Investors who already own a property that is successful often conduct regular reviews to calculate income earned each year. A lot of factors go into judging just how successful an investment will be during the course of the year. There is a debate among many new investors about month to month leases vs annual leases for investment homes. This guide explores each type.
Pros of Long-Term Lease Agreements
Getting a tenant to sign a long-term lease is the obvious way to build wealth. When someone is tied into an ongoing lease agreement, the potential for more income increases for investors. There is virtually no guarantee for wealth building with a shorter lease term because not all renters live out the extended lease agreement.
It is standard in the real estate industry for a rental to include a one-year lease agreement or longer. Most people have already become used to renting for an extended period of time. A person who moves into a new area for employment or to retire often has pre-determined goals. A longer lease is more appealing to these renters.
Cons of Longer Rental Contracts
Credit checks are now the norm in the housing industry by landlords and property management companies to determine if renters are financially able to enter into a lease. A long-term client who rents a property during a one-year or extended agreement could face an unexpected financial setback. This could cause issues with rent collection and property upkeep. Costs for credit checks must be paid each year to ensure renter stability.
Advantages of Month to Month Leases
While some can argue that there are no upfront advantages to a shorter lease, there are times when a smaller lease term could be appropriate for a property owner. A rental tenant who is problematic or consistently late on rent payments can make a longer lease term more frustrating. By shortening the term of the agreement, many risks are avoided that could hurt future income potential.
Renters who are self-employed or who experience shifts in employment could prefer a smaller time frame to rent a property. An investor can make the decision independently or through a property management company to rent under a shorter agreement if the type of renters in the area have similar financial issues. Renting to more than one client over multiple years does have benefits and can build wealth for a property owner.
Cons of Shorter Rental Contracts
Fees from property managers can vary when it comes to rent collections and other activities. The payable fees will eat into the profits that are earned on a successful investment property. Most companies give price breaks to property owners based on the length of the rental contract. Because month to month leases are temporary, cash flow interruptions can be common due to tenant turnover.