If you invest in rental properties, you probably already know the ins and outs of a standard residential lease agreement. These are typically anywhere from six to eighteen months in length and contain all of the other details that tenants need to know when living in one of your properties. Most of your residents will be more than happy with this kind of lease to lock in a rental rate and know they have a comfortable home for at least a year.
However, many people are out there looking to rent properties on a month-to-month basis. If you have never had a reason to use a monthly lease agreement before, your instincts might be to say “no” right off the bat. However, there are both pros and cons to this kind of agreement for real estate investors. In this article, we’ll cover the basics of what a month-to-month residential lease agreement looks like, as well as some of the pros and cons of using one for your properties.
What Is a Month-to-Month Lease Agreement?
Exactly how it sounds, a month-to-month residential lease agreement is a lease that only lasts for 30 days or one month. There are several nuances to these, similar to a standard lease agreement. These include pet deposits, charges for late rental payments, security deposits, etc.
However, many aspects of the lease differ from a standard lease agreement, such as automatically renewing every month unless otherwise an official notice is passed between the renter and the landlord or vice versa. An official notice of non-renewal usually requires a 30-day notice, depending on local regulations, and can be filed by either the tenant or the landlord.
What Are Some of the Pros and Cons of Monthly Leases?
So, what should rental property investors consider when thinking about the best lease options to maximize returns? Let’s talk through some of the pros and cons when using a month-to-month rental agreement.
Pro: Peace of Mind
Have you ever had a tenant that just refuses to pay rent on time, or constantly disturbs their neighbors, or creates a mess of the property? With a month-to-month lease agreement, you could have more peace of mind in this kind of situation, as you would also be allowed to terminate a renter’s lease at the end of 30 days—rather than being stuck with a bad tenant through the duration of a fixed-term lease. In addition, with greater control over your property, you wouldn’t have to worry when a tenant you thought would be a great fit turns out to be anything but great.
Offering a month-to-month residential lease agreement to a tenant can also be an excellent opportunity to test their reliability. For renters with low credit scores or spotty employment history, if they can prove they can pay on time and be a great tenant, then you can offer long-term leasing options for them.
Con: Replacing a Tenant On a Short Notice
On the flip side, whether you or your tenant finds themself ending the automatically renewed residential lease agreement, you may find yourself with an empty property. Estimates show that roughly 6% of rental units in America are currently sitting empty, and that is not a statistic any investor hopes to be. Any month your units are left empty is money directly out of your pocket.
With monthly agreements, property owners face the possibility of frequent vacancies due to only needing 30 days’ notice from a tenant to end the lease. If the idea of needing new tenants throughout the year adds stress to your real estate investing strategy, a monthly lease agreement might not be the best fit for your goals.
Pro: More Financial Fluidity
With a month-to-month lease agreement, investors could change the rental rate every month if they desire. This allows you more fluidity in keeping up with market costs and competitive rates, so you will always be on top of changing neighborhood prices. You can also charge a bit more from the get-go compared to a long-term lease, in most cases. Since month-to-month leasing is riskier for landlords, most monthly renewal leasing agreements are a bit more expensive than long-term leasing.
While some would argue that a monthly lease means your tenants will jump ship if they find a better price, it also means you can choose to be competitive in your pricing. If your tenant expresses interest in moving out, you can offer them a lower rent. Since moving can be a huge hassle, many people prefer staying where they already are if the price is right.
Con: Unpredictable Income
However, along with flexibility comes the potential for unpredictable income. When tenants aren’t committed to a lengthier fixed-term lease, they can move on with short notice—despite adjusting the rental rate to accommodate tenant requests. With your standard long-term leases, you have a better idea of how much money your rental properties will generate throughout the year.
If you require a stable income for family reasons or otherwise, month-to-month lease agreements might cause you more stress than they are worth. Generating consistent monthly cash flow is one of the best ways to reduce financial risk and meet long-term income goals.
Pro: Greater Control Over Leasing End Dates
As we’ve mentioned, having greater control over when tenants come and go is appealing to many rental property investors. Depending on the market and the quality of your tenants, ending a lease sooner rather than later can be a nice benefit when dealing with a renter that won’t pay the rent or is otherwise disruptive and violating the lease.
Real estate investors might also prefer to rent out a property for only part of the year. Whether they live in the property a few months out of the year or need it for visiting family members for a short time, having the flexibility to end a lease with 30-days’ notice can work well. Since you can control the end date of your leasing agreements, you’d truly have complete control over the property to do what you wish with it.
Con: Uncertainty About Occupancy
If you choose only to offer month-to-month leasing, you may find yourself with an uncertain flow of tenants willing to live in that arrangement. What works for some will not work for all, and there is a high chance you could miss out on great tenants that prefer the stability of a long-term lease vs. a monthly arrangement. In addition, if you struggle to generate enough revenue or consistent occupancy throughout the year, you might find that monthly leases aren’t ideal for your goals.
Privy Helps Real Estate Investors Find Better Properties For Leasing
With the pros and cons presented in this article, you can see that month-to-month leasing is not ideal for every investor. However, that doesn’t mean it can’t work for you with the right properties and strategies to meet your goals. Consult your real estate investing team to set up the lease agreements that help you maximize returns and protect your investments in any market! To find the best properties for your rental property investing goals, you need a tool that will help you make informed decisions on the best investment deals in your preferred markets. With Privy, you can learn from others in the industry, as well as find new properties and insightful market data to build a successful real estate portfolio! To get started with Privy’s services, contact us today!
Learn more insights into creating strong lease agreements for rental properties! Download a free copy of "The Ultimate Guide to Lease Agreements."
