Fixed or Periodic: which is the best kind of tenant?
After all the sweating and long nights from buying your property, finding a tenant to occupy it might seem like the easiest part of the process. However, while finding the tenant can indeed be very simple (especially with a good property management team behind you), there are still decisions you need to make as the landlord.
If you’re new to the rental game, here are some things to think about before you decide what type of tenancy you’re willing to offer, and to what kind of tenant.
Fixed Tenancy Agreements
By far the most common type of rental agreement, fixed tenancy agreements run for a fixed, mutually agreed amount of time. They are typically six or twelve months long, although they can go for any amount of time that you and the tenant agree to.
On one hand they’re fantastic for security, as you know that your rental income is secured for the term of the lease, and the tenant is happy as they also know where they’ll be living for the next however long. If your property is a good fit for them, chances are they’ll be happy to stay on for even longer, investing in the property and reducing your administrative costs. You can also write periodic rent increases into the rental agreement, so both you and your tenant know when those changes are coming and can plan accordingly.
However, this does mean that a tenant is entitled to stay in your property until the end of the lease, and they may be difficult to remove if there are problems. These problems could run anywhere from failure to maintain the lawn, right up to property damage or non-payment of rent. While periodic inspections may let you spot any problems, it can still take a while to evict tenants who aren’t holding up their end of the deal. The longer the lease, the longer you have to put up with them. Conversely, tenants can leave the agreement early, and while there are usually sufficient penalties built into the agreement to protect you, it’s still possible that your property could be left empty.
Fixed tenancy agreements also reduce your flexibility. If, for example, you’ve signed tenants on for a twelve-month lease and then property prices go up in the area, it means that you’ll be left for the rest of that tenancy agreement earning less than you could be if the house was put on the rental market tomorrow. Of course, the opposite is true: if property prices went down, you would be earning more, but hopefully the value of your property won’t decrease!
Finally, fixed tenancy agreements also make it more difficult to sell the property, especially if you bought something with family appeal. No one wants to have to wait six months to move into their new house because they’re waiting for the current tenants to move out! While there are some ways around this (especially if your tenants don’t mind moving), you can’t force the tenant out, and if they’re determined to stay, then you need to consider that in your plans.
Periodic Tenancy Agreements
Periodic tenancy agreements are those that run from month-to-month or week-to-week. They typically don’t have a fixed end date, which leaves it more open for either party to end the arrangement.
While a periodic tenancy agreement gives you a lot of flexibility, it gives your tenant the same, and it may be that they’re done with your property before you are done with them as tenants. While the party choosing to terminate the tenancy does have to provide notice (how long will depend on where your property is, as laws vary from state to state), if you still need a tenant, it can be annoying to find another periodic tenant with relatively short notice. However, sometimes they can be mutually beneficial. If you have a tenant who’s looking for somewhere to live while their house is being built, for example, they will likely have a rough idea of how long they want the property for, but won’t want to sign on for six months. This lets you both assess each month whether this arrangement is working for both of you.
The majority of fixed tenancy agreements happen when a lease expires, when they usually default to a month-to-month arrangement. If you have a good tenant, it might be worth asking them if they’re willing to sign another fixed tenancy agreement, but if you’re still making up your mind as to what you want to do with the property, a periodic arrangement will help you keep your options more open. However, typically most tenants are looking for a long-term lease, so you will likely have fewer applicants for a periodic tenancy.
Which is best? It depends largely on your needs as a landlord, but also the type of tenant that you can get in the property. If none of the long-term tenancy applicants are making your heart sing, but you have a very solid prospect looking for a six-month lease, it might be worth your while to revisit your expectations. On the other hand, if you’re looking for a long-term tenant (preferably one who will stay on for many years after the initial lease), it would be very unlikely that taking a chance on a short-term tenant would work out the way you wanted.