Most landlords require a lease of some term at the start of a new tenancy. Some landlords require a 1-year lease, while some might go for as short as a six-month lease. But it’s rare these days to see a landlord who will take a tenant from the very beginning of their tenancy on a strictly month-to-month basis. Why? Because having a tenant move in and then move out a few months later is a huge hassle, and usually results in more vacant days for your rental. But what about when that first lease term expires? Does it make more sense to renew the lease, or to switch to a month-to-month arrangement?
Renew the Lease or Month to Month?
There are different issues to consider when a tenant is first moving in, as opposed to when the tenant’s first lease period is up. Getting an apartment rented takes time and effort. You have to advertise the property, screen tenants, make any necessary repairs left over from the last tenant, and clean, paint, and possibly re-carpet, depending on how messy the prior tenant was. If you’re really, really lucky, and if you have lots of advance warning that a tenant will be vacating, you can front-load some of those tasks before the tenant has vacated, and you might whittle your turnover time down to just a few days. More often, however, the process might take a couple of weeks to a month, which means you might be going for 1/2–1 month without collecting any rent.
Plus, if you’re a landlord doing the work yourself, it’s a huge pain in the you-know-what. If your full-time job is owning and managing your own rentals, then the hassle might just feel built into your regular management/maintenance schedule, but if you’re a part time landlord in addition to your regular full time job, having a vacancy means you are probably going to lose your evenings and weekends until the unit is rented again.
So, given the time and expense of turning over a unit, it makes sense for a landlord to require a lease of some length when a tenant first moves in. It would be awful to finally find a tenant you like, have them move in, and then have them give notice a couple of months later that they’re planning to move out. This is especially true if the rental market is soft, and you had to run a move-in special to get the unit rented in the first place. At our apartment building, during the economic downturn, we ran a special that gave the tenant half off their second month’s rent. We didn’t force anyone into leases, because we were trying desperately to get the units filled, and we figured that a tenant who was just moving in would realize what a pain in the butt moving is, and would decide to stay for at least six months to a year anyway. Wrong. There was a certain subset of tenants during that period of time who would apartment hop from building to building, taking advantage of move-in specials like ours. Needless to say, we quickly changed our program to require a lease of at least six months to deter those apartment hoppers.
But what about after the tenant has been there for the initial lease term, and the lease is about to expire? Does it make more sense to try to renew the lease, locking in the tenant for another lease term? Or is it better to switch to a month to month rental at that point? Let’s say the first lease term is a year. If most tenants move after 1-2 years, and you’ve already gotten a year out of them, you’re doing fairly well. You’ve undergone the hassle of renting out the unit, but you’ve just about gotten your money’s worth out of this tenant. Of course, if you can get them to stay for another 6 months or a year by locking them into the lease, you might be able to sleep a little easier knowing that you won’t have to re-rent that unit for the length of the new lease term. But what if entering into a new lease term actually works against you? Let’s examine the pros and cons.
Renew the Lease: the Pros
The biggest pro to renewing the lease is peace of mind. By locking the tenant in to a certain lease term, you can rest easier knowing you won’t need to jump through hoops to get the unit re-rented any time soon.
Another pro is that a lease term helps you control when a tenant might move out of the property. Let’s say your property has no air conditioning. If you try to rent your place in mid-August, everyone who comes through that property to look at it will be hyper-aware of your property’s biggest flaw. If a tenant were living there year-round, they might only wish they had air conditioning for a couple weeks a year. (Hey, this is Orange County, folks, we’re spoiled by good weather here.) But if you’re showing your property during a heat spell and you don’t have A/C, that’s going to hurt your chances of getting the unit re-rented. By renewing a lease, you can try to time when the unit might be vacant next. If the lease renewal comes up in spring, you might renew for 6 month intervals to keep the vacancy in either spring or fall, which are great times to show the property. If the lease renewal comes up toward the end of June, you might instead renew for 3 months or 9 months, to avoid having to re-rent the unit during the holiday season (6 months away) or the following summer (1 year away).
Month to Month: the Pros
You get more flexibility with a month to month arrangement than you do with a lease. You want to raise the rent in month 3? Go for it. With a lease, your one and only chance to raise the rent comes when the lease is being renewed. If you lock in for a one-year lease term, and rents have jumped up significantly about six months in, you’re forced to wait out the remainder of the lease term before raising the rent. But in a month to month rental, you can raise the rent at any time, so long as you give enough notice (30 or 60 days in California, depending on how large the rent increase is).
If your tenant is on a month to month lease, and you are concerned they might be destroying your property, it’s much easier to get them out. You just have to give 30 or 60 days’ notice (in California, depending on the length of the tenancy). You don’t even have to give a reason why you’re kicking them out. Just give them notice, and within a month or two, you have your property back and you can choose better tenants the second time around. With a lease, you’re stuck waiting until the end of the tenancy, unless you feel like you’ve got a strong enough case that they’re violating the lease. If you think they are violating the lease, you could give them notice to cure the violation or vacate the unit, and if they don’t cure the violation, you can evict them. But then you might need to prove in court that they were violating the lease terms, and sometimes it’s hard to say conclusively that they are. You might have noticed in one of your annual maintenance inspections that it looks like too many people are living in the unit, but it’s one thing to count the toothbrushes in the bathroom and know for yourself that that’s what’s going on, and quite another to be explaining that to a judge and hoping that he or she believes you and agrees that that’s sufficient evidence.
In fact, if you decide you want the tenant out for any reason, the month to month arrangement is easier for you. For the renovations I’m doing at my new fourplex, I’m thrilled that all of the tenants are on month to month agreements instead of longer term leases. That way, I can kick them all out of the units to do all of the necessary repairs without having to justify anything. It might be easy enough for me to try to evict them for breaching their rental agreements by having pets when they’re not supposed to (or the guy with 10 chickens in his garage, for example), but if the former owner let them move in with a pet, and if they’ve lived there the whole time with their pet and the former landlord accepted it, there’s a good chance that the tenant will successfully argue that that term of the rental agreement was waived by failure to enforce it. Better to be on a month to month arrangement, where you can just give the tenant notice of termination of the tenancy and be done with it.
Another huge benefit of switching to a month to month agreement is that it can actually make your tenant stay at the property longer. I’ve had at least a couple of tenants who initially told me they were planning to stay for only a year. After that, they planned to move into a bigger place, or buy their own property, or move to a new city. If I approached those tenants and told them their lease was about to expire, and required that they sit down and enter into a new lease, I would effectively be reminding them that they were planning to leave. Couple that with a rent increase upon lease renewal, and a requirement that they lock in for a set period of time, and you’re basically encouraging the tenant to leave. Instead, if you quietly let the lease expire and automatically convert into a month to month rental, the tenant is unlikely to notice that the set amount of time has passed, and you might get them to stay for another few months to a year purely out of inertia. This really works!
The inertia factor could also come to your rescue if market rents drop. With my rental condo, I had some tenants who started out paying $1575 per month in rent. When the economy crashed, market rents dropped to around $1375 or so. If I had pursued another lease agreement when the first one expired, I would effectively be reopening negotiations on the rental amount. They would probably research market rents and negotiate a lower rental amount. But by quietly letting the lease roll over into a month to month agreement instead, I avoided that whole sit-down conversation, and the tenants kept paying the regular monthly rent without examining for themselves whether their rent should be reduced.
My Vote: Switch to a Month to Month Rental
After reading the above, it’s probably no surprise to you that I favor switching over to a month to month rental at the conclusion of a lease. I’ve just seen it work out to my benefit too many times. And I think tenants prefer it, too, because they don’t feel like they’re handcuffed to the property. Everyone wants to feel free to make their own choices.
If you’re on a month to month agreement with your tenant and you want to try to prevent having vacancies fall during winter or the peak of summer, you could just time your rent increases to have them take effect at the start of the busy season. A rent increase that takes effect December 1 won’t be doing you any favors, because a tenant might move out and leave you to fill the unit over the holidays. But a rent increase that comes into effect around April 1? No problem. If the tenant moves, you can find a new tenant easily.
What do you think? Do you prefer to renew the lease or switch over to a month to month rental? If you prefer to renew the lease, tell us why in the comments!