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Rental Property Lease: Is Month-to-Month or Annual Fixed-Term Better?

month to month or annual rental lease

A rental property lease is the most important document a landlord can have. The legal contract between a tenant and a landlord outlines expectations, costs, requirements, and usage rules for residents to occupy a rental property. That said, there are many variations to the lease terms, but there are two main types; annual leases and month to month. Continue reading below as we discover how each rental property lease type works along with the pros and cons to help you choose the right option for your property.

What is a Rental Property Lease?

As we mentioned, a rental property lease is an agreement between a tenant and landlord. Whether annual or month to month, this document includes basic and property-specific information about what a tenant can and cannot do. Additionally, it provides an explanation of tenant and landlord responsibilities as governed by state law. Some of the provisions a lease may include are as follows:

  1. Term Dates for Beginning and End
  2. Names of Authorized Occupants
  3. Rent Amount and Late Payment Procedures
  4. Security Deposit Amounts and Process
  5. Termination for Nonpayment or Lease Violation Consequences
  6. Property Use Limitations
  7. Insurance Requirements
  8. Landlord and Tenant Maintenance Responsibilities
  9. Pet Policy and Fees
  10. Termination, Renewal, and Rate Increase Procedures

A month-to-month rental property lease follows the same format but for a different term. As the name suggests, it lasts for one month with automatic renewal unless either party provides notice of non-renewal. The amount of notice required is typically 30 to 60 days. So, check with your local jurisdiction for any notice limits required by law before preparing your lease. When an annual rental property lease ends, it can roll over into a month-to-month lease, or landlords and tenants can sign a month-to-month lease from the start.

What is a Rental Property Lease?

The Pros and Cons of Month to Month Leases

Month to month leases are a great option for landlords and tenants, depending on your unique situation. With that in mind, let’s take a look at some of the benefits and disadvantages of the month to month rental property leases below.

The Pros of a Month to Month Lease

  • Rent Increases – When the local market is hot with rents climbing and an abundance of prospects, month to month leases offer flexibility. In an annual lease, you are locked into a rental rate for the duration. However, a month to month lease allows landlords to raise the rent more frequently to meet market demands. When month to month is offered as a renewal option, increasing the rent is justified for allowing tenants added flexibility in the vacate timeframe.

Helpful Tip: Need advice on setting the right rental rate? Check out our blog.

  • Flexible End Date – A month-to-month lease, in theory, could go on for years and years. The difference between this and an annual lease is the flexibility it provides for when a tenant can vacate. A month to month lease requires only 30 to 60 days notice at most. So, a landlord can choose to end the lease when it is most likely to refill the unit quickly.
  • Appeal to Existing Quality Tenants – Like landlords, tenants face a variety of circumstances in their lives. Occasionally, they may request a month to month lease extension for a variety of reasons. Instead of losing a good tenant at an inopportune time, consider offering the month to month option. Thus, serving two purposes, to allow you additional time to plan for their eventual vacancy and keep someone who takes good care of your property a little longer for a premium rate.

The Cons of a Month to Month Lease

  • Less Financial Stability – Ideally, long term tenants are best for a landlord’s financial stability. Since month to month, tenants can vacate with relatively little notice; rental income is, therefore, less stable.
  • Term Uncertainty – Just as a landlord can end a lease at the most beneficial time for finding a new tenant, a tenant could potentially end the lease at the worst possible time. Imagine receiving notice in the dead of winter; this is detrimental for landlords. So, the quick notice that month to month allows makes it hard for landlords to anticipate and plan for turnover.
  • Quick Turnaround – To limit vacancy time, landlords must prepare for a vacancy at any point in time. The short notice requirements do not give landlords much time to market, screen, and place new tenants while also doing inspections, repairs, or upgrades to the property as apart of the turnover process. Therefore, this can be stressful for landlords.
  • Unstable Market Condition – Month to month rental leases are susceptible to higher turnover rates than their annual counterparts. Therefore, if the property is located in a struggling rental market, finding new tenants could prove difficult. When this occurs, landlords may need to lower rental rates to fill the unit or prepare for an extended vacancy.

The Pros and Cons of an Annual Rental Lease

The Pros and Cons of an Annual Rental Lease

Annual lease agreements range from 12 months to up to 24 months, depending on the property. Once the initial term ends, renewals can either be on an annual or month-to-month basis, depending on the lease. Below we list a few pros and cons of an annual rental lease agreement.

The Pros of an Annual Lease

  • Financial Stability – Leases for a year or longer offer landlords a stable expected rental income. The tenants are locked in for the rental rate for the duration and will pay added fees if they break the lease and vacate early. Therefore, offering landlords assurances against unexpected vacancy.
  • Limited Turnover – By locking tenants into a fixed term, landlords know when they may vacate. Thus, it is easier to plan for and prepare for marketing, unit turnover, and finding new tenants. The notice required for annual leases is typically 60 to 90 days, unlike the 30 of a month to month lease. Month to month leases have higher turnover by nature, and turnover costs can quickly add up and cut into an owner’s long-term profits.

The Cons of an Annual Lease

  • Limited Rent Increases – On one hand, an annual lease provides stability through a fixed term and rate. However, the downside is also that it provides a fixed rate. When or if a landlord seeks to raise the rent mid-term, they cannot. If your property was not competitively priced, to begin with, you could be losing out by hundreds of dollars each year. Typically, with an annual lease, rent increases can only be requested at the time of renewal.
  • Diminished Flexibility – Locking in a fixed term, in turn, means locking in a fixed tenant. Unfortunately, if that tenant is not a good one for whatever reason, getting them out could prove difficult. Additional notice is required, and you may find yourself stuck with the troublesome tenant for longer than you would on a month to month lease.

Helpful Tip: Unsure how to write a legally binding lease agreement? Check the tips in our blog.

Navigating a Rental Property Lease Amid COVID-19

The coronavirus pandemic has left many landlords and tenants on edge. The ever-changing federal, state and local guidelines make keeping up with rental requirements challenging at best. Many states have imposed rent freezes, eviction stays, and more, leaving landlords wondering the next best steps. When a lease ends during a pandemic, tenants may be wary of signing an annual fixed-term lease. Experts agree that financial and job instability are major factors in this decision.

Navigating a Rental Property Lease Amid COVID-19

Consider offering tenants a month to month renewal at either the same rate or an increase if your local jurisdiction allows. While there are downsides associated with month to month rental property leases, these are unprecedented times. Knowing your local market will also aid in your decision. Marketing and showing properties have gone nearly entirely virtual, and some areas have seen a significant drop in the pool of qualified applicants. Offering a month to month lease allows landlords to continue receiving rent, and the tenants added flexibility while searching for a new place.

Conclusion

No matter what type of rental property lease you choose to use, enforcing the terms is crucial to your success. A dedicated and experienced property management firm can assist landlords with a legal rental agreement and the staff to handle concerns that arise. When a month to month lease vacates suddenly, Bay Property Management Group jumps into action with a team of leasing professionals, targeted marketing efforts, and thorough tenant screening. Give us a call to learn more about our full-service rental property management.