Managing commercial properties is a busy job. From attracting new tenants to your commercial space to maintaining the grounds, there’s a lot on your to-do list. But before you sign your next commercial tenant, you need to determine what length to include on the lease agreement. Should you opt for a longer-term lease? Or would you benefit from signing a month-to-month lease agreement?
To better understand if a month-to-month lease is right for your commercial investment, we’ve outlined everything you need to know about how they work, the advantages, and the disadvantages.
What Is a Month-to-Month Lease Agreement?
As a commercial landlord, your goal is to attract tenants who want to rent your commercial property for a specified period. Although lease agreements can range in length, from short-term to longer-term, there may be instances where you are considering a month-to-month lease agreement.
With a month-to-month rental agreement, the lease runs for 30 days and renews automatically at the end of each month unless the tenant or landlord provides written notice ahead of time. There is no predetermined termination of the contract. In most cases, a month-to-month lease agreement requires a minimum of 30-days’ notice by the tenant or landlord.
Now that we understand what a month-to-month rental agreement is, let’s take a look at alternative types of commercial lease agreements, as well as the pros and cons of a month-to-month lease.
What Are Alternative Types of Commercial Lease Agreements Besides Month-to-Month?
Along with month-to-month lease agreements, there are a variety of commercial lease types that all commercial landlords should consider. What worked for you a year ago may not be the optimal choice this time around, which is why it is important to understand the options available to you.
Although a month-to-month rental agreement can fall under a short-term lease, any lease agreement that is for 12 months or under would also fall into the same category. The period is typically predetermined, unlike a month-to-month rental, and lasts for 6 months or 12 months. Tenants or the landlord are usually required to provide at least 30 days’ notice of lease termination at the time of renewal.
Long-term lease agreements refer to a commercial lease that is 12 months or longer — oftentimes ranging somewhere between 3 and 5 years. A long-term lease allows the commercial landlord to focus less on finding new commercial tenants, as the tenant is locked in until the lease is up for renewal.
Each type of lease has its advantages and disadvantages, which is why it’s important to determine which is right for your specific needs.
The Advantages of Offering a Month-to-Month Lease
If you’re considering switching to a month-to-month lease agreement for your commercial investments, you’re probably wondering what benefits you can expect. Here are a few of the advantages of offering your commercial tenants a month-to-month lease.
As a commercial investor, you’re always focused on cushioning the bottom line. A major advantage to month-to-month rental agreements versus longer-term agreements if that there is a higher earning potential. Because month-to-month leases are harder to come by, you can typically charge higher rent each month. Not only can you charge more rent, but you’ll also have more opportunities to increase the rent than you would with a long-term lease agreement. Although a shorter-term lease carries more risk for the landlord, the higher-earning potential is a factor to consider.
A long-term lease locks the tenants into your commercial spaces for the specified period. With a month-to-month lease, the commercial landlord has more flexibility in how they want to handle the commercial property. From upping the rent to removing a headache-worthy tenant to selling the investment property, a short-term lease allows you to make changes more often since you aren’t locked in with a specific tenant for years at a time. This can be extremely beneficial if your commercial property is in a hot market where rent is rapidly increasing — instead of being stuck at a lower monthly rent due to a long-term agreement, you can make the necessary changes to keep your property comparable to the market.
Although the goal is to never have to evict a tenant, we’ve all been there. If you are dealing with an uncooperative tenant on a month-to-month lease agreement, you can resolve the problem much more quickly than you could with a long-term lease. A month-to-month lease is also a great temporary option if you want to test the waters with a new tenant to see how they are. If all goes well, you can always switch them over to a long-term lease agreement a few months into the relationship.
The Disadvantages of Offering a Month-to-Month Lease
While there are several advantages you’ll experience when opting for a month-to-month lease for your commercial tenants, there are a few disadvantages that are important to note as well.
Sourcing new tenants for your commercial property isn’t always easy. Tenants come and go in waves, and long-term leases can help you reduce vacancies within your portfolio. With a month-to-month lease, you never know how long your tenants plan to stay in your commercial space. If they decide to leave, you’re left to scramble and find a new tenant, spending money to market your listing and screen prospective tenants.
It is common practice for month-to-month lease agreements to require 30-days written notice when a tenant is not renewing. This gives the commercial landlord 30 days to find a replacement tenant or else they will experience loss of income from not having the space occupied.
Although month-to-month lease agreements allow flexibility in adjusting what you are charging for rent, the uncertainty of how long a tenant is going to stay can greatly impact your income. Instead, a long-term lease allows you to have peace of mind knowing that you have a steady stream of rent payments coming in each month without having to worry about if your tenant is going to renew or not.
How Can a Commercial Property Manager Help?
Trouble deciding which type of lease to offer your tenants? Market conditions and individual preferences regarding security of income may be the biggest factors in deciding between month-to-month rental agreements and long-term leases. Trust the Price Commercial Management team to walk you through the process as a Commercial Landlord. Not only can we help you decide which lease type to offer, but we help enforce and collect rent on your behalf. Contact us today to learn more.