While some landlords want to give tenants a grace period — a time during which they'll accept rent without penalty — most experts think it makes better business sense to impose a late payment penalty a day or two later. Some also charge their tenants an additional small fee for each day rent is late.
When Good Tenants Are Late
If you have a long-term tenant who has paid on time consistently, you can make an exception for a late payment — if you want to and if you don't violate fair housing laws by establishing preferential treatment. It's not a good business practice, however. Watch your step!
Landlords who allow a one- or two-week delay do so figuring that anyone can have a temporary financial setback or make errors in a checkbook. A good tenant very likely will notify you before rent is due that it will be a little late. You can work out a catch-up payment schedule and move the due date back a week or two. Put it in writing, however, and it should be signed by both of you.
Keep track of your tenant's catch-up payments. If they meet the updated due date on time, you have nothing to worry about. If not, your only option is to hand out a Pay Rent or Quit notice with specific dates for leaving. Don't procrastinate too long. Start the termination process.
If you decide to give your tenant a grace period, it's best not to go beyond three to five days. Then if your tenant still hasn't paid, add a late-payment penalty to what they owe, and the day after it was due, start the eviction process by giving your tenant a Pay Rent or Quit notice or Unconditional Quit notice.
Determining Late Charges
Your late-payment penalty should be high enough that tenants want to avoid it, but not too high. Some tenants who believe that the late fee is too high might contest it in court. If the court agrees with them, your penalty will be unenforceable.
Some states have laws that prevent landlords from setting extremely high, unreasonable late-payment penalties. In rent-controlled areas there may be regulations on how much you can charge. Other states restrict the late payment penalties to about 4 to 5 percent of each month's rent. By staying in the range of 4 to 6 percent, you shouldn't run into any problems. Daily fees also can be added for each day rent is late. They, too, should not be coercive. Three to five dollars a day would be reasonable.
Include Late Fees in Lease
Your lease should say that you will charge a late-payment penalty at X dollars a day with the total not to exceed $XX.XX. Let your tenant know exactly when the penalty is imposed, whether it's one day or more after rent is late. If you also have a daily fee for each day missed, put that in writing, too. Include a statement that penalties are not negotiable. Highlight the paragraph in the lease and read it to your tenant; then both initial it.
You may question why initials are so important, but when they're next to important items in your lease, like late fees, they serve as proof that the tenant knew beforehand that the fees would be imposed and therefore it might make the tenant less likely to try to take you to court.
If you impose a late-payment penalty on rent, never waive it. It weakens your standing with your tenant and sets a bad precedent. If you waive it one month, your tenant will assume you'll waive it again.
How to Handle Late Payments
The day after rent is due talk to your tenant or give her a reminder letter saying that rent was due on the previous day and that now, in addition to rent, the late fees spelled out in the lease or rental agreement also must be paid.
At the same time, file a five-day (or seven-day) notice to Pay Rent or Quit. It notifies your tenant that she will be evicted if rent is not paid in a specified number of days. (The time allotted may vary from state to state and communities may also have eviction regulations.) Then one full day after the deadline you can start filing papers in court to evict your tenant.
Most states allow landlords to give a tenant a Pay Rent or Quit notice after rent is one day late. A few have rules about how many days a landlord has to wait. Handing out a notice does not invalidate the late-payment penalties that the tenant owes.
If you've given your tenant the notice and, subsequently, are paid the full amount owed, the notice to Pay Rent or Quit is automatically cancelled. Be aware that if your tenant pays only a portion of the amount owed and if you accept that partial payment, this also means the current Pay Rent or Quit notice is cancelled. So if your tenant does not come up with the balance of the money, you have to issue another notice and start the process all over again.
Don't give your tenant too many chances. After rent is late a second time, even if it's six months later, it's better to give a tenant with a lease an Unconditional Quit notice. Tenants on a month-to-month lease should get a thirty-day Notice to Quit. (See Chapter 21 for more details on the eviction process.)
Some communities have rules about evicting tenants for nonpayment of rent. They'll specify when rent is due and when it is to be considered late. Find out what your community's regulations are and periodically check that they haven't been changed by local officials.
If you have the name of your tenant's employer and your tenant's social security number, you can garnish wages, income tax returns, or savings accounts to collect back rent. (See Chapter 20 for more on this.)
Should You Accept Credit Cards?
Credit card payments may make sense for landlords who have several rental properties or a large complex. But you have to pay a fee to the credit card company on the money they send you. The fee might eat into your profit and that's not good if you are right at the break-even point on income and expenses.
But if the credit card payment seems to be the only way you'll collect rent and you need the money to cover bills, accepting a credit card might be worth your while. You'll have to look into it and decide whether it has merit for you.