Why Landlords Charge A Large Late Fee
I charge a large late fee to all of my tenants. It isn’t because I am evil, it is because the market dictates that I must. I currently own 22 units and here are the reasons I have decided to charge a large late fee.
I Don’t Want To Collect A Late Fee:
The main reason for charging a large late fee is so that I never have to receive a late fee. A large late fee gives tenants a negative incentive for paying rent late. I would be thrilled if over the course of the year I collected $0 in late fees, because it would mean my tenants paid on time. The primary part of this is that I of course have bills associated with the property that I must pay, and I must pay them on time. I have to pay property taxes or the county will seize my property. I have to pay the mortgage or the bank will seize my property. I have to pay for common utilities or the providers will shut them off. I have to pay for insurance or it will get cancelled…and the bank will seize my property. The VAST majority of most rent payments go out the door to these other costs right after the rent is collected.
Aside from the budgetary reason for not wanting rent to be late, it is also a major pain in the ass. I have no desire to have a half dozen conversations about WHY it is late, or when it will be paid, especially when these are half truths at best. The desired result is to open my bank account on the 3rd of the month with all rents deposited and no late fees collected.
I Don’t Want To Let Tenants Get Far Behind:
In my state late fees can only be charged once per month. I can not charge a late fee based on HOW late the rent is, just on the rent being late. If my late fee is $10, I can only charge $10 once, and because the tenant is happy to pay this $10 late fee, I have no real recourse and the tenant can pay at the end of the month if he wishes.
If a tenant pays their rent at the end of the month, will they have rent at the beginning of the month for the next one due? Most likely not. Now they are going to be chronically late. Being chronically late turns the tenant into a constant headache and makes it more likely we will end up in court, which costs a bunch of money for both parties and is unpleasant for both parties. When my late fees were low it was often the same tenants would be late every single month.
Rather than charging a $100 late fee, I would much rather charge $10 per day. This would allow tenants more flexibility and keep the late fee based on HOW late it is. It’s only $100 if they are 10 days late. Now if they are 20 days late, then it’s $200. If they are 5 days late, hey it’s what they wanted, only $50! Sadly, the Michigan legislature does not agree, so this is not an option. To be clear, with this late fee there would still be no difference with filing a notice to pay or quit, they would still get this notice as soon as legally possible.
I Want My Rent To Be A Priority:
In general one would think that people would pay the most important bills first: Food would be #1, followed by rent, then utilities, then car payments, etc. This is not actually how people spend their money. People will often choose to skip on the payment that has the lowest consequence of being late. The car note shops around here will grab that thing a few days after missing a payment. So if my car will get repoed if I don’t pay the note, and my rent will be only $20 more and it takes 2 months to evict me…who do you think I’m paying first. Now compound this across all expenses. I want there to be a large penalty for paying rent late precisely so that it won’t happen. If Michigan courts were like Florida or Indiana and it took under 30 days to evict, then it would be different because the consequence of late payment would be eviction, not a late fee.
I Am Not A Payday Lender:
Having a low late fee turns the landlord into a payday lender, and a poor one at that. If I go to Check’ N Go to borrow $500 for 14 days they will charge $67. If I borrow it for 28 days they will charge $152. It costs money to borrow money.
If my late fee is $20, then the tenant gets to borrow the $500 from me for the entire month for $20. This is only 13% of what the payday advance stores charge. For tenants moving their money around to get the cheapest lending terms, paying their rent late is often the cheapest form of credit. I do not want to be the cheapest form of credit to my tenants.
Obviously most rent is over $500, I used this as an example because Check N Go’s rate sheet only goes up to $600. Comparing it to $1,000 rent makes more sense. If they charged linearly, then it would cost $304 to borrow $1,000 for a month. A $100 late fee is still a third of this and is an effective deterrent. A $25 or $50 late fee is not.
I do allow payments on Apartments.com, and tenants are able to use a credit card on there if they choose to. Most landlords don’t provide this ability.
The Problems With Late Payments Scale:
I keep an active spreadsheet each month of the status of all rents coming in. If everything ran like it should, then I would have 100% of rents in by the 3rd of each month. This has never happened and I have a “high” late fee of $100 on all of my leases. This month I had 4 out of 18 active tenants late. If my late fee was $20, then it is likely ALL of my tenants would pay late.
The cash flow from the tenants who do pay on time cover the expenses in the NOW that are not being covered by the late tenants. This only works if 2/3 to 3/4 of tenants pay on time. If over half of tenants pay late, then there is no money to cover the expenses that must go out. Now I’m trying to cover several mortgages with my personal savings or W2 money. This is not sustainable.
Paying Late Is Disrespectful:
It is a sign of disrespect to pay someone late. I could not imagine paying my HVAC guy late, or my plumber late. It shows that you don’t value the service I am providing, while still expecting me to provide that service. This is especially true if a tenant is chronically late, paying late repeatedly. Think if you were a service provider, say a plumber and you have serviced a client 3 times in a year, and each time they paid late, how likely would you be to come work for them again? Likely not all. This is also why in addition to charging a late fee, I have added a clause to our leases that state being chronically late is a cause for leaser termination, defined as 3 events inside of 12 months.
Demand For Rentals Is High:
If I lived in an area where there were 100 rental houses and 50 of them were vacant with landlords offering incentives to move in like first month of rent free and a free moving truck rental, then I may reconsider. People on both sides of a transaction need to respond to the economic forces in their area. In my local area there are virtually no vacancies for home rentals. I am starting to see some vacancies at a large apartment complex near us, but that is likely due to them recently opening up a rebuilt building after a large fire destroyed it. Any time we list a property there are dozens of applicants and any home listed on the market is off in a few days. There is far more demand than supply and with that being the case, I can replace a tenant who chooses to not pay on time with one who does.
What do you think about Late Fees for rentals? How high is your late fee?
Leave a Reply