Month-to-Month (MTM) versus Annual leasing. As with anything, it’s not as clear-cut as you might think. I started asking around some of my landlord colleagues what they prefer. Amazingly, it was split down the middle! How can this possibly be? Isn’t there a *right* way? Indeed there is.
MTM vs Annual
Let’s make sure we are all on the same page. When you sign a lease with a tenant to rent your property, your agreement has a term. That term is often 12 months. That is a legal agreement for each of you to rent to or from the other for that duration. If that agreement is broken, then there are damages, and the other party might have to remedy them.
At the end of the initial term, leases usually have a clause that continues the stipulations of the lease and renews every month. At this point, either party can give a notice to terminate the lease. When that happens, the tenant must move out per the terms of the lease.
True, the tenant can physically leave whenever they want but the landlord cannot forcibly remove a tenant (without the force of an eviction and a sheriff). So, it’s on the landlord to require that the lease terms are upheld in the courts if the tenant leaves before the term is expired. This costs a lot of money, so often landlords just ‘write it off’ and begin looking for a new tenant.
Annual Lease Pros
- Tenants are ‘locked in’ and are likely to remain paying rent until the end of the term.
- MTM keeps tenants on old leases and some are there for a long time. It’s difficult to know who’s on what lease. Annual keeps them all up to date within 2 years of time and is much more nimble as times and laws change. Try going to a MTM tenant of 4 years with a new lease because there’s a new law regarding pets. Even if you aren’t raising the rent, good luck getting them to sign anything at all! There’s no incentive.
MTM Pros
- Within 30 to 60 days, depending on your laws, you can require a tenant to leave the premises. If they are misbehaving, then they can be gone.
- Hmm, nothing else
If you are a landlord and want to grow your business you need to think like a business person. This means getting leases signed. For those who like MTM better, I ask, “Why don’t you sign the initial lease MTM?” No one does that. Keep the good tenants, get rid of the bad ones.
Here’s my strategy: Whenever an annual lease goes MTM, I have my property manager present the tenant with a new updated lease. The rent will increase to market rent which is usually a sensible amount that can be paid. This keeps the rents going at a steady increase but is not too onerous on the tenants. If they want to go MTM, there is an additional fee per month, about 5% of the total rent. And, I try to make my leases expire in the Spring, when leasing is easier. So, if they leave, it’s probably at the end of their lease and in the Spring.
If they sign the new lease, great. They are going to be there for another year. If they don’t sign, then they will be paying you more money and you now know they will be leaving in about 6 months. Get prepared for the turnover. Why 6 months? They will pay an additional 6 months x the rent bump to go MTM. That’s usually people’s value for the uncertainty. If they secretly plan to leave within 6 months, they will pay the rent bump. If longer, they will sign and decide to move out at the end of their contract.
And that last paragraph is the best reason of all to keep them on the annual lease. Keep signing!
