If you’re renting out a property for the first time, one of the things you need to decide on is if you should offer a long-term lease agreement. This often covers twelve to twenty-four months. Long-term leases are more stable since they provide consistent income over the course of several years, but the downside is that they tend to chain the parties to their contracts.
Although long-term lease agreements are more common, the good news is that property owners that don’t want the commitment can opt for month-to-month rental contracts.
In this article, we’ll go over the advantages and disadvantages of opting for a month-to-month rental. We will also share a few useful tips on how to implement this form of rental so that you can secure real estate success.
What is a Month-to-Month Rental?
A month-to-month rental, as it implies, is a rental contract that “ends” and “renews” at the end of the month. It’s for tenants that want to enter into a short-term tenancy in which they stay in a rental property with no predetermined termination date. Under a month-to-month rental, the tenancy never ends until the tenant or the real estate investor serves a thirty days’ notice (but bear in mind that this varies by state). In other words, it will automatically renew.
Why are Month-to-Month Rentals Offered?
In general, month-to-month rental contracts are designed to extend the long-term lease agreement. For example, if your tenant’s long-term lease agreement is about to end, but they need a bit more time to find a replacement rental, you can recommend a month-to-month rental to accommodate their needs. In such a case, you can charge your tenant a separate amount on top of their original lease agreement.
Even if you don’t have an active tenancy, you’re free to implement a month-to-month rental contract if you want to convert your investment property into a vacation rental, student accommodation, and so on. Ultimately, as the investor, you get to decide whether or not a long-term lease agreement aligns with your investment goals.
What are the Pros and Cons of a Month-to-Month Rental Contract?
Not sure if you should offer a month-to-month rental? While a month-to-month rental will allow you to escape the commitment of a long-term lease agreement, it’s not the right route for every investor. Let’s take a look at the pros and cons of a month-to-month rental so you can make the correct choice:
Pros of a Month-to-Month Rental Contract
Don’t want to renew your tenant’s rental contract? All you need to do is to serve your tenant a thirty days’ notice to inform them that they have to move out. Compared to a long-term lease agreement where your tenant agrees to stay in your property for a predetermined period (e.g. twelve months), a month-to-month contract gives you control over what you want to do with your property.
Let’s say you decide to end the tenancy since you want to use it as a vacation home over the summer. Under a long-term lease agreement, you’d have to cover your tenant’s relocation costs or wait for the rental period to end. On the other hand, if your tenant signed a month-to-month lease agreement, they are aware from the start that you may choose not to renew at any time.
#2 Raise Your Rental Rates
Month-to-month rentals can be financially beneficial since you’ll be able to collect a premium. Unlike long-term lease agreements that are more secure, a short-term rental contract carries more risk since renters can choose to end their tenancy at any time. To mitigate that risk, you can charge a higher rental rate.
Furthermore, you can safely raise the rent each month. Since you no longer have long-term tenants, you don’t have to worry about losing tenants as a result of the rent increase. And since short-term tenants typically don’t plan to stay for more than a month, they’re more willing to pay a premium price.
#3 Bid Goodbye to Problem Tenants
If you’re planning on running a long-term rental but you aren’t sure if your tenant is a good fit (i.e. if they’re responsible), you can treat it as a month-to-month rental while you “test the waters”. If they turn out to be a bad tenant, you can get rid of them at the end of the month. On the other hand, if they’re a good fit, you can offer to turn their contract into a long-term lease agreement.
By doing this, you’ll be able to protect your rental from problematic tenants that will potentially cause property damage in the long term.
Cons of a Month-to-Month Rental Contract
#1 Tenant Turnover Costs
Tenant turnover can be costly, and because tenants will move out every month, there’ll be multiple turnovers with a month-to-month rental. In short, you will have to clean the unit every month or conduct even more serious repairs if the previous tenants left it in poor condition. Plus, you need to take into account the time it takes to find a replacement tenant, and the costs to market your rental property. Of course, this can be mitigated by partnering with a property management software or company that has a tenant screening process in place.
#2 Unstable Source of Income
Be prepared to deal with an empty property, because there’s no guarantee that replacement tenants will always be at the ready. In addition, there will be times when the rental demand is low. With that said, if you’re looking for a stable source of income, a long-term rental may be your best bet instead.
Tips on Managing Month-to-Month Rentals
Managing a month-to-month rental can sometimes require a property management software or property management company. One option is to potentially partner with a property management company like Luxury Property Care. Or, if you’re managing your investment property on your own, you can use a property management software like RentRedi. Either way, here are a few useful tips you can practice to guarantee profit:
#1 Acknowledge the Possibility of an Empty Property
Keep in mind that it takes forward-thinking to operate a short-term rental property. It would be a mistake to assume that you can find a replacement tenant in an instant or that your current tenants will renew. Make sure to ask your tenants to inform you ahead of time if they plan to move out in a month or two. This should give you enough time to advertise your rental unit so you don’t have to deal with a vacant unit for too long.
#2 Take Advantage of Peak Seasons
If your investment property is in an area where there are peak seasons, make sure to take advantage of them. Let’s say that your property is in a university town where the demand is low over the summer. To deal with the loss of income in the off-season, you can lower your rent, for now, to continue to attract tenants. Similarly, if you own a vacation home, you can raise the rent over the summer.
#3 Establish a Network of Vendors
Remember, you’ll be dealing with multiple tenant turnovers (sometimes back-to-back), so it’s best to have several vendors you can count on to do the work at any time. By establishing a reliable network of vendors, you’ll eventually be able to negotiate better rates and therefore save more money.
#4 Learn the Law
The rules and regulations on short-term rentals vary by state, so it would be wise to brush up on your reading before you attempt to offer a month-to-month rental contract. Don’t forget to review your homeowners’ association (HOA) covenants to confirm if you’re even allowed to run a short-term rental.
#5 Use a Property Management App
Although your tenants aren’t in it for the long-term, you should still document all rental-related information, including their rental applications, tenant screening, rental payments, and more.
If you don’t have a team of your own, consider investing in a property management software or app like RentRedi to help you with bookkeeping and the like.
#6 Partner With a Property Management Company
Managing a month-to-month rental can be more challenging because you’ll spend more time on it than you would with a long-term rental. You’ll have to market the property, clean up the unit, and look for replacement tenants every time there’s a move-out.
Partnering with a property management company can help you take care of your property while also ensuring your tenants are satisfied, even if it’s only for one month.
Month-to-month rental contracts can be more flexible, but they can also be more expensive due to the multiple tenant turnovers. However, it does allow you to charge a higher rental rate and get rid of tenants that cause nothing but trouble.
Weigh the pros and cons of managing a month-to-month rental property, but remember, most of the cons can be easily mitigated by enlisting the services of a property management software or company. If you really want to offer month-to-month rentals, there’s always a way to work around the risks!