How To Structure Your Late Fees?
Late fees are an unfortunate but necessary part of the rental business.
For most landlords, enforcing them can be one of the worst parts of the job.
It’s understandable. No one wants to be the bad guy.
In this article, we’ll review late fees and the different ways to structure them.
The Legality of Late Fees
Different states have different laws regarding late fees. It’s important to fully understand the applicable regulations for all the states you have properties in. Most states will also have rules related to residential rent, like when and if you can charge a late fee, the maximum amount you can charge, and if you’re required to provide tenants with a grace period before charging late fees.
The Cornell Legal Information Institute (LII) is a website with regulations for each state, which can help you stay up-to-date on applicable laws.
In general, you can charge late fees if the local and state laws permit it and:
The lease agreement has a provision permitting late fees to be charged.
Late fees aren’t used for retaliatory purposes (i.e., a tenant complains about the state of the rental and you get upset).
Late fee amounts are fair and within a reasonable percentage of rent.
The average rental late fee is approximately 5% or less of monthly rent payments. For instance, if the rent amount is $1,500, a late fee of 5% would amount to $75. In situations where the rent is extremely late, this goes out the window. In such cases, a 10% late fee could be reasonable.
You may want to meet with a lawyer if you want to cover your bases about late fees for your area.
Structuring Late Fees
There are two main ways to structure late fees – a percentage or a flat fee. Neither is inherently wrong or right. It really comes down to preference.
1) Percentage of monthly rent. We’ve already touched on this briefly, but this is probably the typical way landlords structure late fees. Again, anything over 5% is most likely too high, but find out the average late fees in your area and go from there.
2) One flat late fee. A single flat fee may make more sense to you. If you decide to go this route, you will need to choose a reasonable amount. For example, you set a late fee of $75 to cover the entire period that rent is late. You can also break this number down as a percentage if you prefer.
3) Daily flat late fee. You can also choose to charge daily late fees instead of or in addition to a flat late fee. This can also be a set dollar amount or a percentage of rent.
No matter how you charge a late fee, it’s imperative to consider setting a limit on the total amount a tenant can accrue in late fees. Setting limits in your lease can make it clear when you will no longer tolerate tardy payments from your tenants. This will also make it obvious when you should start eviction proceedings.
Based on your preferences and state regulations, you can set a late fee maximum not exceeding a certain amount (i.e., $250 during a lease term or no more than one late rent payment in three months).
Collecting Late Fees
Now you need to collect the fees. You can do this the old-fashioned way by tracking down your tenants and staying on them about paying. You can also pull unpaid late fees from your tenant’s security deposit after their lease is up, but you don’t have to wait that long to get paid.
It’s ultimately your tenant’s responsibility to pay late fees if they fail to pay their rent on time.
Your job is to keep the tenant informed about their late rent by sending a late rent notice after the grace period has passed. If the tenant doesn’t take care of the issue in time, you will have to begin preparing for an unpaid rent eviction.
It’s crucial to be proactive when it comes to late rent fees. That’s why property management software is such a great option for managing your properties. Most software can track unpaid rent, push out late payment notifications, and automatically add late fees until payments are made. This makes everyone’s lives easier. It also means you don’t have to be the bad guy. If you have things automatically set up, the software will stay on top of things and keep tenants in the loop.
Conclusion
Late fees are an important part of the leasing process. There have to be consequences if people don’t pay rent on time. And following through on late fees makes it more likely tenants will prioritize getting their rent in on time.
Structuring late fees doesn’t have to be complex. Pick what works best for you based on regulations in your area. Again, there isn’t a right or wrong way to go about this. Then, make sure you collect the fees as needed. As long as you follow the guidelines laid out in this article, you’ll be in great shape!
