When dealing with a vacant rental property, it is common to focus solely on moving a tenant in. However, it is equally if not more important to look ahead to the time when the tenant will be moving out. One of aspects of moving out that you need to ponder is the rental terms you want to offer.
If you are about to rent out your property, you need to consider whether you want to offer tenants a lease (one year is typical) or if you want to rent the property month-to-month. Both options have their advantages and drawbacks from a landlord perspective. It is important to understand what both options entail, and which option best fits with your goals. Even if you have considered this in the past, it is important to avoid falling into a rut of offering one type of agreement simply because it is the way you have always done it. Your plans/goals might change and you need to be prepared.
Month-to-month rental agreements are a contract between you and the tenant where both sides agree to take the rental relationship a month at a time. The tenant can leave at any point with 30-day advance notice. This option has several advantages:
- Tenants who need the flexibility of a month-to-month agreement are usually willing to pay more for that flexibility.
- The landlord gets the flexibility to terminate the agreement with 30-day notice as well (during the first year). After the first year, 60-day notice from the landlord is required. This flexibility is extremely handy for owners who are considering selling their property at the height of the market cycle.
The disadvantages of month-to-month agreements are:
- The tenant can move out shortly after moving in, leading to more turnover costs and effort advertising that might not outweigh the rent that the tenant brought in.
- If the tenant moves out during a low point in the market (like Thanksgiving through the new year), you may have difficulty filling the property, or you might not get as much rent.
Leases are a contract between the landlord and tenant in which they agree to a tenancy that has a set duration (usually a year). The agreement specifies a penalty that would be assessed to the tenant for breaking the lease, but the landlord does not get the same lease-breaking option. The advantages to this are:
- You have an increased level of certainty that your property will bring in rent for the duration of the lease.
- If you are renting during the summer, you are able to set yourself up for the tenancy to end in the summer as well – the height of the rental market.
- If the tenant breaks the lease, there is usually a lease break fee that helps offset the cost of turning the property before the anticipated time.
- You have flexibility in the timing of rent raises.
The disadvantages of leasing are:
- The landlord is committed to honoring the lease for the entire duration. There is no termination of the lease unless the tenant has broken the lease, or they mutually agree to terminate the lease.
- Leases often have the most competitive rent rates, because the tenant is committing to stay for a set period of time.
- Rent can only be negotiated at the time of the lease signing. For the life of the lease, the rent stays flat.
Depending on what your goals are for your property, and what your landlord style is, you might find that one option appeals to you more than the other. Put serious thought into your plans for the property for the next year. Is there a chance that you will want/need to sell the property? Is there a chance that you could need to move in to the property yourself? By considering all of the possibilities, you can save yourself from a difficult situation down the road.