Investment Property Closing Costs - Who Foots The Bill?
Updated: May 21, 2019
Building up your real estate portfolio is one of the best ways that you can accumulate long-term wealth. But, buying an investment property can be a complicated process. It's vital that you take the time to consider the costs involved and seek the help of a professional if you're unsure.
One aspect of the real estate transaction, which is often overlooked by inexperienced real estate investors, is the closing costs.
So who pays the closing costs and how much are they? We'll get to that shortly! Let's first take a look at what closing costs actually are.
What Are Closing Costs?
The term "closing costs" covers a multitude of expenses. This can include attorney fees, title fees, taxes, lender costs and more. Some costs, such as recording or transfer taxes charged by your state or local government, are non-negotiable.
Other costs, such as your loan origination fee, can be negotiated. It's also possible to negotiate with your lender (or the seller) to cover part of your closing costs to reduce your expenses further.
Closing costs are typically between 2% and 4% of the agreed sales price, but this can differ significantly dependent on the state and lender.
It is also important to note that lenders will often require buyers to have additional escrow accounts. These escrow accounts are administered by the lender and typically go toward property taxes and home insurance. A lot of lenders require a years property insurance upfront at closing, as this helps to protect the lenders collateral.
Although these costs are expected to be settled at closing, they are not actually closing costs. They are what is known as 'prepaids' and will appear on your closing disclosure in section 'F' as such.
Who Pays The Closing Costs When Purchasing An Investment Property?
There is no cut and dry answer to this question. As stated above, closing costs can vary, but some of them may be negotiable. There are, however, some standard closing fees you should expect when purchasing an investment property.
As a buyer you should expect to pay the following:
A Loan Origination Fee (Unless You're Paying In Cash!)
A loan origination fee is a fee charged by your lender for processing your loan application. A loan origination fee is an upfront charge and is typically quoted as a percentage of the loan total. You can expect to pay up to 1% on most mortgage loans, including investment properties.
An Appraisal Fee
An appraisal fee is a professional opinion and estimate of the market value of a home. This is required by your lender to ensure that the house you have agreed to purchase is not worth less than you're borrowing. This not only helps to reduce your lender's risk, but it can also protect you from paying above market value for your home.
A Title Search Fee
A title search fee is a fee charged for searching the public records of the property you are planning to purchase. This is important because it highlights any defects on the title, such as all liens, judgments, and deeds. It can also uncover other documents such as easements that have been filed and recorded on the property.
As well as the closing costs listed above, you should also expect to pay any prepaid interest, property taxes, and recording fees, among others.
How Do You Know What To Expect?
Don't worry; you won't be blindsided with these fees at the closing table. According to federal law, your lender should provide you with a closing statement (including all associated costs) at least three days before closing.
These figures should be mostly similar to your loan estimate, and shouldn't contain any significant surprises. If you aren't sure how to read your closing statement, the Consumer Finance Protection Bureau has a wonderful tool to help you double-check that all figures are correct on your Closing Disclosure.
The Bottom Line
If you're thinking about purchasing an investment property, there are more costs to consider than just the homes sale price. Managing properties can be time-consuming, and requires expertise. Having an experienced real estate investment business helping you to make informed decisions can be invaluable.
If you're planning on growing your real estate investment portfolio in 2019, head over to our podcast for some great tips, or better yet - give us a call! We would love to help you build a reliable and stable income for now and for your future.
All information and materials in this article are for educational purposes only. Opinions expressed in this article are based on information considered reliable, but The Daily Money Show cannot guarantee the accuracy of the information nor should it be relied upon. The information discussed in this article should not be used as a recommendation to buy or sell securities nor should it be taken as investment advice. The Daily Money Show is not a Registered Investment Advisor or Broker Dealer. The Daily Money Show is not an accounting firm and does not give tax advice regarding any security or real estate transaction. You may want to consult with an accountant, attorney, real estate agent or financial advisor before proceeding with any transaction regarding securities or real estate.