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Landlord Studio, Tenant Management

What landlords need to know about late rent fees and grace periods

Late rent fees are a way for landlords to motivate tenants to ensure they pay rent on time and in full every month.

To help encourages on-time rent payments, first of all, have a very clear policy on how you are going to collect rent. Whether that’s online, in cash, or by check in the mail. Make sure your tenants know what is expected of them. We recommend online rent collection with Zelle pay

What are late rent fees?

A late rent fee is exactly what it sounds like, it is a fee charged to the tenant in the scenario where they don’t pay rent by the due date, as stipulated on the lease agreement.

A late rent fee has two purposes. First and foremost it is to encourage tenants to pay on time, this isn’t a way for landlords to make extra money off their tenants, rather a way to ensure rent is paid on time and in full every single month.

The second purpose is to compensate the landlord for the back-and-forth communication, as well as an increased risk, for the landlord to now collect those late payments.

If rent is due on the first, landlords can apply a late fee on the second unless there is a grace period detailed in the lease or mandated by state or local laws.

 Grace periods are quite common, especially a 3-5 day grace period. They provide tenants extra time to pay rent before the landlord can legally charge the late fee.

Are late rent fees legal?

Late fees are legal. However, they have to be written into the lease signed by both parties. To ensure legal compliance we recommend that landlords write into their lease both the late fee amount as well as when it will be charged.

Should you have late rent fees?

The main purpose of late fees is to encourage on-time payments and compensate landlords for the extra hassle and risk of a tenant paying late. For these reasons, it’s a good idea to have late rent fees written into the lease.

Whilst it’s a good idea to have a late rent fee, it’s also worth noting that many landlords never actually have to charge these late rent fees. Late fees are to motivate tenants to pay on time. Be clear about the amount, the dues date and exactly when a late fee will be incurred. This makes tenants less likely to pay late as they know you are serious about on-time rent payments and you will be chasing them if they are late.

How do you set late rent fees?

The most common late fee amount is between $20 and $50. 

You can also choose to set the late fee as a percentage of your rental price. However, make sure you check with your local and state laws to determine what the laws are around late fees amounts

Do a quick search online like “New York late rent fee limit” to determine whether your city has limits on the late fee amount you can charge.

Ultimately, the late fee amount should:

  • Compensate you for the inconvenience and risk of not receiving rent on time;
  • Motivate the tenant to pay rent on time;
  • Keep in mind that you don’t want the fee to be so high that if the tenant falls behind on payments, he or she can’t afford rent plus late fees, and becomes hopeless as a result.

Setting Late rent fees with Landlord Studio

You can use Landlord Studio to automatically set your late fees.

When you are adding your lease scroll to the bottom of the lease page and you’ll see a section that reads late fees. If you don’t log the payment as collected the software will automatically apply the late rent fee as owed income for that payment period.

What are Grace Periods?

A grace period is the legal amount of time the tenant has before you can charge a late fee.

For example, rent may be due on the first, but to give your tenant the best opportunity to get the rent to you you might have a five day grace period. Meaning you wouldn’t charge a late fee until the 6th of the month.

Should you have a Grace Period?

You can choose to write a grace period into your lease even if your state doesn’t require you to. There are several reasons you may decide to write a grace period into your lease.

Here are three reasons why landlords choose to have a grace period:

  • The money is in transit. 

Not all payment methods are instantaneous. If a tenant pays rent by check in the mail or even online. The rent might take a few days to get to you. Landlords understand this and write in a grace period to allow for this time the money is in transit.

  • Often tenants live paycheck to paycheck. 

What this means is that they may not have sufficient funds to pay rent until their paycheck comes in. If they get paid on the first then having a couple of days to pay rent makes everyone’s lives a lot easier.

  • Public Holidays. 

For those infrequent times where the tenant cannot pay rent on time – for no fault of their own (aside from lack of planning) a grace period is a life-saver. For example, sometimes rent days fall on public holidays. 

As a landlord, you want to maintain a good ongoing relationship with your tenants. By giving a tenant a grace period you are giving your tenant the most opportunity possible to pay their rent, so that even if an unlikely scenario crops up they still have a couple of days to get the rent paid without having to worry about falling into arrears.

Does every state have a legal grace period?

Some states, but not all, have legal grace periods. States that require grace periods typically want to provide tenants extra time to deliver the payment because transferring money is not always instantaneous.

For example, a mailed check might take three days to be delivered and tenants can’t always write the check in advance if they’re waiting to receive a paycheck first.

The standard grace period is five days.

What if the tenant still doesn’t pay after the grace period?

If the tenant still hasn’t paid their rent after the grace period is up there are a few things you can and should do.

  1. If stipulated in the lease, apply your late fee.
  2. Formally warn them of late rent payments.
  3. Begin filing for eviction.

Even if this is the first, and only time they pay rent late, they are violating the lease, a signed and legally binding document. If your tenant doesn’t pay rent on time then you have the right to begin pursuing an eviction.

Typically, landlords don’t want to evict their tenants. The process is long, arduous, and expensive. However, if a tenant isn’t paying their rent at all for multiple months then you may want to pursue an eviction sooner rather than later so that you can get a court mandate for repayment of overdue rent as well as get new tenants into the property.

How do you determine if rent is officially late?

There are several different points when you might determine that rent is officially late. For example, if a tenant mails you a check before the rent is due but it doesn’t arrive until after your grace period is over, is that rent late?

You should decide at what marker rent is determined as being late and make sure you communicate this to your tenants.

Here are three markers that you might choose to use to determine whether or not rent is late:

  • The date payment is initiated;

This is the day the tenant schedules the payment or the tenant mails the check.

  • When the payment is received;

For online payments, this is when the money actually goes into your account. For checks, this is when you receive the check.

Be aware that as the landlord you determine the method for your tenants paying, so if you know that the process you’ve chosen takes an average of 3 days for you to receive it then bear that in mind and if you’re going to use this marker, make sure your tenants know.

  • When the payment has cleared;

This is often a sensible consideration as with certain payment types tenants can clawback their payment or in the case of checks, the payment might bounce. The money needs to successfully transfer into your bank account and be accessible to you before you can really say that rent has been paid.

We recommend considering all three of these points when thinking about rent collection.

Our tips for handling late fees and Grace periods

  • Be clear in your policy;

Make sure your grace period and late fee policy are outlined and detailed legally in your lease. More than this, make sure your tenants understand how they need to pay rent, what the cut-off date is for rent payments as well as the consequences of late ent payments.

  • Be strict with enforcement;

If your tenant is late and you don’t enforce your late rent policy then there is no reason for them to believe you will the next time. In this way, the motivation the late rent fee provides is removed. Make sure you are strict ad your tenants understand the seriousness of breaching the lease.

  • Be understanding;

At the end of the day, you want your tenants to make their rent payments. So be understanding and communicative to help ensure they pay their rent on time.

  • Talk to your lender;

You have bills to pay for your rental property, often due at the beginning of the month. You can also call your lender and ask to change the due date of your mortgage payments to the 15th of the month moving forward. This is a common way that landlords alleviate the stress of receiving rent payments on the first of the month, especially when there is a legal five-day grace period.

Using Landlord Studio Automation for  on time rent payments.

Landlord Studio for late rent fees

There are several features in landlord studio that can be used to help you keep track of rent collection and late rent payments.

Set Automated Rent Reminder Emails with Landlord Studio

These emails send out automatically when you set them to remind or chase up tenants. For example, you might set and email to go out 3 days before the rent is due as a gentle reminder that rent is due on the first of the month. Or you might set a rent overdue reminder notifying that rent has not been paid at the end of the grace period.

On top of this, you can set late fees in the app to automatically apply to a property if the tenant doesn’t pay rent on time.

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Ben Luxon

"Ben is an author and real estate enthusiast. His interest in all things entrepreneurial has led him to work with real estate professionals all over the world, distilling their knowledge into articles and Ebooks. His love of travelling has taken him to over 10 countries in the last year, where he has sampled the craft beer of them all."