Pros and Cons of a Month-to-Month Lease for Landlords

For landlords, choosing the right lease structure for their rental property is a significant decision that can determine how well their real estate investment is helping them achieve their long-term financial objectives. One option is a month-to-month lease, which offers flexibility, but also comes with its own set of challenges. Specifically, going month-to-month can increase turnover rates, lead to income interruptions and possibly limit legal protections. It can still be the right move in landlord-favoring hot rental markets or if an investor plans to sell a property before long.

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What Is a Month-to-Month Lease?

A month-to-month lease is a rental agreement that renews automatically at the end of each month, provided that neither the tenant nor the landlord has given proper notice to terminate the lease. Rental property management requires making many consequential decisions, ranging from deciding how much rent to charge and finding quality tenants to handling repairs and, if necessary, evictions . Choosing a month-to-month lease can be one of the more consequential of these decisions.

A fixed-term lease locks both parties into a specific period of time. This is often six months to a year, but may be multiple years in some cases. A month-to-month lease, on the other hand, gives both the tenant and the landlord the flexibility to end the lease with short notice, typically 30 days.

This type of lease is commonly used when landlords or tenants need flexibility. For example, a tenant may need short-term housing or a landlord may want to retain the option of selling or moving into the property.

The following are some of the pros of offering a month-to-month lease:

• Flexibility for landlords: A major benefit of a month-to-month lease is the flexibility it provides to landlords. If a landlord decides to sell the property, renovate or move in themselves, they can terminate the lease with proper notice. This flexibility can be advantageous in uncertain or changing housing markets.
• Higher rental rates: Landlords offering a month-to-month lease often have the opportunity to charge higher rental rates than they would with a long-term lease. The short-term nature of the agreement allows for periodic rent adjustments, giving landlords the ability to raise rents based on market conditions without waiting for a fixed lease term to end.
• Easier tenant transitions: A month-to-month lease can make it easier for landlords to transition between tenants. If a tenant becomes problematic, the landlord can provide notice to terminate the lease and find a new tenant without being tied to a long-term agreement.
• Catering to short-term tenants: In areas with high demand for short-term housing, such as cities with large student populations or seasonal industries, a month-to-month lease can be more appealing to tenants looking for temporary arrangements. This opens up the rental market to a wider range of potential tenants.

While this type of lease can offer freedom, it also comes with less stability than a fixed-term lease, which may impact both the landlord's income and property management strategies. There are some cons to a month-to-month lease that you should be aware of:

• Unstable income stream: One of the biggest disadvantages of a month-to-month lease is the lack of income stability. Since the tenant can terminate the lease with short notice, landlords may face periods of vacancy more frequently than with long-term leases. This can result in unpredictable rental income, making it harder for landlords to budget.
• Higher turnover rates: A month-to-month lease often leads to higher tenant turnover rates. Because tenants are not committed for a fixed period, they may decide to move out at any time. Frequent turnover can lead to more time and money spent on marketing the property, screening new tenants, and preparing the unit for the next renter.
• Limited legal protections: Some jurisdictions offer fewer legal protections for landlords in month-to-month agreements compared to fixed-term leases. For example, landlords may have more restrictions on how they can terminate a month-to-month lease or raise rent. It's important for landlords to familiarize themselves with local regulations governing these types of agreements.
• Increased property wear and tear: With higher turnover comes increased wear and tear on the rental property. Every time a tenant moves out, the property may require cleaning, repairs and maintenance before a new tenant can move in. This can add to the landlord’s operational costs and reduce the overall profitability of the property.

Other Considerations

When deciding whether to offer a month-to-month lease, you should consider a few additional factors. One of these is market conditions. If the rental market is hot, a month-to-month lease may provide the flexibility needed to adjust rent more frequently, which could help the landlord stay competitive. However, in a cooler market with fewer tenants, a fixed-term lease may offer more stability and security.

You should also think about your long-term goals . If you plan to sell the property soon or use it for personal reasons, a month-to-month lease can give you the ability to regain control of the property on short notice. However, if you want to minimize vacancies and maintain steady cash flow, a long-term lease may be a better option.

You'll also want to think about how willing you are to manage frequent tenant turnover and handle the potential added costs associated with preparing the property for new tenants. Month-to-month leases can result in more administrative work and higher maintenance expenses, which can cut into profitability.

Bottom Line

While month-to-month leases offer landlords flexibility and the ability to adjust rent more frequently, they also come with risks like higher tenant turnover and less income stability. Before deciding on this type of arrangement, you'll want to weigh the pros and cons and consider their long-term goals and market conditions.

Tips for Real Estate Investing

• If you want to invest in real estate, a financial advisor can help you create a plan. Finding a financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now .
• Financing is a key for real estate investments. SmartAsset's mortgage calculator could help you estimate how much your monthly payment will be including principal, interest, taxes and fees.

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