How Much Can You Charge for a Late Fee

Author: Todd Christiansen | Category: Rent Collection

A recent visitor sent me a message and asked how much they could charge for a late fee.  I realized that I have never actually written about this.

It is pretty common for most landlords to set a flat fee for late rent.  Although the typical amount I see is $50, I have seen as low as $30 and as high as $150.  I use a flat amount.  Then there are some other variations like $35 initially on day 1 and then $5 for every day past that.  While I understand this method, I think it can be confusing and lead to issues.

Although I am not an attorney, I have been told by eviction judges and read the statutes that the late fee is not actually a penalty, but to offset additional costs incurred by the landlord for  the tenant paying the rent late.  Now, that is the technical/legal definition, but I think we will all agree that most landlords and tenants look at the late fee as a penalty.  Regardless, as a landlord, you need to keep the fee reasonable so that if it is ever challenged in a court case, you could justify the amount.

In the state of Minnesota, as of January 1, 2011, a new late fee statute took affect for all leases signed after January 1.  Any leases signed previously are not subject to this new statute.  The new rules are:  “Late fees for failing to pay rent on time are now limited to 8% of the overdue rent payment. The only exception to this is if a federal statute, regulation, or handbook provides for federally subsidized properties to charge late fees that conflict with the 8% limitation.”   Therefore, you can charge a late fee of $8 for every $100 of rent (or $80 on a $1000 rent).  For some of you Minnesota landlords, this may mean that you are  leaving money on the table!

For other states, check with your state housing association or local rental housing deportment to see what you can charge.  If there are no rules, I would keep the amount less than 10% of the total rent.  If you end up in court, it is going to be difficult for you to state why you need a $150 late fee for a $600 rent.  Now, if you can justify it because you have a service that collects rent or something, maybe, but that is an exception.

When you are sending your late rent notices, make sure to specify that now the tenant owes the late fee.  Preferably, reference the lease language around that amount and repeat when rent is supposed to be due to avoid the late fee.  Also add that if they don’t pay immediately, you will start the eviction.

I heard another interesting trick, although I am not certain it is legal, but it was done by a large property management firm, so I have to believe they know what they are doing.  If the tenant is always late on rent, this property manager increases the rent by 5%.  They have this language spelled out in the lease in order to make it legit.

Successfully managing late rent is an important aspect of being a good landlord.  I have seen many landlords fail in this area and their cash flow has suffered as a result.

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