-to-month lease instead of a fixed-term agreement.
While monthly agreements are less common for long-term investments, they can be effective in the right situations. Keep reading to discover what a month-to-month lease agreement is when you would use it for your rental property investments.
What Is a Month-To-Month Lease Agreement?
A month-to-month lease agreement typically lasts for 30 days before auto-renewing, giving your tenant the option to continue living at that property for another month. To end the contract, renters or a property owner must give 30-days notice.
This type of lease differs from long-term lease agreements, which can last from 12-18 months. Ending a long-term lease early can lead to penalties for renters. In many cases, fixed-term leases shift to monthly agreements at the end of the lease unless a renter decides to renew for another long-term agreement or the property owner decides not to renew.
When Should You Use a Month-To-Month Lease?
Although a standard residential lease agreement is often more reliable when planning for consistent income, a month-to-month lease agreement can offer flexibility for landlords. Opting for a monthly agreement can be a good option when planning to sell the property soon. This ensures that tenants are not locked into a long-term lease that would go on longer than an investor owns the rental unit.
Monthly rental agreements can also be a smart option if your real estate investments are in a popular tourist area and you rent them as a vacation rental. Property owners can rent to a family or travelers for a month or two and then rent to someone else after that.
Monthly agreements can be another good option when owning and operating student housing. Often, students don’t need a long-term lease, depending on their school and semester schedules.
When considering monthly lease agreements, work with a real estate attorney and a property manager in your market to ensure that your documents comply with landlord-tenant laws. Each state may have different laws regarding month-to-month rentals.
What are the Pros of a Month-To-Month Lease Agreement?
What are some of the best benefits rental property investors should consider when planning the best lease options? Month-to-month contracts have plenty of benefits, depending on your goals.
Investors Can Control a Tenancy’s End Date
Sometimes, a long-term rental agreement just does not work out between a tenant and a landlord. Whether a good tenant situation has turned into a bad one or a renter needs to end the lease due to job relocation, property owners have more control over the ending date with a month-to-month lease.
Since this type of lease agreement can end with only 30-days’ notice, a property owner can end the lease when a renter fails to comply with the rules or pay rent. This can save investors a lot of stress and avoid the eviction process by not having to break a contract to remove a resident.
Rental Rate Flexibility
A month-to-month rental agreement allows property owners greater flexibility with rental rates. With a long-term lease, investors must stick to the same rental rate throughout the term. However, investors can adjust the rate higher or lower more frequently with a monthly lease since lease “terms” end every 30 days.
However, it’s important to maintain competitive rates and be mindful of the market. Offering monthly tenancies often allows property owners to set the rate slightly higher than they would for a long-term lease—but remember that keeping the rent the same while housing the same renter (even on a monthly basis) can encourage them to stay longer. Fluctuating rental amounts can lead to high turnover rates.
Peace of Mind
Month-to-month rental agreements can give landlords peace of mind because they offer flexibility. Since you don’t have to worry about long-term agreements or getting stuck with a bad tenant for twelve months (or longer), you can change the terms of the contracts based on what works best for your needs and goals. With more flexibility, the ability to end a tenant's start quicker, and the chance to raise rent sooner, property owners often like the peace of mind that a monthly agreement can deliver.
What Are the Cons of a Monthly Lease Agreement?
While there are plenty of benefits, property owners should also consider the drawbacks of a monthly rental agreement. While flexibility and higher rental rates can serve you well in some situations or markets, they also come with plenty of concerns that could keep you from reaching your goals. When setting up your strategies, talk with your attorney and a real estate CPA about the best options.
High Tenant Turnover
With a 30-day out to leave the rental unit, property owners often deal with high tenant turnover. When renters come and go throughout the year, it can be challenging to find new tenants quickly to maintain consistent rental income each month.
Compared to a standard residential lease agreement, real estate investors often lose money when relying only on month-to-month leases. Be prepared to list a property, screen tenants quickly, and conduct make-readies several times during the year when choosing monthly tenancies.
Unpredictable Income
When a landlord fails to fill their unit, they lose money! When month-to-month lease agreements lead to frequent vacancies, property owners must budget for a month or two of income loss during the year. It’s also crucial to understand how the seasons affect renting, whether you are in a college town with high vacancies during the summer or choose monthly lease terms. Many investors find that committing to long-term leases of twelve months or longer helps reduce the potential for unpredictable cash flow to improve returns.
Overall Uncertainty
With a higher turnover rate than long-term agreements and an unpredictable income, month-to-month lease agreements can create a lot of uncertainty for investors with big plans for real estate investment wealth. In addition, once the tenant signs a monthly lease or renews it, you only have another 30 days of safety before your property is at risk of another vacancy.
Many rental property investors prefer to reduce stress and operate with more financial stability. When investing in multiple properties in multiple markets, it can be better for long-term planning to offer fixed-term leases rather than rely on monthly agreements that can delay your income.
Invest For Success With Strong Lease Agreements and Privy!
With millions of rental properties throughout the U.S., real estate investors must find ways to stay competitive, find excellent properties, and protect their investments and income. When it comes to choosing between a short-term, monthly, or long-term rental agreement, it may be in your best interest to talk with a real estate attorney and a property manager about your goals and the strategies that can get you there. No matter the types of properties you invest in or the lease agreements that work best for your success, you also need the best insights when choosing new properties for your real estate portfolio! If you are ready to get started or grow your portfolio, reach out to Privy today! Our software helps investors find better properties at the best prices in markets throughout the country.
Boost your knowledge about leases with our free resource, “The Ultimate Guide to Lease Agreements."
