As a real estate investor, you get to choose the properties you purchase. Perhaps you favor a particular location, property size, or building style. Many investors choose to make the leap from “just” an investor to a landlord to diversify their income streams and play the market with greater flexibility.
When becoming a landlord, perhaps the most significant choice you will need to make is the type of lease agreement you choose to offer to your tenants. A standard lease agreement usually stipulates that the tenant rents the property for 12 to 24 months. However, one of the most popular alternatives to a fixed-term lease agreement is a month-to-month lease agreement.
While the guaranteed income associated with standard lease agreements may be favorable to many landlords and investors, the flexibility of month-to-month lease agreements shouldn’t be overlooked. In some cases, a monthly agreement can benefit both you and your renters. So, what are the pros and cons of monthly leases for tenants? Keep reading to find out!
Why Tenants Like Monthly Lease Agreements
What do renters find beneficial about month-to-month leases? Property owners should consider these perks when setting up a new lease.
They Can Leave When They Want To
Renters sometimes balk at the idea of staying in a place for a year or longer. There are plenty of reasons renters may need to limit their time in a rental property. Sometimes, people look for a temporary home as they adjust to a new area. Other times, they may need a place to stay for just a few months for a work assignment.
Month-to-month lease agreements allow people in these circumstances to live in a comfortable private residence without a long-term commitment they can’t or don’t want to keep. However, even though tenants can leave without waiting out a long-term lease, they must still provide 30-days notice to end a monthly agreement.
Better Financial Management
Renters facing financial hardship may value low-cost properties over long-term stability. A month-to-month lease agreement gives them the option to take advantage of a better offer or lower monthly rent without breaking a lease commitment. Of course, they must still provide the required notice, which should still give you some time to find new tenants. Otherwise, they will be free to move around as they wish if they spot a lower-priced rental property they prefer.
Peace of Mind
Many tenants feel trapped by a lease agreement at some point in their life. Perhaps they want a change of scenery or to move in with a loved one. In other cases, renters need to break their residential lease agreement to accept a far-away job offer or deploy with the military.
Renters might also prefer the peace of mind knowing that if a rental situation isn’t working out well for them, they aren’t required to stay in a property for more than the next 30 days when they deliver notice. Whether they aren’t happy with the landlord or their commute to work is taking longer than they planned each morning, a monthly agreement can relieve stress for renters. For people who need to change their living arrangements frequently, a month-to-month rental agreement can be preferred over a standard lease agreement.
Why Do Tenants Prefer a Long-Term Lease Agreement?
While monthly leases can work well for some tenants, others prefer long-term agreements when renting a home. Here are some of the cons for tenants when property owners only offer monthly tenancies.
Short-Term Living Arrangements Can Cause Stress
There are no long-term guarantees associated with month-to-month lease agreements. Unlike standard lease agreements that forge a long-term landlord and tenant relationship, monthly agreements leave tenants without the promise of a place to live next month. This can be problematic for renters who want to find stable, consistent living arrangements because they may be forced out if the landlord chooses not to renew the monthly tenancy, even with proper notice.
If you’re struggling to find reliable tenants for rental properties in your real estate markets, the short-term living arrangements offered by month-to-month lease agreements may make finding good tenants significantly more difficult.
Financial Instability
Unlike standard lease agreements where the terms of the agreement are truly fixed for the duration stipulated in the agreement, month-to-month lease agreements are much more volatile for a renter’s finances. Landlords have the freedom to raise the rent to fluctuate with market conditions, and many landlords choose to charge higher rents for monthly agreements to offset the potential risk of losing tenants quickly. This can cause some financial strain for tenants.
If you plan on using your tenants’ rent payments to subsidize your mortgage payments, you may find yourself strapped for cash if they decide to move on short notice or if they find another rental home that offers long-term leases to give them better financial stability.
General Uncertainty
Although month-to-month leases offer freedom in their flexibility, they also create uncertainty for renters. Many renters struggle with not knowing whether or not they will be living in the same place next month as they are this month. To adapt to this concern, renters in short-term lease agreements have to create backup plans if their landlord decides to raise their rent or sell the property they’re living in. For some renters, this stress simply isn’t worth the freedom to move on short notice.
Some landlords also feel discomfort with the uncertainty of monthly tenancies. Part of managing a property is creating a positive relationship with your renters, and this is much more difficult to achieve if your renters are constantly changing. You may find that you have to put in a lot more work to keep your property in full working order and consistently leased if you choose a month-to-month lease agreement over a standard lease agreement.
Choose Leases That Benefit Renters (and Your Long-Term Success)
Choosing the right lease agreement for your situation and long-term goals can be challenging, and many landlords find that they need to be able to adapt their lease agreements to suit the best available tenants. Consider being open to multiple options that make the most sense for the right renters and your properties. If you receive a request from excellent applicants for a month-to-month lease agreement, it can be beneficial to accommodate that request to encourage them to stay in your rental vs. going through the marketing and screening process right away.
Additionally, if you plan to maintain multiple rental properties and rotate through selling and buying properties, you may want to vary the type of lease agreement you use. Having a few stable streams of income from properties with standard lease agreements and a few properties you know you can sell quickly and operate with monthly agreements allows you to make the most of your investments.
Excellent Real Estate Returns Start With the Best Properties!
As you consider the pros and cons listed above, don’t forget about your priorities as a real estate investor. With Privy, property investors have a resource you can’t find anywhere else to help you locate great properties to rent to future tenants and diversify your real estate investments. Get started using our platform today to find properties and investor insights in your preferred markets!
Get more expert insights into lease agreements when downloading a free copy of “The Ultimate Guide to Lease Agreements."
