Fixed-term or month-to-month leases? What’s better?
When renting out your property, you have a few tenancy options to choose from, depending on your preferences. If short-term or holiday rentals aren’t an option for you, it’s time to think about your long-term options. When looking for long-term tenants, most property investors rent their property on a fixed-term or periodic tenancy. We explain the differences between fixed-term and periodic leases and when each may be appropriate for you.
A fixed-term lease is an excellent choice if financial security is one of your primary motivators. A fixed-term lease, as the name implies, is for a set period of time, most commonly six or twelve months. When a fixed term expires, you and your tenant can negotiate a new lease. If a new fixed-term lease is not agreed to and the tenant does not vacate, the lease becomes a month-to-month agreement. The periodic lease will remain in effect until either you or your tenant gives notice to terminate the agreement.
Rent increases are most commonly seen at the start of a new fixed-term agreement. When negotiating a fixed-term lease, it’s critical to seek advice from your property manager to ensure that the rental price is appropriate for the duration of the agreement. You must also ensure that you are following the laws in your state, county and city as some areas only allow a rent increase once per year at a very specific percentage.
The most significant advantage of fixed-term leases is the financial security they provide. The major disadvantages, on the other hand, include having to wait until the end of the fixed term to sell or complete major renovations to your property.
Month to Month Leases
A periodic lease is a month-to-month agreement that offers greater flexibility than a fixed-term lease. It will last until either party gives written notice to terminate the lease. Notice periods vary by state, but in general, tenants must provide 30 days’ notice, while landlords must provide either 30 or 60 days’ notice depending on the circumstance.
If you plan to do major renovations or sell your property, a periodic lease can be ideal for keeping your property rented while you make your plans. However, tenants have the same flexibility in a month-to-month lease, so if your tenant decides to leave, you could end up with a vacant property and no rental income. Rent increases are also not written into periodic agreements, making it difficult to manage.
It’s up to you
It is entirely up to you.
The choice between a fixed-term lease and a periodic lease will be determined by what works best for your wealth-building objectives. If you value stability and financial security, a fixed-term lease is a good option. If flexibility is important to you, a periodic lease may be a better option. When listing your property, consult with your property manager to ensure you select the best option for you.
Please keep in mind that this article is not intended to provide financial or legal advice. Before making any decisions for yourself, please consult with your professional financial and legal advisors.