Recently a client of mine asked for clarification of what our company policy was regarding lease renewals. They were curious if we permitted (or even required) tenants to default to month to month after the original term was up. Since we had no clear cut policy across the board yet for renewals I posed this question to my war council (a.k.a. my staff) and I was surprised at the differing opinions that existed on the subject. Not only individual staff members but by property type. It’s a very passionate topic!
As a landlord I’ve normally preferred my tenants to default to month to month unless I’m really in love with them…in every fashion. If you pay rent on time every month (and it doesn’t bounce!), I never hear a peep from you (or about you), and I believe you take good care of the place then I might offer you a full term. As you can imagine based on my rather lofty criteria there, I don’t extend many year renewals. I generally prefer to hold the sword in my hand…and a 30 Day Non Renewal in the other.
The Disadvantages Of Freedom
This does have its disadvantages though. For one, it leaves you slightly vulnerable at the same time Though happy people (and tenants) are slow to move that doesn’t mean they won’t….especially if they have the freedom. I’ve had some happy tenants stay month to month for up to three years and others that got the sweet smell of freedom and found a rosier garden within a few months. If you are one to create budgets for your rentals, it makes it difficult to be confident in your income projection when you have ¼ or more of your residents on a month to month renewal. When the confidence in your budget begins to slip it just snow balls from there. The budget becomes a guideline…then it becomes advice…then it becomes…scratch paper.
What Does Your Portfolio Have To Do With It?
You can probably think of the advantages of month to month on your own. Some of them being legitimate..others rather Scrooge McDuck based. Should your approach be based on your portfolio? If you have a smaller portfolio of 4 units, should you forgo the freedom of month to month in favor of some sort of term leases, even if they are 3 or 6 month? Possibly, what kind of position would be in if suddenly 2 of your month to month left in the same month?
Yet I think this varies more based on the types of properties that make up your portfolio. Paying the mortgages on 4 single family homes with 2 month to month is much more daunting than paying the mortgage on 1 quad or two duplexes with the same month to month tenancy. If your portfolio is of modest size perhaps it is best to consider the types of property that make up your portfolio when deciding your renewal policy. If your portfolio is larger, you have a little more freedom…maybe. This is assuming your portfolio isn’t 50 single family homes….which is another blog in itself.
Bonus tip: If you own a commercial property (generally 5 or more units) and want to refinance, keep as many residents on term leases as you can. Banks love the certainty of guaranteed income…on paper. As landlords we know better than to call that guaranteed income…