A fixed term lease isn’t the only type of lease that’s around. If you’ve heard about month to month leases, then you know what we’re talking about.
Month to month rentals have some great advantages but also some concerning drawbacks. Before you decide to get involved in month to month rentals, take a look at their pros and cons:
Pros of Month to Month Rentals
Flexibility with End Dates
In a month to month rental, the lease renews every month automatically. The landlord and tenant do not have to agree or sign anything, and the lease could theoretically continue without a fixed limit. The only way the lease is terminated is if one party notifies the other before a specified time period.
This flexibility can be great for tenants and landlords. It gives tenants the option to leave the rental property if they want or need to. For landlords, this flexibility can be great if they need the income property vacant for whatever reason after the end of the month. Flexibility also gives landlords other benefits, which leads us to the next point.
Deal with Bad Tenants Easily
Having bad tenants is absolutely horrible. They could refuse to pay rent, damage the investment property, or disrupt neighbors, all things that are awful for you, the landlord. Dealing with bad tenants is also a hassle, and if push comes to shove, an eviction could take place.
With month to month rentals, this headache ain’t so bad. All you have to do is send to the bad tenant a non-renewal notice. This notice suffices as the short notice to break the lease, as mentioned earlier. The tenant will be required to vacate the rental property. This method is a sharp contrast from waiting to inform a tenant to leave after the end of a year-long lease.
Target Specific Tenants
Another perk of month to month rentals is targeting specific tenants. One example of such tenants is college students. While some college students like to rent out in college towns, others turn to month to month rentals. The short-term leases are perfect for staying in this location one semester at a time, especially if the students are leaving during the summer. New workers and arrivals in a city may also prefer month to month rentals over traditionally leased ones. They might prefer to become familiar with an area while living in a temporary stay.
Can Convert to a Long-term Lease
Some tenants, like the new arrivals in the previous point, may decide to stay in the rental property in the long-term. In that case, it is normally easy to convert the month to month lease to a fixed long-term one.
This is the pro that will make your wallet happier. Month to month rentals charge more than fixed-term rentals. There are typically two reasons for this. The first is that a month to month lease charges a premium. These leases are not all too common, so this premium is something you can take advantage of. The second is that these leases bring in more risk, which will be discussed later. Don’t be discouraged, however, as the rental income from these rentals can cancel out the risk.
Update Rent Price Monthly
During a new month cycle, you can decide to raise the rent if it is justified. Of course, the tenant could respond by breaking the lease and leaving the real estate property. Generally, however, a tenant will stay in the investment property if the new rent is justified by the property and its services. This ability to change prices monthly has the upper hand to fixed-term rentals in which rent prices can be increased only after the lease has ended, which can take months.
Cons of Month to Month Rentals
Short Notice for Termination
A short notice for termination can be a blessing and a curse. The instability that month to month rentals can bring in is something to take note of. At any time, a tenant may choose to leave with short notice. These short notice is usually 30 days, but it can be as low as one week. Different states have different notice periods, click here to find about your state.
Having a tenant leave on a short notice means you will need to hurry up to find a new one. If you are unable to find a new tenant, your cash flow will suffer, as expenses, like mortgage, will still need to be paid, regardless of the temporary lack of a source of rental income. If you do manage to find a tenant, there are other costly actions that will need to take place.
Potential for High Vacancy
If you cannot find a tenant for a while, vacancies will start to take a harder hit on your cash flow. Since breaking the lease is easier with month to month rentals, the possibility for vacancies is higher than that of fixed-term rentals.
If you do manage to find a tenant, then you will need to have the property cleaned. Doing so on a short time notice is not too pleasant and is time consuming. Your best bet would be to hire a cleaning company to clean the property as you are pressed for time, which of course costs money.
More Maintenance and Renovations
Cleaning isn’t the only thing you need to take care of before accepting a new tenant; renovations and maintenance might also need to take place. Because the tenants in month to month rentals typically do not reside in the property for long, they are likely to be more careless towards it. That means more property damage can take place. In this way, month to month rentals can cost more in renovations and maintenance than fixed-term investment properties.
All in all, owning a month to month rental is a great way to earn high rental income, especially with the right tenants. It does come with an increased risk, so you will likely have to be quick on your feet in some scenarios.