Should You Charge a Late Fee on Your Single Family Rental Property?

There has always been, and will always be, a debate among single family rental property owners, and landlords in general, as to whether you should charge a fee to tenants who don’t pay their rent on time. If you place a high value on having a friendly rapport with your tenants, you might struggle with assessing this penalty, However, if you look at these situations from a business perspective — as you should to ensure your rental is profitable — then it’s crucial that you have a late fee as an incentive for on-time rent payment.

Key Considerations for Late Fees

If you choose to require a late fee, there are some important issues to keep in mind, including:

● Your late fee must be stated in the lease. If the fact that there is a late fee and its parameters aren’t spelled out clearly in your lease, you cannot charge it. Verbal statements as the tenant signs their lease or requests for an additional amount as they present their late rent check to you can’t be enforced.

● Some states have regulations about late fees. In some cases, late fees and required grace periods are dictated by state law. You should talk with your attorney or do some research on your own to determine if your state has regulations on late fees and if so, what they are.

● Late fees must be “reasonable.” As a general rule of thumb, you will not get backing from the court system if your late fee is especially high or if it begins immediately. A fee is much more enforceable if it is under 10 percent of the rental payment and if it is not applied until at least three days after the due date. Sticking with these guidelines will not only help you get buy-in from the court (if it comes to that), it will also ensure you come across as reasonable to tenants and potential tenants.

● Late fees must be applied consistently and uniformly. Trying to be understanding and help one tenant can earn you good will and a happy tenant, but if you aren’t consistent, that nice gesture could put you on the bad side of a fair housing complaint.

Keeping the Purpose of a Late Fee in Mind

Your late fee should not be thought of as a “money maker” for your single family rental business. Even the most well-intentioned tenants may have a financial setback or get busy and may forget to get a check in the mail on time occasionally. At the same time, their rent is what you depend upon to make your mortgage payment and pay other obligations. Your bank will not be understanding or forgiving if you’re late on a payment because the tenant was late with rent. Choose a reasonable amount and time frame, explain it clearly in your lease, and apply it consistently across all tenants and all situations, and you will find it helps keep the rent payments coming in promptly.