Rental Management

Late Fees: Are You Using Them Effectively?

August 17, 2017

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How To Use Late Fees Effectively

Every landlord has encountered tenants who don’t make paying rent on time a priority. Usually, a late fee will be implemented to act as a threat, not an actual debt. Since it’s a threat, the tenant often won’t pay the late fee. And once they’ve managed to avoid the late fee the first time, they may take advantage of your leniency in the future. Even one late payment or other real estate contract breach can start this cycle and result in a higher rental delinquency rate by the end of your lease terms.

Prioritizing the collection of late fees is imperative to decrease late payments and generally enforce your real estate contracts. Fortunately, there are steps landlords can take to ensure the late fee is collected with the late rent, and, in turn, to decrease the amount of rent outstanding each month.

Reasons Why Rent Should Be Paid on Time

So why does it matter if your tenants pay rent on time?

Well, for starters, it’s a breach of contract—it represents a breakdown of trust between you and the tenant as well as a lack of respect towards you as a landlord and the tenant’s contractual obligations. When a breach of contract occurs, it should be penalized exactly how it was designated in the lease agreement. If you allow your tenants to turn in late rent payments with no consequences, then in most situations, you will be taken advantage of. This could lead to other more serious offenses, like housing an unauthorized pet, destroying property, or other activities prohibited by the lease/real estate contract.

Additional Reading: How to Handle Long-Term Guests

Additionally, late payments can cause unforeseen financial issues for both the tenant and the landlord. Tenants are usually on a strict budget. Once a tenant gets behind on payments, it makes paying rent that month a lot harder. During the cycle of late bills, rent is usually the number one bill which is put to the side.

Late rent payments will also weaken your financial position in the short term and can jeopardize mortgage payments in certain extreme cases. If your tenant doesn’t pay rent until the fifth and you have bills due on the first, coming up with the money for those bills and/or other real estate transactions can be difficult.

The chore of collecting a late rent payment can be very uncomfortable for both the landlord and tenant. Late fees are implemented by most landlords, if not all, to act as an incentive to compel tenants to pay rent on time. Even though this method has proven to be effective, there are still problems landlords will encounter.

Common Problems When Collecting Late Rent

So we’ve established that collecting rent is important. But it’s not always that simple…

Excuses for Late Payments

One common challenge is distinguishing a real reason for late payment from a counterfeit reason—in other words, the “My dog ate my rent check” excuse. Charging a late fee will eliminate the burden of having to identify a legitimate reason from a false one. But simply slapping on a late fee is easier said than done.  

Tenants Ignoring Late Fees

Another common problem is that the tenant will submit the principal amount due (or they’ll be evicted) but won’t pay the associated late fee. Implementing a late fee without a proper collection system turns the late fee into a mere a threat rather than an actual debt. And when the tenant recognizes the emptiness of the threat, they will take advantage of it.

Your lease states that it is the tenant’s responsibility to pay rent by a certain day each month, but your actions have implied something else. By reaching out to your tenant the first time they are late, you’ve established a precedent: it is your burden as the landlord to collect the rent.

Poor Communication About Late Fees

So how do you get ahold of your tenants to collect late payments? Lack of communication is another challenge landlords frequently face regarding late rent. Millennials are renting more than any other generation, so your first instinct might be to call your tenant’s cell phone to inform them about a late payment. Surprisingly, getting a millennial to pick up their phone is just as hard as collecting the late fee. Texting your tenant would work, but ignoring a text is easier than ignoring a call. Many individuals don’t even check email anymore. As you can see and have probably experienced, communication with your tenants can be very difficult, especially when they are the breaching party.

Additional Reading: Communicate With Your Tenants For Pain Free-Management

On occasion, landlords will run into tenants who always pay rent late. You’ll likely want to evict them, but you might feel like you can’t because they’re still paying rent. A repeat offender can be an annoyance and needs to be dealt with. But do not fear, there are steps which can be taken to eliminate this burden.

Effective Methods for Late Fees

Laws in a few states restrict the imposition of late fees, both by amount, and length of the grace period. Every state is different when it comes to these laws [Click Here to find your state’s laws] (and remember, for any legal questions, always consult a local lawyer, preferably one with rental property experience).

The average amount you will see charged for a late fee lies anywhere from a flat fee to 5% of total rent. Charging anything above 5% may be viewed as cruel and unfair and could sully your reputation as a landlord. So, why do some landlords charge more than others? Looking past the restrictions of your state’s’ law, this decision depends on the demographic to which you’re renting, the income bracket of your tenants, and how seriously you take late rental payments. The higher the late fee percentage, the more incentive your tenants will have to pay rent when they’re supposed to.

A great way to solve the challenges outlined in this post is through software. With Innago, renters can’t submit future rent payments until all previous invoices (and associated late fees) have been paid in full (the landlord can of course waive those fees at their discretion). The real estate transaction happens without the landlord even lifting a finger, and it moves the burden of responsibility from the landlord to the tenant.

If you’re collecting rent and communicating with your tenants the old-fashioned way, the burden of responsibility always ends up resting with you. It really should be on the tenant. Implementing software will decrease the amount of late rent payments, increase the late fees you actually collect, and simplify the entire collection process.

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