Everything You Need to Know About Late Fees
Every rental business needs a late fee system. Landlords need a documented and enforceable way to penalize tenants who don’t pay their rent on time.
With a short line in your lease, you can establish your late fee system and gain more protection against irresponsible tenants.
The amount and nature of the late fee structure are up to you. A substantial fee paired with little to no tolerance for missteps leaves tenants bitter and hesitant to renew their lease. On the other hand, a lenient fee with a long grace period and careless or spotty enforcement lead to chaos and mismanagement. It’s up to you to find the right balance between these two extremes.
Here are a few other common questions about late fees and some wise ways to approach them.
Do Late Fees Work?
You might think that if a tenant is forgetful or irresponsible, they aren’t going to pay on time no matter what you do. However, this isn’t true for most tenants. In fact, the threat of a late fee is often a tenant’s primary motivation to get on the rent bill.
A late fee is less severe than an eviction notice but sterner than a friendly reminder. It’s the perfect combination of threat and kindly notification.
There’s little doubt that late fees work and are beneficial for your business. Late fees compensate you for the trouble and risk of late payments and are successful at preventing most tenants from forming bad habits.
How Much Should Late Fees Charge?
The amount of a late fee depends on you. Commonly, late fees are $50 to $100. However, some landlords charge less than $20 while others charge more than $200.
There are several ways to structure your fees. Maybe you set a flat rate and charge every tenant $50 each month their rent is late. Or maybe you’d prefer a ratio approach, wherein late tenants are charged a percentage of either their total rent or just the outstanding amount.
In either case, your property management software tool can help you establish and accommodate your late fee structure. Platforms like Innago offer an especially flexible and intuitive late fee system. On Innago, landlords can customize late fee charges and warnings, override defaults, and waive or reduce late fees when necessary.
Should You Have a Grace Period?
In most states, it’s up to you to decide whether you want to give tenants a grace period. There’s no federal law that requires grace periods, but some states such as New Jersey, Tennessee, Maine, and Massachusetts do have laws requiring them. These laws acknowledge that online payments might take several days to transfer.
A common grace period is five days. Even if not required by law, there are several reasons landlords write them into leases. For one, many tenants get paid on the first of every month. A grace period provides a small cushion in case a tenant’s check is delayed.
Grace periods also decrease the risk of bounced payments. Rather than risk the hassle and inconvenience of a bounced check, a few days of leeway gives tenants enough time to deposit paychecks and transfer the payment.
As long as your state doesn’t require them, grace periods are up to you. However, remember that adding a grace period is appreciated by tenants and increases tenant satisfaction.
How Should You Enforce Late Fees?
Enforcing late fees is the easiest part. On property management software, you can set up late fees right on your rent collection portal.
Property management software also allows you to fully automate late fees. If a tenant hasn’t submitted payment by the due date, your software will automatically push the late fee to their account. You can also set further restrictions so that tenants can’t make future payments until they pay the previous month’s rent plus the incurred late fee in full.
Your grace period can also be configured in the software. You can even configure it to send tenants late fee warnings the day after rent is due but not actually charge them until the proper length grace period has passed.
With property management software, you no longer need to be the “bad guy” when it comes to late fees. Instead, your software acts as a neutral third party. Late fees appear automatic and unavoidable to tenants, but you always retain control of enforcing them.
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Prioritize Accountability with Software Solutions
Integrating and enforcing late fees is painless with property management software. With the right tools, you can fully automate your late fee infrastructure. You won’t regret this simple solution for keeping tenants accountable.