Why Not Sticking to Your Late Fees is Hurting Your Landlording Business

1A grace period is additional time given to the tenant to pay their rent before they will be charged a late fee or given eviction notice. For example, rent may be due on the 1st of every month, but the tenant has until, say, the 5th to make their payment. Grace periods can be anywhere between 2–“X” number of days. They are actually a requirement in some states, and in others they are not, but we have found that they are useful for a couple reasons:

  1. Many tenants are on a fixed, government income and don’t get paid until the 3rd of the month, and
  2. It shows the tenant that the landlord gives them flexibility in when they make their payment. Nice guy.

However, the flexibility is on the landlord’s terms. We always let our tenants know that rent is still due on the 1st, so technically if they take advantage of the grace period, they are considered late, though we won’t initiate eviction notice and penalties until the 6th of the month.

Whatever you do, make sure all your tenants are on the same schedule. Don’t change due dates and grace periods to suit the tenant when they move in (because they will ask). It may work out fine for the first few tenants, but as you continue to acquire more rentals, you will want everyone to be paying at the same time so you can keep track of who has paid and who has not.

Our grace period goes through the 5th of the month. If rent has not been paid by the 5th, they will get a late fee, currently $50. Additionally, we charge them an extra $10 per day after that until they have paid their rent in full. For example, on the 6th they receive a one-time $50 late fee, on the 7th an additional $10 is added to the $50, on the 8th an additional $10 is added to the $60, and so forth. Every day gets a little more expensive.

Stick to Your Late Fees—No Matter What

When your tenant pays late, it is vital that you follow through with the late fees. This bears repeating: It is vital that you follow through with the late fees. Don’t waiver, as the late fee’s sole purpose is to motivate your tenant to pay as quickly as possible. Take away that motivation, and good luck getting your rent—that is, until the tenant gets around to paying it. If there is one simple piece of advice in this entire book that you should listen to it is this: always follow through with late fees.

Let’s be real: The number one reason most tenants are late on their rent is not because of an emergency or some unforeseen necessary expense, but because of priorities. They are late because paying rent on time has not been made a priority. The best way to make timely payments a priority is by following through on the late fees. Tenants, and America in general, usually live above their means. In other words, there’s always more month than money. Therefore, every month requires sacrifice and prioritization of bills: food, clothing, rent, cable, a new TV, a game console, tattoos, medical bills, Starbucks—these are all expenses your tenant is internally trying to prioritize.

Naturally, the bills with the highest penalty for negligence are usually prioritized the highest. Those will be the bills that get paid first. So the question is, is the consequence for paying rent late greater than or less than the consequence of having the cable turned off or having to go without their daily coffee or smoke fix? Despite what tenants think, late fees are not about lining the landlord’s pockets. Late fees are designed to give rent a place of high priority because of the consequence. You may feel bad or think you’re being cruel by charging a late fee, but by following through, you are helping your tenant prioritize the most important bill they have: their housing.

This last month we had a tenant call us a couple days before her grace period was up to let us know that she had some unexpected expenses come up, wouldn’t have the full rent in time, and wanted to know if she could pay the rest at the end of the month. We told her we needed to follow her lease, and the lease says her full rent payment is due the 1st and late after the 5th.

Any rent not paid would trigger both late fees and eviction notice. Guess what? On the 5th her priorities suddenly changed, and she paid her entire rent payment. From past experience, this particular tenant knew that we take non-timely rent payments seriously.

The One Alternative

We do offer our tenants one alternative to the late fee penalty, but it requires their planning ahead and communication. We call it the rent extension, and it is not something we advertise to our tenants. However, if a tenant calls us before the 1st to let us know they will be late on their rent, we will offer them a rent extension up to the 10th for a $20 penalty. If they don’t follow through on the 10th, they are hit with the full late fees and eviction notice. The reason for the rent extension is to reward responsible behavior:

  1. They planned ahead to deal with the problem,
  2. They communicated, and
  3. They initiated the communication, rather than waiting for us to call them once the rent was already late.

Source: biggerpockets.com