If you’ve just picked up a rental property and are creating a lease, then after you decide how much rent you want to charge, you’ll want to decide on late fees. Some landlords don’t charge a late fee for their rent. Others have a flat charge that is assessed if a rental payment is overdue. Sometimes a percentage of the rent is charged as an additional fee. Which is right for you? Many of these choices are already set for you. Landlord/Tenant laws typically dictate a maximum amount that can be charged in late fees. It is generally up to 10% of the rent that is paid each month or a flat fee maximum.
Should You Even Be Charging a Late Fee?
The issue with a late fee being included on a rental agreement is that it allows someone extra time to stay in a rental without actually paying for that privilege. An eviction procedure cannot even begin until the grace period for the late fee has expired. Let’s take two examples for consideration.
- Landlord A has a flat that he rents for $700 per month. The lease clearly states that rent is due by 5pm on the 1st of the month. He does not have a grace period or a late fee. This means he can file a Notice to Quit or Pay on the 2nd of the month right away in the morning. If the tenant doesn’t pay, with a 3 week average time for eviction, he can have a paying tenant ready to go for his flat by the next month.
- Landlord B has an apartment that he also rents for $700 per month. The lease states that rent is due on the 1st of the month, but that there is also a grace period until the 5th of the month where no late fees will be charged. After the 5th, the lease states that $70 late fees will be assessed and rent will be due by the 8th. This means that Landlord B cannot start the actual eviction procedures until the 9th of the month.
- The benefit of setting late fees is that you’ll be able to offset some of your costs that come with the collection of overdue rent. The detriment is that if you have a tenant who is in a rental and isn’t paying what is due, it can be 10-14 extra days of not receiving any income from the rental property.
Late Fees Can Sometimes Be Charged as a First Expense
Depending on your landlord/tenant laws, it may be possible to charge a late fee as a first expense. This means that you could take any rental payments that are received from a tenant and apply them to the late fees first. In the example above, let’s say Landlord B gets paid rent on the 7th of the month for $700. This landlord could then apply the $70 late fee first, meaning that the tenant is still out of compliance on the lease because the full amount has not been paid. An eviction proceeding can still begin. Late fees can be a delicate balancing act. Some landlords may choose to ignore late fees and just start the eviction process immediately. Others may choose to include late fees as a possible way to earn extra profit. Know what your legal limits are before you begin, be consistent with your policies, and you’ll have an overall positive experience.