Late Fees, How to collect them and when to charge them

stress-391654_1280-PDAre your current month’s rents collected by the 5th, every month?  Are you charging late fees?  If not, it’s time to start thinking about late fees. 

When you accept a tenant that makes less than 3.5x the rent, rent payments are a struggle to them.  They live paycheck to paycheck, generally have low credit scores, and often the rent doesn’t match up in a timely fashion with the paycheck.  It is a tough situation.  If you tack on a late fee, it is a surefire eviction.

When I rented to Section 8 tenants and other low-income people, I had to just wait for the rent to come.  It was far better to have a slow paying tenant, than a vacancy.   The problem is a slow payer turns into a non-payer very quickly.  After only 30 days, you are two months behind in collecting rent.  Adding an eviction expense would make the cost even higher.  So you let it ride longer.  If you took in a tenant that was making less than 3.5x the rent, it was mostly your own fault for them not making payment, you rent was too high for them.  You should have waited for a more qualified tenant.

In today’s rental market, you can get well-qualified renters.  They have the money to pay rent, but they might have a budgeting problem.  This will be indicated by their credit score.  They do not want to get evicted and move; they will pay.  I always charge a late fee now.  Often when you tell a tenant that asks about a late payment that they can pay late but “just include the $75 fee”, they somehow come up with the money for the rent payment in a timely manner.

With 24 renters, I cannot have a bunch of them not paying.  I need the revenue to pay my bills too.  While I will probably always have a late payer or two, there are ways to avoid late payments.  Often the tenants just need a reminder.

I send a group text message to all my renters about three days before the end of the month.  A simple message, just to remind them the first of the month is coming, and rent is due soon.  It takes all of three minutes, or less, and is free.

On the second of the month, after I have collected all my rents from tenants on the first, I send another message to all tenants that have not paid.  Generally, there is one or two that have not put the check in my rent box, and occasionally I missed a check that didn’t fall all the way to the bottom of the rent box.  Either way, it is another reminder that saves late fees, gets your rent faster, and could ruin a good landlord tenant relationship from a simple mix-up.

If I still have some that have not paid on the 5th, unless I have already received word of a late payment, I send another text.  I rarely have to do this, I think only one time in the past two years.

So the lesson is this.  Get renters that can afford the rent easily.  Remind them that rent is due.  Increase profits with late fees.  Avoid late payments altogether with the proper amount of diligence and incentives for your tenants.

 Have you ever had to pay a late fee as a renter? Or a late mortgage payment? 

8 Replies to “Late Fees, How to collect them and when to charge them”

  1. Eric,

    These are some great tips and I like your no nonsense approach. I’m hoping to also build up a portfolio of homes that cater to good tenants that can easily make the rent payments… going back to your 3.5x rule.

    With Section 8, it is a totally different ballgame, as I’m learning firsthand.

    1. 3.5x is a minimum. I have many renters that make much more. Some are better than 15x the rent in income, along with 750+ credit scores.

      No matter how many people want to buy a home, there are many renters that like the flexibility of renting. Some people want to move often, some do not want to do the yard work. Some want to get more established in their career.

      Remember, when it is hard to find a qualified renter, “Lowering price increases demand, every time”. Simple economics 101, but it’s hard to lower rent at times.

  2. Hi Eric,
    Very informative!
    I knew nothing about being a landlord when I started renting out my SFH after moving in with my husband. He gave me a copy of a lease that he used for his own previous rental property. I don’t know if he ever had this lease looked at by a lawyer, so I’m not sure if it’s legal, but I used it and one of the line items was a rental discount. I wanted $750 per month paid by the 5th of each month. The lease states that the rent is $850 per month, but if it’s paid by the fifth, they will get a $100 discount. I’ve had the same couple in the home for 11 years. One month they were a day late early on, so I gently reminded them that I will hold them to that line item and it’s been on time ever since. Have you ever heard of this and do you know if it’s legal?

    1. If the late fee is excessive, it is not legal. In MN, we have an 8% late fee limit. Some states have lower, some higher, some none at all. In any case, a judge likely would not allow an eviction over a late fee. A discount is the same as a late fee. That is, you had a $100 late fee, in the Courts eyes. Rent is $750, late rent is $850.

      Daily late fees are almost always excessive, unless there is a cap. $5 a day, until you hit 8%, might work. I have heard of $25 per day late fees, I doubt that would fly with a Court.

  3. Hmm…a text reminding me that rent was due. Can’t say I’d appreciate that. Then again I was never a problem tenant who NEEDED reminding.

    Still, a good tip from the owner/manager point of view.

      1. It really is different. I get bills by email, which I may peruse at my leisure, when the time is good for me. When you send a text to my phone, that is an interruption, at a time that is convenient for you, and is no different than a dunning phone call. Having never been late on a rent payment, that would irritate me very much. I see why you think it’s a good idea, but a good tenant should only be getting the “late” reminder, not the “hey, dummy, your rent is due, just like it is every month” reminder.

        1. Thank you for reading!

          You can ignore the text as well, no different than an email, until it is convenient to read it. It is just a different electronic format. Unfortunately, people have been trained like Pavlov’s dog to immediately look at their phone for a text message. You seem like you have fallen into that trap.

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