Late fees provide the proverbial muscle to motivate tenants to pay their rent on time.
One-time fees are great, but daily late fees are better.
I don’t enjoy charging late fees, and have never had a late rent payment since I started using Cozy. However, I still include late fees in my lease, just in case a tenant decides to be rebellious.
Laws Exist, but Differ
Because some cowboy landlords have gotten a little carried away with late fees, many states have put limits on the fees a landlord can charge for late rent. Further, many cities and localities have additional rent control ordinances to regulate late fees.
- Oregon specifically allows a landlord to charge daily late fees starting the 5th of the month.
- California and Texas simply state “a reasonable amount” is allowed.
- New Mexico takes it a step further by allowing late fees, but not more than 10 percent of the rent amount, and the landlord must give notice of the late fee charged no later than the last day of the following month after the default occurred.
The Perfect Late Fee Combination
My state doesn’t have a statute on late fees, but that doesn’t mean I can charge whatever I want!
Any fee that is not “reasonable” will likely get thrown out of court. Unfortunately, the term “reasonable” is not very helpful because everyone has a different opinion of what that means.
Generally speaking, a one-time late fee of 3-5 percent will be considered “reasonable” by most people.
To double-check, ask your friends and family what they think. If they cringe when you tell them your late fee, you’ll know it’s too high.
With that said, I have seen large, nationwide apartment companies charge as much as 10 percent and get away with it. I suppose they think it’s better to ask forgiveness than permission.
One-Time Fees Aren’t Enough
The problem with one-time late fees is that once the tenant has incurred the late fee, there’s no incentive to pay rent quickly, and often the tenant will wait until the end of the month to pay up.
Since the rent is already late, why should the renter scramble for money to pay rent on the 6th, when it could wait until the 30th at no additional cost?
Daily Late Fees
The beauty of charging a daily late fee in addition to a one-time fee is that once the tenant incurs the initial fee, there is still financial motivation to deliver the money as soon as possible.
Personally, I charge a $20 daily fee, starting on the 2nd late day and every day thereafter, until rent is paid in full. This ensures that the tenant will continue to attempt to pay rent quickly, even if it is officially late.
When you use a one-time fee and a daily late fee together, it really provides incentive for the tenant to pay rent on time.
Keep in mind, all this can be avoided if you force your tenants to pay automatically through a property management system like Cozy.
Sample Lease Clause
Before using this clause, you should check for compliance with your state laws, and have a local attorney look at it.
LATE FEE AND ALLOCATION OF PAYMENTS. In the event that any rent payment required to be paid by Tenant(s) hereunder is not paid IN FULL by the start of the SECOND (2nd) DAY OF EACH MONTH, Tenant(s) shall pay to Landlord, in addition to such payment or other charges due hereunder, an initial “late fee” in the amount of 5% OF THE MONTHLY RENT AMOUNT. Further, a subsequent late fee of TWENTY DOLLARS ($20.00) PER DAY will be incurred by the Tenant(s) for every day payment is delayed after the 2nd day of the month.
All future payments will be allocated first to any outstanding balances other than rent, such as late fees or unpaid deposits. Any remaining monies will be allocated lastly to any rent balance.
What Late Fees Do You Charge?
What type of late fee structure works for you? Share it in the comments below.