What are the benefits between 12 month tenant leases, verse month to month tenant leases?
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The beauty of working in property management is that oftentimes you can work from wherever you want! Today I'm working remotely; as you can see, I am in beach mode and getting ready to go down to the shore! I still wanted to work my way through a couple more questions, though, so today’s question is from Sho Tanaka.
“Joe, can you do a podcast on long-term lease agreements versus month-to-month lease agreements? I'm just curious—do you have two separate leases, one with an end date/long-term and one for month-to-month, or just one lease that could be used for either situation?”
In the way we run our properties, we don't actually offer month-to-month leases at all. In the Philadelphia real estate market, and probably every other market, when our properties are vacant in April and in the spring, our rents skyrocket. During this time, we have a lot more leverage to increase the rent for our property owners and we also get a lot more applicants, so instead of choosing the best applicant out of three applicants, we get to choose the best out of five, which means we likely get a way better future tenant! That being said, when someone become our tenant, we aggressively work to get their unit vacant in April or May specifically. We work very hard to make sure that's the case, and we won’t easily let a tenant persuade us otherwise.
If a tenant wants to move out in the middle of their lease, we're very resistant to that if it's going to damage our clients’ prospects. We don't want units to be vacant around November and December especially. The span of time from Thanksgiving to Christmas can be a bit of a dead zone, so we would expect the rent to go way down and our vacancies to go way up. In this scenario, we would have to take whatever applicants came our way. Historically we've actually been pretty successful at renting even during those times, but with that said, we do work very hard to ensure vacancies mainly happen in April.
Thus, we don't typically do month-to-month leases because we really don't want a tenant to terminate their lease unexpectedly in that dead zone. If a tenant wants to break their lease or get out of it, we basically follow whatever a real estate court judge would want us to do. They would want us to let the tenant out of the lease, they would want the tenant to be responsible for the lease until we found a viable tenant, and the judge would expect that we would begin instantly taking reasonable action to find that new tenant. We won't let a tenant out of the lease instantly, no strings attached, but we do require them to pay a one-month fee if the tenant wants to break their lease, and that's a fairly common practice.
It’s perfectly understandable that sometimes a tenant wants or needs to break their lease. A lot of our tenants move on to home ownership, and when you go looking for a home and you get a homeowner contract, you often don't have a lot of flexibility when it comes to when you will take possession of the home. So, it's reasonable that they might want to terminate in the middle of the lease, but it's also reasonable that we charge them the one-month fee that helps us do right by our clients. This allows our clients to be compensated fairly. I don't think it's excessive, but it does help to compensate them, and once we get the new tenant in there, we work to getting them vacant around April.
As far as offering month-to-month leases on a regular basis, I personally just don't really see the value in it. We do 12-month leases, and oftentimes we'll do a 15-month lease if that will bridge the difference to get our property vacant at a more desirable time. We’ve never gotten pushback from tenants about this; they're always fine with it. After they apply, we'll send them a 15-month lease, and they might contact us and say, “Hey, why is this a 15-month lease?” We just simply say, “That’s what benefits the owner,” and then they'll sign it and everybody's happy.
If you follow this method, just make sure that your rent still escalates yearly. After the 12 months are up, even though they still have three more months in that lease, their rent should still escalate the yearly amount that we built into the lease. This way, the yearly rent increase is built right into your lease and it isn’t a surprise to anyone, and you’ll just want to make sure that it gets triggered adequately for those last three months of the lease.
I hope this gives you some food for thought. It’s time for me to head to the beach!