Late Fees: What Are They and How Much to Charge?

There are tons of landlord responsibilities that aren’t fun to deal with — late fees chief among them. Will you issue late rent fees? Let it go just this one time? Offer a grace period?

Generally, whether you impose late fees is up to you. However, before making a final decision on collecting late fees, it’s important to have a fundamental understanding of late fees and how they can impact your bottom line.

Not to mention, there are laws that affect your ability to charge and collect late fees. In short, it’s essential to know what you’re getting yourself into when it comes to setting a late fee clause in your lease agreements.

This guide will break down late fees for landlords and teach you everything you need to know. Let’s get started.

What are Late Fees?

Late fees are fees charged when a tenant does not pay their rent on or before the due date. As late fees are only charged for late rent, most tenants are able to avoid them solely by fulfilling their lease obligation of paying rent on time.

Through the tenant screening process, many landlords attempt to scout and vet a tenant who has a history of responsible money management and on-time rent payments.

Unfortunately, predicting a tenant’s ability to pay the rent each month can be difficult, even with the most rigorous of screening processes. Life happens.

In these cases, both tenants who are experiencing financial instability related to an emergency or those who routinely pay rent late may be assessed a late fee.

Landlords cannot collect late fees proactively, like they would with a fee such as last month’s rent. Late fees can only be collected once rent is considered late.

Should You Charge Late Fees?

Whether you choose to charge tenants a late fee is your decision. However, if you decide to charge a late fee, you must have a late fee clause in the lease agreement.

The late fee clause should address late fee charges, including their amount and the circumstances in which you would charge them. For example, a late fee clause in a lease agreement may read:

“If the tenant fails to pay rent on or before the rent’s due date, the first day of each month, any rent left unpaid will be subject to a late fee not to exceed $10 a day until rent is paid in full.”

Late rent fee clauses protect your right to levy a late fee if you so choose. Moreover, these clauses provide tenants with a clear definition of late rent protocol that they can reference in the event they are unable to pay rent on time.

Benefits to Charging Late Fees

In most cases, late fees are the very last thing a landlord wants to deal with. Ideally, landlords prefer rent paid on time and tenants who aren’t disgruntled about paying more this month. That said, late fees are a necessary nuisance for landlords for two reasons:

• Late fees discourage tenants from paying rent late. Even if it’s a low fee, no one likes paying extra.
• Late fees protect your income as a landlord. Landlords depend on the income they receive from their tenants, so it’s important to protect your cash flow as much as possible.

Even if you don’t want to be “that guy,” charging late fees is justified and helps to keep tenants and landlords accountable when it comes to rent payment expectations.

Late Fees and Grace Periods

A significant factor in charging late fees is deciding when to charge a late fee. That’s where grace periods come in.

A grace period is a length of time after rent’s due date, in which a tenant has the chance to pay their late rent without facing any penalties, such as late fees. Most landlords who provide grace periods set the period at five days after the due date, but a grace period can be shorter or longer than this.

There are a few benefits to setting a grace period. For one, sometimes tenants may be waiting for payday until they can make rent. A grace period allows them to pay rent “on time” without facing penalties.

For landlords, grace periods mean less paperwork and time wasted. When rent is late, you can simply send a notice of late rent. You don’t have to calculate late fees or chase your tenants down if they can to pay during the grace period.

If a tenant can pay during the grace period, it’s a win-win situation. Just be sure to note any grace periods in your lease agreement.

Keep in mind, some state laws mandate a grace period and limit the amount a landlord can charge in late fees.

For example, New York State’s late rent fee laws state that landlords can’t consider rent late until after the grace period of five days after rent is due. Landlords in this state are also required to send a notice of past due rent by certified mail to tenants.

That said, it’s essential to review your state’s laws regarding late rent payment grace periods to avoid legal trouble.

How Much Should You Charge for a Late Fee?

Determining how much you should charge for a late fee depends on your state’s laws but may otherwise be at your discretion.

Many states have late fee laws that limit the amount landlords can charge for late fees. For example, New York landlords may not charge a later fee that is more than $50 or 5% of your monthly rent, whichever is less.

As of late 2020, 22 states and Washington DC have late fee laws, with the remaining states having no laws on the issue.

While your state may not have any laws regarding late fees, you don’t have the right to charge exorbitant amounts through your late fees. Many states set laws against “unreasonable” fees.

How to Charge a Late Fee

Late fees can be levied in various ways. Here’s a look at how you can charge a late fee:

• One Flat Fee: Tenants pay a single set sum to cover their late fee. For example, a tenant may be asked to pay a late fee of $75 to cover the entire period their rent is late. You can break this number down as a percentage, such as 10% of your total rent as a late fee.
• Daily Fees: Landlords may charge daily late rent fees separately or in addition to a flat fee. This fee can also be levied as a percentage of the total rent or a set dollar amount.

Regardless of how you charge a late fee, it’s essential to consider setting a limit to the total amount of late fee debt a tenant can rack up.

Whether a tenant simply chooses to pay rent when they feel like it or racks up late rent fees they have no intention of paying, setting limits can help you determine when to start the eviction process.

Depending on your preferences and state laws, you can set a late fee limit not exceeding a certain amount, such as $200 during a lease term or no more than one late rent payment in three months.

How Do You Collect Late Fees?

Collecting late fees is a little different from collecting rent payment. You can take unpaid late fees out of your tenant’s security deposit after their lease expires, but you don’t have to wait that long to get paid.

However, you should not be hunting down your tenants when it comes to late rent. It’s a tenant’s responsibility to pay rent, with late fees or otherwise.

As a landlord, your responsibility is to keep the tenant informed about their late rent by sending a late rent notice after the grace period has expired. If the tenant fails to resolve their late rent problem in due course, you may choose to pursue an unpaid rent eviction.

That said, it’s important to be proactive when it comes to late rent fees and payment collection. That’s why many landlords opt to use an online rent payment platform.

These landlord software tools are great options when it comes to collecting rent and late fees. Look for software that can track unpaid rent, send out late payment notifications, and automatically tack on late fees until the rent is paid.

Final Thoughts

Charging late rent fees isn’t exactly a landlord’s dream duty, but it is an integral part of the renting process that helps secure your income by encouraging timely payments.

Unfortunately, sometimes late rent payments lead to an eviction and vacant units. On the bright side, this situation presents an opportunity to recoup your losses and secure your income by renting out any vacant units.

By listing with Apartment List, you give your unit a chance to be seen by prospects looking for everything your unit has to offer. One of these high-value prospects could be your next tenant!

Want to fill vacancies and increase your ROI? List with us today.