What Is a Month-to-Month Lease?
Have you considered the potential of month-to-month leases for your rental properties? In real estate investing and rental property, the flexibility offered by shorter lease terms can be a game-changer for both new and experienced property owners.
Uncover the hidden benefits of month-to-month rental agreements and how they can adapt to the ever-changing market demands. This leasing option not only provides you with the agility to respond to market trends but also caters to a wide range of tenant needs.
Picture a rental strategy that aligns perfectly with your investment goals, offering you the opportunity to optimize occupancy rates, adjust rental prices with market conditions, and attract a diverse pool of tenants. Month-to-month leases can unlock this potential, presenting an adaptable and responsive approach to property management.
Dive into our focused exploration on how month-to-month leases operate, their distinctions from long-term agreements, and the unique advantages and considerations they bring. Equip yourself with the knowledge to decide if month-to-month leasing aligns with your vision for real estate investment success.
What is a month to month lease?
A month-to-month lease functions as an open-ended agreement that continues on a monthly basis without a set conclusion. It hinges on mutual consent for continuation, with the provision that either party—landlord or tenant—must give notice, commonly 30 days, if they wish to end the lease, subject to local laws that may dictate a different notice period.
This framework ensures both parties retain the flexibility to adjust their arrangements in response to changing needs or circumstances.
How does a month-to-month lease work?
In a month-to-month lease, a tenant and a property owner enter a monthly rental agreement lasting no more than 30 days. During this time, the renter is legally obligated to pay the property owner monthly rent.
If the tenant would like to terminate the lease and move out, they would need to give the property owner a 30-day notice. However, some states require tenants to provide landlords with more or less than a 30-day notice. To simplify lease renewals, many tenants and landlords choose to automatically renew the existing lease unless proper notice is given.
Month-to-month rental agreements are ideal for out-of-state tenants who are unfamiliar with the area they're moving to. They may not want to commit without getting a feel for the neighborhood. This kind of short-term lease also makes sense for long-term tenants who are planning to move out after ending their fixed-term apartment lease but are still looking for a new place to live.
What is the difference between month-to-month rental agreements vs. annual leases?
The main difference between a month-to-month lease and an annual lease is the length of the lease agreement. In most month-to-month rental agreements, as mentioned previously, either the tenant or property owner can exit the agreement with a 30-day notice.
If the landlord decides he wants to raise the price of rent or make any changes to the lease agreement, they have to notify the tenant within the same time frame. Both the landlord and the tenant would need to agree to the new terms before renewing the lease.
Month-to-month rental agreements provide tenants with more flexible living arrangements than annual leases. They also allow property owners to increase rent more frequently. In some cases, a security deposit isn’t required, making it easier for a tenant to move in and reducing their upfront costs. This makes month-to-month agreements riskier than long-term lease agreements, but also more attractive to tenants.
An annual lease binds both parties to a minimum, one-year rental agreement with more stability for both the tenant and the landlord. The agreement can usually be renewed every year and requires a notice period of 60-90 days for termination. Unlike month-to-month options, rent for annual leases can be paid on a quarterly or annual basis. However, most tenants still pay every month.
Pros of month-to-month leases
Now we have covered the fundamentals on this flexible lease type, let's take a closer look at the pros.
Although annual leases are more common, month-to-month leases come with multiple benefits for property owners and tenants, such as automatic renewals, flexible arrangements, higher rental income, the ability to quickly get rid of a bad tenant, and the ability to accommodate good tenants who are unable or unwilling to commit to a long-term lease. Take a closer look at these benefits below:
Automatic lease renewals
As mentioned above, month-to-month leases tend to renew automatically. This simplifies the renewal process if both renter and property owner are content with lease terms and would like to continue renting under a new lease with the same conditions.
Flexible rental arrangements
Month-to-month leases allow for changes every month if either the landlord or tenant is unhappy with the existing rental agreement, providing greater flexibility for both parties. Rental owners can vacate a rental within a month’s notice if they need to sell, while tenants can negotiate special terms, such as a pet policy or an additional roommate, as their living situation evolves.
Higher rental income
In a long-term lease, property owners cannot increase the rent price until the lease has ended. However, in a month-to-month lease, the price of rent can technically increase every month. Although increasing rent every month is not the best practice, the ability to do so allows property owners to capitalize on rental market shifts on a month to month basis.
Month-to-month leases allow property owners to respond swiftly to market conditions. This agility is particularly advantageous in high-demand areas or during peak rental seasons, where the ability to adjust rent or terms can lead to optimized profitability and occupancy rates.
This responsiveness not only benefits the landlord in maximizing income opportunities but also ensures properties are consistently aligned with current market values, enhancing their competitive edge in the rental market.
It’s easier to get rid of a bad tenant
In a long-term lease, getting rid of a bad tenant can be an extensive, complicated process. Tenants' rights vary by state, but they generally protect a tenant’s right to continue living on a property for some time.
With a month-to-month option, tenants' rights are usually only valid for the designated rental period, which is only 30 days. As a result, property owners can vacate their rental within 30 days or less, depending on when they ask the tenant to leave.
It’s easier to attract a good tenant
Some good tenants out there are either unable or unwilling to sign a long-term lease. By offering month-to-month leases, property owners can attract and retain these tenants, widening their rental pool.
Not only does this provide the tenant with flexible living arrangements, but it also avoids vacant units for the property owner, at least for a while.
Cons of month-to-month leases
Month-to-month leases come with several benefits, but they also come with a few downsides. Property owners who offer month-to-month leases must deal with a lack of stability in vacancies and rental income, move-outs on short notice, and potentially, higher expenses. Take a closer look at the cons below:
Lack of stability
Property owners who engage in month-to-month leases enjoy flexibility but sacrifice stability. Since fixed-term tenants stay for longer periods, they tend to pay rent in full, look after the rental, and pose less of a flight risk.
On the other hand, month-to-month tenants can leave at any time during the year. This can be problematic if they choose to leave during a time of the year when rental demand is low, leaving your property vacant at a vulnerable time.
It’s worth noting that rental vacancies are the most common way property owners lose money. To combat this instability, property owners sometimes ask month-to-month tenants for pre-paid rent and security deposits.
Move-outs on short notice
Another downside to month-to-month rental agreements is the short notice you receive before a tenant moves out. If you’re struggling to fill rental vacancies regularly, accepting month-to-month leases may not be ideal.
Long-term tenants usually need to provide property owners with a notice of 3 months, which is plenty of time to find and screen a new tenant in any rental market across the country. This time can also be used to sell the rental property if you no longer wish to manage it.
Given that month-to-month leases come with higher risks of vacancies, they can be more expensive than fixed-term leases. Make sure to evaluate the area in which your property is located before deciding to accept month-to-month leases.
Difficulty in long-term planning
The unpredictability associated with month-to-month leases can make it challenging for property owners to plan for the near future and long term. With tenants able to leave at short notice, forecasting rental income, maintenance schedules, and property improvements becomes more complex, potentially hindering the owner's ability to invest in and upgrade their property effectively.
Potentially higher insurance premiums
Some insurance companies view month-to-month leases as higher risk, which could lead to increased premiums for landlords. The perceived instability of a month to month tenancy and the greater likelihood of frequent tenant changes may contribute to this perspective, impacting the cost of insuring the property.
Tenants' rights for month-to-month tenants
Since month-to-month leases are short-term, some property owners and tenants prefer not to sign a rental agreement. However, it’s important to note that even in the absence of a rental agreement or written lease, property owners still need to keep their rentals safe and habitable. They also need to respect their tenant’s privacy by providing proper notice as designated by state law before entering the property.
You also have responsibilities as a tenant, which include making on-time payments and respecting the written or verbal agreement established between you and the property owner. If the rental sustains substantial damage during your tenancy, you’ll also be legally responsible for making amends.
Just like a standard lease or a fixed-term lease, a month-to-month rental contract is a binding agreement. The only difference is that a month-to-month rental agreement has a lease expiration date that comes sooner.
Which is better: A long-term lease or a month-to-month rental agreement?
Both a long-term lease and a month-to-month rental agreement can be beneficial for a property owner. Month-to-month leases may be ideal for property owners who live in areas where rental demand is high or are looking to sell their properties soon.
They also make sense for renters who prefer minimal commitment rental agreements. However, if you prefer consistent income and don’t want to constantly look for new tenants, a long-term rental agreement makes more sense. Consider your goals as a real estate investor before deciding on either kind of lease.
Month-to-month leases- are they right for you?
Understanding how month-to-month tenancies differ from long-term leases is important before deciding to sign a month-to-month lease. Month-to-month rental agreements offer flexibility, the potential for higher income, and seamless tenant turnover. However, they also come with a certain level of instability, move-outs on short notice, and a higher risk of vacancies which could make them more expensive in the long run.
Long-term leases provide more stability and consistent income than month-to-month arrangements, however, they aren’t as flexible. It can be difficult to get a bad tenant out or sell a rental property quickly if you have to respect a long-term lease. Ultimately, whether or not a month-to-month or short term rental agreement is right for you depends on your specific goals as a real estate investor and the conditions of your local rental market.