A rental property lease is the most important document you as a landlord can have. This is a legal contract between you and your tenant, outlining expectations, costs, requirements, and usage rules. There can be many variations to the lease terms, as long as they comply with state and local law, but there are two main types: annual and month-to-month leases. Read on to find out how each works along with the pros and cons to help you decide which better suits your needs.
Month-to-Month Lease
A month-to-month lease is an agreement that continues each month until either party provides at least 30 days’ notice. As the name suggests, it allows tenants to live in your rental property on a month-to-month basis.
Pros
Flexibility
One of the main reasons some property owners prefer to offer month-to-month lease agreements is because of the flexibility it gives both themselves and their tenants. A flexible end date means that your lease could technically continue indefinitely. Tenants usually appreciate this flexibility.
No more bad tenants
There is nothing worse than placing a bad tenant in your rental property. The situation can get especially tricky when they cause a lot of trouble but just never quite breach the lease agreement enough to warrant an eviction. Having to deal with them for a whole year does not sound great. If you come across such a tenant and you offer month-to-month leases, you can easily get rid of them by providing at least 30-days’ notice.
Updating your rent price
You may prefer a shorter lease agreement as it allows you to keep your rental rates comparable to those of others in the area. In this situation, you can sometimes also justify a higher rent price because you are offering convenience and flexibility to your tenant. This is especially true if your tenant specifically asked for the month-to-month lease.
Cons
More Wear and Tear
If you often move new tenants in and out of your rental, it’s bound to experience more than the average amount of wear and tear. Tenants only staying for a few months may not care for your property as well as if they planned to call it a home for a year. Plus, moving itself can cause damage to your property’s floors, doors, windows, and walls.
Short notice to find new tenants
Finding new tenants with only 30 days’ notice can prove to be stressful. You may also find yourself facing a loss of income or, in the rush of trying to fill the vacancy quickly, you may end up not screening your potential tenants properly.
Less stability
There’s nothing better than finding a good tenant for your rental property and not worrying about much else than depositing rent checks. However, only keeping them temporarily instead of for a whole year is less ideal. The instability of renting month-to-month also means a less stable income for you.
Annual lease
An annual or fixed-term lease is an agreement with a designated start and end date, set rules and a fixed rent. An annual residential lease agreement typically runs for a one-year period.
Pros
Security of income
Vacancies are always a blow to your income. With an annual lease agreement, you get a guarantee to take in monthly rent for a longer period. As somebody is contractually obliged to pay the rent for the entire length of the lease, your extra income is pretty secure.
Less hassle
If you’ve taken a DIY approach, advertising your property, finding tenants, screening them, and getting them all set up can be exhausting, especially if you have to do it more than once a year. With an annual lease, you’ll likely keep the same tenant for at least a year and will not have to worry about much else other than depositing rent checks.
Limited Turnover
If you know when your tenant is likely to vacate, it’s easier to plan for and prepare for marketing, unit turnover, and finding new tenants. It also makes it easy to raise the rent for your next tenant. Month-to-month leases have a higher turnover by nature, and turnover costs can quickly add up and cut into your long-term profits.
Cons
Less chance for a raise
Being locked into a long-term contract means you’ll be collecting the same rent until the contract ends. This means that you can pretty much only raise the rent when the contract ends.
Less flexibility
A long-term lease gives you a little less flexibility. This may not be an issue if you’re happy with your tenant renting your property for a whole year. However, if, for whatever reason, you need to reclaim it, perhaps to sell it or give it to a relative of yours to live in, you’ll need to wait for your lease to expire.
Chance of getting stuck with a bad tenant
If you happen to come across a bad tenant, you may end up getting stuck with them for the long haul. If you have a tenant who’s often late with rent payments or is disruptive, it’ll take you much longer to get rid of them.
Every landlord will have different needs when it comes to choosing a month-to-month or an annual lease. Think whether you prefer flexibility or consistency and how much time you’re happy to sacrifice.
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