Late Fees: What Should a Landlord Charge?

It’s inevitable, perhaps in 2024, that some of your tenants will be late paying their monthly rent.

Across the US, quite a few renters are behind on their rent payments.

“8,070,524 people ages 18 or older in the U.S. aren’t caught up on rent payments. Put another way, 13.17% of the nation’s adult renters live in a household that charges them rent and are behind on payment.” –– from LendingTree analysis of U.S. Census Bureau Household Pulse Survey.

This means notifying tenants professionally, applying fines, and collecting them become an issue for landlords and property managers. However, manual collection can create a lot of friction with tenants. That works against you. Instead, using property management software, you can automate everything from timely, legally compliant notices, to automatic bank withdrawals and payment notification alerts.

Reactive vs Proactive Management

A better way to look at late rent payment in today’s rental environment is not to be vindictive or punishing. Instead, consider a proactive strategy of managing tenants’ intent and budget habits and positively encourage on-time payments. Good management should eliminate late rent payments as well as ensure tenants stay leased.

Rent payment optimization is all about communicating the value of paying on time, and reminding tenants (education in their terms) of how they can avoid late fees and stay on good terms with you. The key message is to keep good relations with you, the landlord. This carries more value to keep tenants leased, as opposed to the threat of fines, which makes tenants consider ending their lease and looking for a cheaper apartment.

The late fee is a deterrent, however a better message is about good financial management.

As you know, rent prices are falling in the US as the glut in multifamily supply balloons. A few are warning that this event is serious. In fact, rent prices in some regions are falling fast. You’re vulnerable, so managing proactively is wise.

Renter cost burden. Screenshot courtesy of Axios.com

Rent Payment Issues are on the Way

In 2023, the rent cost burden for renters is very high.  It will remain that way for a while and bring more rent payment issues. Student loan repayment, job losses, and food prices will exacerbate renter’s financial challenges.

A few renters will get careless (or overwhelmed) and fail to keep sufficient funds to cover their rent.

As you’re more than aware of, a late payment will generate a bank NSF charge, and a late fee as specified in the lease. In your communications strategy in November/December, it’s wise to encourage smart financial management so they don’t commit their funds to something else (credit cards, car payment, vacations, student loans).

Building these messages into your tenant communications, videos, and blog posts is important. When professionally presented with right strategy, they will be impacted by your message.

You have the power to prioritize their spending decisions.

Setting the Right Late Fee

Back to late fees, they are a good psychological tool if not a valid financial punishment. They’re kind of annoying to your tenants, and not really sufficient to protect your interests. Still, you need to have them in place.

TransUnion quotes that a standard late fee is about 5% of rent, and 10% after 10 days late. In some states/countries, the late fee could be 20%. Zumper says the standard late fee is between $25 and $50.

Deciding whether a set amount or a percentage is up to you, depending on the nature of problems that happen when you don’t get paid. You could set the late fee to begin 3 or 4 days after not receiving payment. In the rental lease, the terms and price for late fees is set.

Landlords must also send a notice of late rent to the tenant. If you didn’t specify the late fee amount, then it can’t be charged.

What About the Rent Grace Period?

Some states establish a grace period for rent which might be 3 to 5 days, however this will be indicated on the tenant’s lease.

A rent grace period is a span of time from the date rent is due until the day a late fee is incurred. While a renter can make partial payments, the entire balance of the rent must be paid by the end of the rent grace period to avoid the late fee. I’ve seen grace periods of up to ten days.

A tenant may decide not to pay the late fee, but in most cases, the landlord could terminate the lease and ask them to vacate at the end of the month. In most jurisdictions, landlords can evict tenants on month-to-month leases, with notice, for no reason, same as their employer can fire them for no reason.

Whatever the fee, $10 to $100, tenants should pay their late fees right away. Risking eviction is not a good way to deal with a matter that is the tenant’s responsibility. Tenants should always arrange to have one month’s rent guaranteed available and use automatic payment to prioritize rent payment.

A late fee when reported could impact the tenants’ future ability to rent. Mentioning TransUnion’s Smartmove tenant screening report  is a subtle way of encouraging on-time payments too!

How to Ensure Tenants Pay Their Rent on Time Every Month

If you’re still accepting cash or checks each month, this practice leaves you vulnerable to late payments. The real issue is that if a tenant can be irresponsible, then at some point they will be.

Given all the payments renters pay in a month, including expected charges, they need to have backup sources ready. It’s important to keep good communications with tenants and ask about why they haven’t paid on time, if it’s something that’s happened several times.
It may be signaling a rent default is just ahead. Since collections is difficult and often involves the courts, you may want to prepare for issues such as unemployment and bankruptcy.

Rent Payment Automation

One good way for a landlord to deter late payments, is to insist that your tenants use automatic withdrawals from their bank accounts. And it can be set up to arrange funds to be transferred from other accounts to ensure the rent payment is always successful.

You’ll find your tenants paying rent on time and managing their finances better when they’re paying via an online rent payment system, such as ManageCasa’s.

And our system helps you reduce administrative time, bookkeeping and data entry errors, and avoid issues at your bank (which prefers online transactions).

Yes, automating financial transactions and accounting save landlords time, and it’s now fundamental to any property management business model. If you’re still collecting rent old school, it’s time to adopt automation solutions. And ManageCasa can help you automate payments, invoicing, rent collection, late notices, late fees, and much more.

Enjoy a simplified, all-in-one management dashboard and keep your cash flow assured with ManageCasa.

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