There are disadvantages and advantages of both month to month and annual leases and landlords need to make sure their lease suits their needs.
Your lease agreement is the legal document between the landlord and tenant. Each lease should be specific to your property and comply with state laws.
There are disadvantages and advantages of having a month to month vs. an annual lease, the specifics of which landlords should investigate to see which is best suited for their property and their needs.
A month to month lease gives landlords greater flexibility. It means, at least in theory that they can end the lease at any time as long as they give their tenants the legally required amount of notice. This notice period varies state by state so make sure to check your local state laws.
It is also easier to implement policy changes or update the terms of the lease. This again can be done after the landlord gives the appropriate notice to their tenants.
The main benefit of having this flexibility comes if you are uncertain about the tenants living in this rental, or you have plans for improving the property which would require your tenants to move out. It is especially important in states that tend to favor tenants over landlords in disputes.
One of the key benefits of having a year-long lease is the security of income for your rental property. An annual lease means you have someone contractually obligated to pay the rent for the entire length of the lease. In theory, this means avoiding turnovers and rental vacancies, ensuring a positive cash flow for your property. This is a powerful stress relief and simplifies business immensely.
Additionally, for tenants, a year-long lease means protection from being asked to vacate the property by the landlord and means they have a place that they can call home.
It’s not all golden, however. When it comes to month-to-month leases many landlords choose to shy away from them. A month to month lease often comes with shorter tenancies which means more vacancies and more effort and expense required for finding and screening tenants.
On top of this, tenants can give their notice to vacate at any time which could mean unexpected vacancies and less security for the landlord.
On the flip side, there are downsides to annual leases too. A major disadvantage is that should the resident prove to be a poor tenant (perhaps they are constantly late, or they cause damage to the property) then as a landlord you may have to go through the lengthy process of getting an eviction. This is the only way to force them to vacate and often courts side with the tenant.
You can do a lot to avoid this scenario by screening your tenants effectively however, sometimes you are just unlucky. An annual lease then entails some risk because of this.
We have asked landlords from all over the US (and the world) and they largely agree that when possible they prefer the security that an annual lease offers.
However, they also agree that this isn’t right for every scenario or every property. A month to month lease offers more flexibility and in states where eviction laws are strict, retaining the ability to end a lease gives a certain peace of mind.
You can always switch to a longer-term lease in the future once your renters prove themselves to be good tenants.