Should you renew your tenant leases automatically on a one-year term, or should you let long-term tenants go month to month?
I get asked this question quite frequently by different investors, and there are pros and cons to both approaches. The right answer depends on what you’re trying to accomplish as the owner and how much flexibility you want to give both yourself and your tenants.
Automatic One-Year Renewals
A lot of lease templates have a clause built into them that says instead of the lease ending and the tenant having to move out, it automatically renews for a specified period of time.
Some landlords have that automatic renewal set to month to month after the initial one-year lease expires. Others prefer to have it automatically renew for another full year unless the tenant gives notice.
One of the biggest advantages of an automatic yearly renewal is that it gives the landlord more control over when vacancies occur.
For example, many people prefer to move during the spring and summer months. If a tenant moves out in December, it’s generally much harder to lease that vacancy than it would be in June. Having an automatic yearly renewal helps protect against tenants deciding to leave at less desirable times of the year.
Offering Month-to-Month as an Option
Sometimes tenants will say they don’t want to commit to another one-year lease because they need more flexibility.
That’s perfectly reasonable, but flexibility has value.
If a tenant wants to move to a month-to-month arrangement, one option is to charge a premium for it. Adding an additional amount to the monthly rent helps compensate for the increased risk of vacancy that comes with allowing a tenant to leave on shorter notice.
That way, the tenant gets the flexibility they want, and the landlord is compensated for taking on additional risk.
Don’t Forget About Rent Increases
One downside to automatic yearly renewals is that landlords sometimes miss opportunities to keep rents current.
A good way to address this is by including a clause that automatically increases the rent by a certain percentage each year when the lease renews.
That helps prevent situations where a long-term tenant ends up paying well below market rent simply because the lease has continued for years without any adjustments.
Month-to-month leases do give landlords the flexibility to increase rents at any time, but in practice, many owners simply don’t get around to doing it. Building an annual increase into the lease renewal is an easy way to stay on top of it.
What Happens if You Sell?
If you’re thinking about selling the property in the near future, lease structure becomes another consideration.
From a buyer’s perspective, month-to-month tenants can offer flexibility. The new owner can adjust leases, increase rents, or make other changes more quickly.
On the other hand, lenders financing a multifamily property generally prefer tenants who have time remaining on their leases. Long-term leases provide more security for both the owner and the bank.
Because of that, having too many month-to-month tenants may not be viewed as favorably during the financing process.
Final Thoughts
There are advantages to both automatic yearly renewals and month-to-month leases. Annual renewals provide greater control over vacancy timing and can be paired with automatic rent increases, while month-to-month leases offer flexibility but also increase vacancy risk.
Many investors we work with appreciate having a lease strategy that balances tenant flexibility with long-term property performance. If you’re evaluating a multifamily property in Pennsylvania or Maryland, or looking to strengthen your leasing strategy, reach out to us. We’re always happy to help.
