It’s hard enough to plan a budget when investing in real estate, as there are so many different real estate fees to consider. What makes it even harder is that real estate investors have to wait until they receive a loan estimate from their mortgage lender to get an idea of how much closing costs are. That happens three days after a mortgage lender receives your loan application. Is that really the best time for a real estate investor to find out how much closing costs are? Probably not.
Well, a real estate investor doesn’t necessarily have to wait until after he/she has already chosen an investment property and is closing on a house to know how much closing costs are. Most closing costs can be estimated, and a real estate investor can plan for them in advance.
Related: Breaking Down Real Estate Fees: What are the Types of Closing Costs of Investing?
How Much Are Closing Costs?
Why is it somewhat difficult to answer the question “How much are closing costs?” It’s because the overall price of closing costs varies based on a few different factors:
- The state where the investment property is located
- Sometimes, the county where the investment property is located affects closing costs
- The mortgage lender
- The type of mortgage a real estate investor is applying for
- What real estate professionals are used in the process (either by the real estate investor or the mortgage lender)
- Whether a real estate investor successfully negotiates or shops around for certain closing costs
Because of all of these factors, the most common answer you’ll hear to how much are closing costs is that they’ll amount to 2-5% of a mortgage. This is a good answer to give a real estate investor a quick idea of what to expect, no doubt. However, when a real estate investor starts planning a budget for an investment property, that range is a little too wide. For example, if a real estate investor was going after an investment property in Seattle, Washington (one of the top cities for real estate investing for 2018), he/she can expect an average investment property price of $775,903. That puts closing costs in a range of $15,518 to $38,795. Who can plan for those kinds of numbers when closing on a house?
So, let’s get into closing costs and how much a real estate investor can expect to pay for them. The closing costs will be discussed as they appear on a loan estimate from the mortgage lender. Any closing costs not discussed unfortunately vary too much to give a good estimate. But those are so few that real estate investors will be able to plan a budget pretty well from this information on closing costs.
Section A
These are the closing costs that a real estate investor pays so that the mortgage lender will carry out the mortgage process.
- Origination Fees: This real estate fee is paid to the person who essentially got the loan for you.
How much are closing costs? These closing costs can depend on your credit score, but typically they are 1% of the mortgage.
- Mortgage Points: If a real estate investor goes for mortgage points, he/she will be paying for a part of the interest rates when closing on a house.
How much are closing costs? 1% of the mortgage.
Section B
A real estate investor can’t shop around for these closing costs, which cover the legal and administrative aspects of the mortgage process.
- Appraisal Fees: A mortgage lender needs to know that a real estate investor’s choice for investment property is worth the mortgage. A home appraiser is hired to determine this. His/her job is to review the size, characteristics, and state of the investment property. The home appraiser also does real estate market analysis to get a final value for the investment property. All of these services are what you’ll be paying for as closing costs.
How much are closing costs? Home appraisers charge anywhere from $300 to $500.
Related: This Is How Not to Do Real Estate Market Analysis
- Credit Report Fees: Before closing on a house, a mortgage lender has to review a real estate investor’s credit report. The mortgage lender buys the report: some charge the real estate investor, others don’t include it as closing costs.
How much are closing costs? These closing costs are usually less than $30.
- Flood Certification Fees: Never seen this on a loan estimate? That’s because mortgage lenders (and FEMA) only require this when your investment property is located in a flood zone.
How much are closing costs? Closing costs for flood certification are usually $15-$20.
Section C
Real estate investors have the option of shopping around for closing costs in this section. So, if the price of these closing costs is too high, look for companies that offer better prices.
- Home Inspection Fees: Real estate investors should know the importance of a home inspection on an investment property. Mortgage lenders know it is crucial as well when closing on a house. A home inspection will report any repairs needed as well as the overall safety of the home.
How much are closing costs? Closing costs for home inspections range from $100 to $500.
- Postage or Courier Fees: Mortgage lenders have to deal with a lot of paperwork when closing on a house. Sometimes, for speed or security, they use couriers or the post.
How much are closing costs? Real estate investors can pay as much as $60.
- Survey Fees: Certain states require that mortgage lenders have surveys of investment properties done before closing on a house. This verifies the borders of an investment property (walls, fences, etc.) as well as where the gas lines are.
How much are closing costs? A real estate investor can expect to pay anywhere from $100 to $400.
- Attorney Fees: Many mortgage lenders rely on an attorney to oversee the paperwork of the mortgage. The attorney makes sure everything follows the law.
How much are closing costs? This can cost from $500 to $700.
Section E
This section of the closing costs has tax and other government fees a real estate investor has to pay on an investment property.
- Government Recording Fees: A real estate investor needs the sale of the investment property to be publicly recorded, and the local government charges for this.
How much are closing costs? This can vary depending on the location of the investment property, but it’s usually less than $200.
Section H
This section is important to the real estate investor because it includes the owner’s title insurance.
- Owner’s Title Insurance Fees: The title insurance specifies who owns the property, and a mortgage lender checks to see if it is legitimate or has any issues. In case there are problems, owner’s title insurance will protect the real estate investor buying the investment property.
How much are closing costs? This amount varies, but a real estate investor needs to be aware that it can be up to 0.5% of the loan amount.
Knowing how much closing costs are can save a real estate investor from having to scrounge around for cash when closing on a house. While it’s always a good idea to have a budget set aside for the unexpected costs that come with investing in real estate, why not scratch a couple of closing costs off that list?
Once you have an idea of the closing costs for an investment property you have your eye on, plug in that amount into Mashvisor’s investment property calculator to see how it will affect your overall expenses for investing in real estate.
Related: Why an Investment Property Calculator Tells You More than Just Numbers