Property Management Blog

Which is better, a term lease or a month-to-month lease?

Steve Schultz - Sunday, September 21, 2014
Property Management Blog

I am sometimes asked this question by property owners who have been told that month-to-month leases are somehow better than term leases.  But before we discuss which is better, let me define what each is so we are on the same page.  A term lease is actually just what it sounds like.  It is a lease for a specified period of time, or term.  So for example, a one year lease is a term lease.  On the other hand, a month-to-month lease is a lease that either the tenant or the landlord can terminate with proper notice, typically 30 or more days.

Some property managers and attorneys suggest that a month-to-month lease is the best option for property owners.  Their argument is, once a tenant is in place and happily living in the house, why bother them with having to think about a lease renewal.  Simply let their lease roll forward on a month-to-month basis, and they are likely to forget all about the lease and stay for an extended period of time. 

From a tenant perspective, one of the benefits of a month-to-month lease is that they could leave at any time with proper notice.  No long term commitment.  If they stay for a couple months and decide to move on, they are free to do so.  But the downside for the tenant is that they can also be asked to leave in only a few months should the property owner decide they have other plans for the property.  For the tenant, moving expenses can sometimes be considerable and this scenario could force them to incur a large, unexpected expense.

I do not subscribe to the thinking that the month-to-month lease is the correct approach.  Our approach and my recommendation to anyone who asks is to only do term leases, 12 months or longer.  I believe a term lease is truly a win-win situation for both the landlord and the tenant. 

One of the benefits of a term lease for the landlord is it reduces the potential turnover of the property.  Turnover costs property owners money, so the less turnover, the more money in the pocket of the landlord.  Another benefit is that a term lease helps the landlord control the timing of the vacancy.  Here in Tucson, the peak activity for rentals is in the summer months.  However, the minimum rental activity is between Thanksgiving and New Years.  If a tenant on a month-to-month lease gives notice to vacate by the end of October, this is far from the ideal situation.  The owner is likely to experience a longer vacancy period because of the reduced rental activity at that time of year.  However, if the property owner chooses to use a term lease, the lease termination date can be the end of a month other than October or November so that they are not caught trying to rent a property in the months of the least rental activity.

The term lease is also beneficial for a tenant.  Assuming they comply with the terms of their lease, they can plan to be at the property for the full term and not have to worry about being asked to leave the house early or only shortly after they settled in.  They also don’t have to be worried about being asked to leave in the middle of the holiday season because they were on a month-to-month lease and given proper notice by the landlord to leave at that time.

So which is best?  My pick is the term lease.