I just realized that my property manager gets to keep any late fees from tenants that fall behind on payments. Is this standard practice? Thanks.

No management company should get an economic benefit for an owner's economic loss.

You sound like the guy who is worried about how he's gonna pay the taxes on his next profitable flip. If your mgmt company is keeping your properties filled, they are obviously incentivized to do so, who cares? As long as they don't let late rents get out of control (or let too many people think it's OK to be late a lot, that's a slippery slope) and they have a firm eviction policy, I'd worry about more important things. I manage my own properties, about 60 tenants, some pay late regularly, some include the late fees, some don't. I note what's owed by those who don't pay late fees and deduct from their deposit later. I don't spend my time hounding people to pay $50 of late fees, my time is more valuable than that. And I factor in the type of tenant. If they don't complain much and take care of minor issues themselves, I'm happy to let a few late payments slide.

The ONLY way I would agree to let a PM company keep the late fee is if they paid me the rent regardless of whether or not the tenant's payment was late. Otherwise, why in the world should the PM company profit from me not getting paid on time? It would be an incentive for the PM company to NOT collect the rent on time and encourage late payments.

My PM pays the late fees to me. As far as PM's benefiting from bad things that happen to their owners, this happens constantly on the maintenance side. That is the area that I watch much more closely than late fees, and where I'm most concerned about misaligned incentives.

To me it seems counterintuitive for an investor to agree to this arrangement.

This practice makes no sense...it is the definition of moral hazard

My PM gets his standard 6%. He said if he would get a large percentage or all of it, it would create an incentive for him to become lax with stressing on time payments. Or telling a tenant that a day or so late is fine.

I think a 50/50 split would be the best course of action. I would never even think about keeping 100% of the late fees because the investor is out money too by non payment of rent

Agreed - especially depending on how well the management company did the initial screening / placement; that initial (mis)management might be the explanation for the late payments.

Our fee's are pretty cheap, so, it varies on your business structure.

Does your property manager keep late fees?Does your property manager keep late fees?

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Does your property manager keep late fees?

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