How to Set Late Fees for Rent

You've got a rental property or perhaps an apartment building and you're ready to get some tenants in there so you can make some profits. As you're setting up your lease, you realize that you don't have any penalties in place for tenants who don't pay their rent on time. The most common penalty that is included in a lease for late rent is a fee that compensates a landlord or property manager's time and effort to collect the funds that are over due. How much can be charged to a tenant as a late fee? Here's how to set late fees for rent so that your tenants will be encouraged to pay on time as much as possible.


Some States Have Set Limits That Must Be Followed

Your local landlord-tenant law is likely going to dictate how much can be charged for a late fee. Many communities have laws in place that allow a landlord to charge a flat rate as a late fee, no matter what the rent might be. This flat late fee can be any amount, but a figure between $50-$150 is usually normal. There may be exceptions for high rental properties that are priced above $1,500 per month, so dig deep into local laws. The flat fee that is allowed by landlord-tenant law may be expressed as a percentage of the rent instead of an actual fee as well. A common percentage for a late fee would be 10%. In other words, if you're charging $1,000 per month for rent, then you'll be able to charge a late fee of $100. There may be a maximum cap, however, despite the flat percentage that is allowed. If the cap is $200, for example, you wouldn't be able to charge a full 10% late fee on a property that has a rent of $2,500 per month.


Late Fees Are Not a Grace Period Extension

Sometimes the addition of a late fee is viewed as an extension of a grace period, but this is not the case. You can charge late fees the instant that your lease with a tenant dictates that they are overdue with their rental payments. If you have a grace period that extends to the 5th of the month, then the late fee can be charged on the 6th. If rent is due on the 1st of the month and you don't have a grace period, then the late fee can be charged on the 2nd of the month. This is important to know because it affects when you can file a notice to pay or quit with your tenant. You cannot file this notice if the tenant is still inside of their grace period. You can, however, file this notice the instant that the lease defines their payment as late. Even if you wind up having to file for an eviction, the late fees will become part of the total amount that is due. For rent to be considered current in the eyes of the law, the late fees must be paid in addition to the rent. Many jurisdictions allow landlords or property managers to apply payments to fees first and rent second, so if there is a $100 late fee on $1,000 of rent and a tenant pays the $1,000 only, they'd still technically be overdue in rent by $100 because of this application. Knowing how to set and then enforce a reasonable late fee helps you manage your finances while encouraging tenants to pay on time. Consider this information as a resource and you'll be able to get the right late fee associated with your rental property.

Posted on Jan 29, 2015


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