The Top 6 Reasons Why Landlords Should Charge Late Rent Fees
Many landlords have a tough job charging late fees. You probably want to show some understanding if someone is having a tough time. It’s also challenging to slap on extra fees for late rent if you have a good relationship with your tenants. And no landlord wants the reputation of being someone only interested in making a quick profit.
Want more articles like this?
Create an account today to get BiggerPocket's best blog articles delivered to your inboxSign up for free
The problem with charging late rent fees is that tenants see you as a person, not a company. A late payment fee from the utility company—they blame the company. But getting a late fee from their landlord—they blame you, the person. So, you might be one of the nice landlords who let late payments side so as not to be the bad guy.
If you doubt whether you should be charging late rent fees, here are several excellent reasons you certainly should.
1. You need to take care of your finances
The hard truth is that a tenant’s rent is your income. In fact, it may be your only source of income. Many landlords rely on receiving payments by a specific date because they have bills to pay. Not being able to pay your bills on time means you risk paying additional costs in late fees. Aside from the cost, you might find that paying bills late negatively impacts your credit rating.
2. Late rent fees motivate tenants to pay on time
Nobody likes to pay out for things unnecessarily. Late rent fees are literally money down the drain from the tenant’s perspective. Tenants are more inclined to pay rent on time for fear of wasting that money.
3. It saves embarrassment
It is often awkward trying to track down your tenants and ask them for rent. It’s just as uncomfortable for them trying to avoid you. If tenants are aware of late rent fees, it will help maintain a healthier relationship between landlords and tenants.
4. Late fees prevent bad habits
If you choose not to charge late rent fees, the tenant has essentially gotten away with it. Even if it’s just a day or two after the grace period, there are no consequences for their actions. The following month it could be three or four days, and then a week. Letting it slide the first time puts you on a slippery slope where you’ll find it hard to prevent late payments in the future.
5. Late fees help tenants
Suppose a tenant lives from one paycheck to the next. If they fall behind on rent and other obligations, it becomes more challenging to catch up. They incur more late payments and may struggle to find the cash to make ends meet. Making tenants aware of late fees encourages them to pay closer attention to their budgets.
6. Tenants talk
Imagine this scenario. You have multiple units or a block of apartments. One tenant pays their rent late, and there are no late fees. When talking to another tenant, they say something like, “Don’t worry, I didn’t have to pay any late fees.” So, the next tenant pays late. Before you know it, you are out of thousands of dollars.
How Much Should You Charge for Late Rent Fees?
When it comes to charging late fees, it's vital to set these out in the lease agreement. Otherwise, you can't charge fees for late rent.
The law states that you can only charge up to 5% of the rent as a late fee. According to statistics, the average rent in the U.S. is $1,463. So, the maximum you could charge for a late fee would be $73. Of course, you could set a lower rate if you wanted to.
You can choose to set a flat fee or a daily late fee.
With the flat fee, the fee gets charged automatically to the tenant if they fail to pay rent after the grace period.
Many landlords choose to set a daily fee as motivation for the tenant to pay rent faster. For example, you might choose $5 per day up to the maximum limit. So, a tenant who is five days late will have to pay an additional $25. As the amount continues to increase, tenants are keener to pay the outstanding rent.
However you choose to set your late rent payments, you must check with local and state laws.
Should You Allow for a Grace Period?
A grace period is a short amount of time to allow for late rent payments. You should check with local laws about any grace period. Some states require that landlords give tenants a five-day grace period. Other states leave it up to the landlord. However, the grace period should be in line with the law and included in the lease contract.
If the rent is due on the first of the month, a five-day grace period means that late fees would begin on the 6th of the month. There are several good reasons to set a grace period:
- Your money could be on the way, and not all transactions clear on the same day.
- Not everyone gets paid by the first day of the month.
- There may be a delay in the tenant receiving their income, which was out of their control.
- A tenant who has paid on time for years and genuinely forgets once may not appreciate a late fee after just one day.
- It shows your tenants that you understand different circumstances without them being able to take advantage of you.
Again, make sure the grace period is stipulated in the leasing contract.
How Can You Help Tenants Avoid Late Rent Fees?
Rent collection apps offer tremendous benefits to landlords. You can streamline communication with tenants, automate processes, and keep a digital record of your accounts. Many of the rent collection apps also automatically calculate late fees.
From the tenant’s point of view, using a rent collection app can help stay on top of rent payments. Automatic reminders and recurring payments mean they reduce the risk of being late with rent.
From the landlord’s viewpoint, using a rent collection app can help maintain a good landlord-tenant relationship. For example, the app automatically charges late rent fees without the landlord confronting the tenant.
Charging Late Rent Fees: The Bottom Line
Of course, late rent fees aren’t a source of income. So always make sure the amount is reasonable and reflects the property type. The combination of rent collection apps and a grace period gives your tenants the ability to avoid late fees while ensuring that you get paid on time.
Join the discussion below.