Now that you know how to handle first month’s rent, we’re going to discuss late rent fees and grace periods. It’s important to have a late fee rule to make sure tenants are motivated to pay rent on time.
Late Rent Fees
When a tenant doesn’t pay the entire rent by the due date, most landlords charge a late fee. This compensates the landlord for the back-and-forth communication, as well as increased risk, for the landlord to now collect those late payments.
If rent is due on the first of the month, most landlords will assess the late fee on the second. That is, unless there’s a grace fee that’s either written into 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 as long as they are written in your rental lease and they follow local laws in regards to the amount you charge and when you charge it. We recommend landlords write in the lease the late fee amount and when it will be charged.
Should You Have a Late Rent Fee?
Yes, it’s a good idea to have a late rent fee written into your lease. The main purpose of having this fee is to compensate the landlord for the extra hassle and risk of the tenant paying late. The fee also helps you prevent late payments because tenants are more likely to pay on time if they understand there is a consequence for being late.
Experienced landlords have late fee rules. It’s not only common amongst landlords in general, but it’s also the standard for landlords using Rentalutions. 83% of our active leases have a late fee rule.
While it’s common for landlords to have late fees rules, it’s important to note that not all landlords will end up needing to enforce their late fee rule. In fact, only 12% of the landlords in our system have actively charged a late fee. For one, only a percentage of our landlords have late fee rules (83%), and second, of those landlords, not all of them will have a tenant who pays late.
We recommend having late fee rules in place to motivate tenants to pay rent on time. Be clear about the amount, the due date, and exactly when a fee will be assessed. You can also let them know you don’t allow exceptions to this rule. This makes tenants unlikely to pay late because they know you take rent payments seriously.
How Do You Set Your Late Fee Amount?
You can set your late fee as a percentage of your rent price. It’s common for landlords to choose 5% of their monthly rent price. For example, if rent is $1,200 per month, then your late fee would be $60.
You can also charge a flat fee. For instance, our online rental lease has a$50 late fee rule written into it. You can customize the amount if you need to.
Below, you can see a distribution of late fee amounts that landlords in our system are charging. The most common late fee amount is between 25 and 50 dollars.
As you’re setting your late fee amount, keep in mind there may be state or local laws that limit how much you can charge. We recommend searching online to find out if your state or city has laws that limit your late fee amount. For example, you can search, “Chicago late rent fee limit” or “Chicago landlord-tenant ordinance.”
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.
When Can You Charge the Late Fee?
You can charge the late fee as soon as the grace period is over, if there is a grace period. Here are some examples to review when you can charge your late fee:
- If rent is due on the first and there is no grace period, then you can charge your late fee on the second.
- If rent is due on the first and there is a three-day grace period, then you can charge your late fee on the fourth.
- If rent is due on the first and there is a five-day grace period, then you can charge your late fee on the sixth.
It’s important to always enforce your late rent fee as soon as you can to avoid tenants taking advantage of leniency by paying late again the next month.
Some online rent collection tools, like ours at Rentalutions, allow you to enforce late fees consistently by setting up automatic late fees. This eliminates extra work for you and also shows your tenant that the system will automatically charge him or her for paying late. Furthermore, it takes away the problem of having to be the bad guy; you can simply tell your tenants that it’s an automated system.
Grace Periods
A grace period is the legal amount of time the tenant has before you can charge a late fee.
Does Every State Have a Legal Grace Period?
Not every state has a legal grace period law. 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. In fact, that’s the grace period we have written into our online rental lease here at Rentalutions. You can customize the number of days of your grace period in our lease if you need to.
Why Do Some Landlords Choose to Have a Grace Period?
Even if your state does not have a legal grace period, you can choose to write one into your lease if you want to. It’s a good way to provide your tenants a little leeway before you enforce your late fee.
Here are three reasons why landlords choose to have a grace period:
- Landlords understand that money may be in transit. Rather than dealing with a bounced check, most landlords prefer to give tenants a few extra days to pay so tenants can make sure there are sufficient funds in their account first.
- Many tenants manage their money on a paycheck-to-paycheck basis. It can be stressful for them if they’re paid on the first and also have to pay rent on the first. Good landlords choose to help reduce this stress by providing a grace period.
- A grace period is also meant to cover unexpected or infrequent cases where the tenant cannot pay on time. For example, if the tenant is traveling that day, if it’s a holiday, or if the bank is closed, then the tenant may not be able to pay on time. The grace period gives tenants a few extra days. That way, if rent is truly late after the grace period, then there really is no excuse, as you’ve allowed extra days to deal with any unexpected concerns.
What Can You Do When the Grace Period is Over?
There are two things you can choose to do when the grace period is over:
- Charge your late fee
- Pursue an eviction
Your tenant is violating the lease when rent is late, even if it only happens once. Remember, your lease is a written, legally-binding document. If your tenant isn’t complying with the rules in the lease then you have a right to pursue eviction.
Typically, landlords do not pursue an eviction after one missed rent payment, especially if the tenant pays you, and continues paying rent on time. However, if late rent is a common issue, or your tenant isn’t paying you at all, then you may want to evict your tenant. Learn more about how to handle late rent payments.
What is the Best Way to Handle Late Fees and Grace Periods?
We help thousands of landlords collect rent payments online every month. As a result, we’ve observed how real landlords handle late fees. It’s most common in our system for landlords to follow a five-day grace period rule. Below, we’re showing you our late rent fee rule from our online rental lease that thousands of landlords across the country use:
Late Charges
Rent received by Lessor later than the 5th day after the due date, as specified in Paragraph 1 above, will incur a late charge. The late charge shall be equal to 50.00. If Lessee mails rent to Lessor, the late charge will apply if the rent is received later than the 5th day of the month, regardless of the date Lessee mailed such rent payment. If a payment of rent is made by personal check which is later dishonored by the Lessee’s bank, Lessee shall be assessed any bank charges incurred by Lessor as a result of such dishonored check, in addition to the rent and late charge due on the payment of rent. The Lessor, at the Lessor’s sole discretion, may waive the late charges.
How Do You Determine When Rent is Officially Late?
There are different markers you can use to determine if rent is late. For example, if a tenant mails a check to you on the 26th, but you don’t receive it until the 6th, will you consider rent to be late?
This will depend on what marker you are using to judge late rent. In the example above, the tenant initiated the payment on time, but the payment was not received on time.
There are four benchmarks to think about when it comes to collecting rent:
- When the payment is initiated
- This is the day the tenant schedules the payment or the tenant mails the check.
- When the payment is withdrawn
- For online payments, there may be a delay between when the tenant initiates the payment and when the money is actually taken out of his or her account. This delay is typically due to the bank only withdrawing payments on business days.
- When the payment is received
- For online payments, this is when the money is deposited into your account. For checks, this is when you receive the check.
- When the payment is cleared
- This is when the payment is fully deposited and cleared, meaning the money successfully went through and is accessible to you.
We recommend thinking through payments in these terms and deciding which of these markers you’ll use to determine if rent is late.
At Rentalutions, we consider rent to be late if it has not been withdrawn by the due date.
What If Your Tenant Consistently Pays By the 5th of the Month and Says They’re Not Late Because of the Grace Period?
In this case, we recommend explaining to your tenant that rent is due on the first and you expect it to be paid on time. You can also explain that you need the rent payment money to cover rental property costs. For example, most landlords use rent money to cover mortgage bills, etc.
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.
If Rent is Due on a Weekend or Holiday and Your Tenant Doesn’t Pay, Is it Still Considered Late?
Weekends and holidays will affect rent payments if your tenant is mailing a check or paying online.
If your tenant is mailing a check, the only way this would have an effect is if mail isn’t delivered to you by the first, because of the holiday. But tenants should be aware of those delays and mail it early accordingly. Grace periods help solve this problem by providing the tenant a few extra days to pay rent.
Online rent payments are typically only processed on business days. For this reason, payments are sometimes received late as a result of delayed processing over weekends and bank holidays. It’s up to the landlord’s discretion to decide whether or not the situation warrants a late fee.
If a bank holiday or weekend is disrupting when the payment is received or deposited, then you can always set the expectation that rent be paid as soon as possible, given the circumstance. And if it’s not paid by then, then you charge the late fee. We recommend that landlords and tenants discuss the situation when there are special circumstances.
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Encourage On-Time Payments
Creating and enforcing a late rent fee encourages your tenants to pay rent on time. Up next, we’ll discuss more tips on how to encourage on-time rent payments. Continue reading below for the next chapter.
Sign up today to join the thousands of landlords who are saving time managing their rental properties online. You can collect rent, set up automatic late rent fees, and let tenants set up automatic payments so you never have to worry about late rent.
Originally published at Rentalutions.
