Back on track with our Tuesday Apartment Budgeting series. It seems I hit the publish button a little too soon last week so you got Tuesday on Sunday. My apologies for the disruption. This week we are talking about Month to Month Premiums.
Month to Month Premium Defined
Month to Month premium is also known as Month to Month Fee or simply a MTM fee. In essence, it is a convenience fee charged to a resident when their existing lease expires without them having renewed it. I have seen the fee vary from $25 to $200 a month. The real point to the fee is to make it painful enough that someone would want to renew their lease instead of stay month to month. But, in the event that they need to be month to month, you want the fee to offset your risk. The risk being to many leases expiring in a given month.
Month to Month Budgeting Strategy
When you are sitting down each month to consider your exposure (leases expiring in the coming two to three months), you have to include your month to month leases. If you property is 100 units in size and you have five leases expiring in the month of August but you have five month to month leases then you really have ten expiring leases. Ten lease holders that could give you proper notice to vacate. That is ten percentage points of occupancy that you would have to cover. Not a pretty position to be in.
As for budgeting month to month fees; I would use twelve months of history as a way to forecast the future. The bigger thing you have to deal with as it relates to this line item is charge up. Many times this fee gets waived out of sympathy for the lease holders situation. Gentle reminder: we are in a business to make money and part of making money is pricing in a risk premium on items that have potential downside effects. Like the scenario above. So, charge the fee and collect it.
Your always considering the downside risk premium multifamily maniac,