Why Not Sticking to Your Late Fees is Hurting Your Landlording Business

by | BiggerPockets.com

A grace period is additional time given to the tenant to pay their rent before they will be charged a late fee or given eviction notice. For example, rent may be due on the 1st of every month, but the tenant has until, say, the 5th to make their payment. Grace periods can be anywhere between 2–“X” number of days. They are actually a requirement in some states, and in others they are not, but we have found that they are useful for a couple reasons:

  1. Many tenants are on a fixed, government income and don’t get paid until the 3rd of the month, and
  2. It shows the tenant that the landlord gives them flexibility in when they make their payment. Nice guy.

However, the flexibility is on the landlord’s terms. We always let our tenants know that rent is still due on the 1st, so technically if they take advantage of the grace period, they are considered late, though we won’t initiate eviction notice and penalties until the 6th of the month.

Whatever you do, make sure all your tenants are on the same schedule. Don’t change due dates and grace periods to suit the tenant when they move in (because they will ask). It may work out fine for the first few tenants, but as you continue to acquire more rentals, you will want everyone to be paying at the same time so you can keep track of who has paid and who has not.

Related: How I Underwrite Rental Applications to Mitigate High-Risk Tenants

Our grace period goes through the 5th of the month. If rent has not been paid by the 5th, they will get a late fee, currently $50. Additionally, we charge them an extra $10 per day after that until they have paid their rent in full. For example, on the 6th they receive a one-time $50 late fee, on the 7th an additional $10 is added to the $50, on the 8th an additional $10 is added to the $60, and so forth. Every day gets a little more expensive.

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Stick to Your Late Fees—No Matter What

When your tenant pays late, it is vital that you follow through with the late fees. This bears repeating: It is vital that you follow through with the late fees. Don’t waiver, as the late fee’s sole purpose is to motivate your tenant to pay as quickly as possible. Take away that motivation, and good luck getting your rent—that is, until the tenant gets around to paying it. If there is one simple piece of advice in this entire book that you should listen to it is this: always follow through with late fees.

Let’s be real: The number one reason most tenants are late on their rent is not because of an emergency or some unforeseen necessary expense, but because of priorities. They are late because paying rent on time has not been made a priority. The best way to make timely payments a priority is by following through on the late fees. Tenants, and America in general, usually live above their means. In other words, there’s always more month than money. Therefore, every month requires sacrifice and prioritization of bills: food, clothing, rent, cable, a new TV, a game console, tattoos, medical bills, Starbucks—these are all expenses your tenant is internally trying to prioritize.

Naturally, the bills with the highest penalty for negligence are usually prioritized the highest. Those will be the bills that get paid first. So the question is, is the consequence for paying rent late greater than or less than the consequence of having the cable turned off or having to go without their daily coffee or smoke fix? Despite what tenants think, late fees are not about lining the landlord’s pockets. Late fees are designed to give rent a place of high priority because of the consequence. You may feel bad or think you’re being cruel by charging a late fee, but by following through, you are helping your tenant prioritize the most important bill they have: their housing.

This last month we had a tenant call us a couple days before her grace period was up to let us know that she had some unexpected expenses come up, wouldn’t have the full rent in time, and wanted to know if she could pay the rest at the end of the month. We told her we needed to follow her lease, and the lease says her full rent payment is due the 1st and late after the 5th.

Related: 10 Seller Documents You May Need to Review When Buying a Rental

Any rent not paid would trigger both late fees and eviction notice. Guess what? On the 5th her priorities suddenly changed, and she paid her entire rent payment. From past experience, this particular tenant knew that we take non-timely rent payments seriously.

The One Alternative

We do offer our tenants one alternative to the late fee penalty, but it requires their planning ahead and communication. We call it the rent extension, and it is not something we advertise to our tenants. However, if a tenant calls us before the 1st to let us know they will be late on their rent, we will offer them a rent extension up to the 10th for a $20 penalty. If they don’t follow through on the 10th, they are hit with the full late fees and eviction notice. The reason for the rent extension is to reward responsible behavior:

  1. They planned ahead to deal with the problem,
  2. They communicated, and
  3. They initiated the communication, rather than waiting for us to call them once the rent was already late.

Are you strict with your grace period and late fees? Why or why not?

Comment below!

About Author

Brandon Turner

Brandon Turner (G+ | Twitter) spends a lot of time on BiggerPockets.com. Like… seriously… a lot. Oh, and he is also an active real estate investor, entrepreneur, traveler, third-person speaker, husband, and author of “The Book on Investing in Real Estate with No (and Low) Money Down“, and “The Book on Rental Property Investing” which you should probably read if you want to do more deals.

15 Comments

  1. Erik Whiting

    I agree with enforcing late fees. Too many LLs get sloppy with this and train their tenants that it’s okay to be late, which then gets them in trouble with guys like me later who preach zero tolerance on late rent. They think “oh, that’s what Bob my old land lord used to say but he always cut me some slack.” I don’t cut anyone slack, period.

    What I don’t like (and what I’m not required to do by my state’s laws) is give a grace period. What I have found in the past when I DID give a grace period is tenants let the whole speech about being late after the due date go right thru their brains and out the other ear. If you say rent is due on the 1st and late fees apply on the 6th, to the average tenant, that means rent is due on the 6th and you’re a worthless jerk if the bank was closed that day for a holiday, or if it was Sunday, or you won’t give them “just one more day.” For me, K.I.S.S. principle and state laws allow me to be firm and fair. The rent is due on this day, every time. Not the day after, not next week….THIS DAY, PERIOD.

    Now I will change the due dates for someone who gets paid on certain days. I have zero problem with that. If someone wants to pay on the 3rd, we add 2 extra days to the time period we prorate them to push back their due date until the 3rd. Likewise, we allow folks to pay 2x per month or once every 2 weeks. There are some logistics to that, but we charge an extra convenience fee for this, so it’s worth our time to have developed this system.

    What I’ve learned is we can make any kind of deal we both agree to, but once that deal is in ink we STICK TO IT!

  2. Dave Rav

    Ah yes, late fees in landlording. Definitely a critical thing to have and follow.

    Brandon hit the number one reason as to why tenants fail to pay on-time: prioritization. Rarely is it a life emergency or something serious (despite tenants’ attempt to make you PERCEIVE it to be such). They have chosen paying for other bills (or more likely, wants and desires) over paying YOU. And essentially paying for a very important expense – housing. For some reason, they dont give it the importance it deserves, then they are stressing come the 1st of the month. Basically their failure to plan doesn’t constitute an emergency on our part.

    We always enforce late fees. Fortunately we budget our business I and E to allow covering expenses (without waiting for rent checks). So its totally fine, we can wait if it means earning anywhere between $35 and $150 in late fees. Yes, thats right $150! Once we even had a tenant pay $250 in late fees (they were almost a full month in-arrears and had been a late several times prior to that. But they want to stay rather be evicted, so this is what we agreed to). Of course, we always follow the law regarding grace periods and the like. Accommodating tenants with extensive delinquency should be something you certainly charge for!

  3. John Murray

    I think late fees are no big deal. I have them in my leases and have collected a few here and there. I have SF home rentals that rent from $2100 to $2600 per month. I have $3.6M worth of SF home rentals and pay very little tax. In my big financial picture instilling financial discipline in my tenants is way below my pay grade. I have made more money by giving far superior service to my tenants without providing financial lessons in life to those less fortunate than me and don’t have to pay a lawyer to evict them.

        • How do you know that? Do you not have a penalty if they’re late?

          The way to really find out would be to remove the penalty and see what happens.

        • Micaiah Cormier

          All of my tenants paid late until the new contracts came out which included a late fee. Now, everyone pays on time! After each had their turn facing a late fee they are suddenly timely!

      • John Murray

        Kurt,
        I don’t think you see the bigger picture here. This is why I’m a multimillionaire and you are not an entrepreneur. You concentrate on money and not concepts. When you are free to understand what I’m conveying the bigger picture is financial freedom. Many income streams, to focus on money from late fees narrows your band to become wealthy. If you worry about $100 here and there you are not focusing on $100K here and there.

  4. Katie Rogers

    I think the extension based on timely tenant communication is great. I would not charge them for it though.

    When I was a tenant, one time receipt of my paycheck was delayed two weeks. I told the landlord that when I received my pay I would pay for two months—one month was two weeks late and one month was two weeks early.

  5. Aly W.

    I have no problem working with a tenant who has a good track record and is occasionally (once or twice a year) late. I have 2 tenants now on a staggered rent schedules due to when they get paid and the fact that they asked me about it before I had to chase them. But late fees are almost always charged, and a judge will question why they weren’t if you ever get to court for an eviction. It’s about setting a policy not only for the tenant, but for the law.

    I’m also dealing with an inherited tenant who apparently decided she does not have to pay the rent until served with a Pay or Quit notice. Three months in a row now, since we bought the property, she has not paid until the end of the 3 Day Notice, just before we filed an eviction. We post the notice the third day after the rent is due, per the lease. She pays the late fee, the service notice fee, and the rent – sometimes more than $125 extra each month. I’m not sure if she’s lazy, broke or bad at math…probably all 3.

  6. Robert Cheek

    I am pretty strict with late fees. I average over $1000 a month in collected late fees. For several years I banked the late fees into a separate account and bought a house for cash. Now I’m getting about $700 a month in rent from that house.

  7. If you are a multi-millionaire I would think you would have “small people” who are responsible for collecting late rental fees, plus enforcing other rules within the lease agreement.

  8. Kurt Buchert

    I think the thing you are both missing is the quality of tenant. On lower end rentals, the “stick” needs to be there or many tenants will take advantage. Many times this lack of responsibility is why they are in that financial position in the 1st place. On the higher end rentals I have, tenants rarely ever pay late rent bc they are very responsible people to begin with. They would feel guilty if they paid me late. It’s a different mindset.

    • Katie Rogers

      “<any times this lack of responsibility is why they are in that financial position in the 1st place." What financial position is that exactly? Tenant rather than homeowner? Are you making income the measure of a person's character?

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