Return on investment (ROI) is the primary goal of most investors when investing in rental properties. Only two things can happen: making a positive ROI or not. Of course, you’ll do everything you can to prevent the latter from happening.
When buying a rental property, investors focus more on the sale price. There’s no mistake in this perspective, but you shouldn’t disregard the closing costs. You might pay significant money on closing costs if you don’t take action to reduce them.
Follow this guide on how to lower closing costs when buying a rental property.
What are Closing Costs?
Closing costs refer to the fees and expenses paid to close a real estate transaction when the property title is transferred to the buyer. The inspection fees, mortgage fees, attorney fees, property taxes, escrow, property insurance, title service expenses, and document stamps are all part of the closing costs.
While closing costs can be negotiated between the buyer and seller, the buyer typically covers a huge chunk of the closing costs, and the seller is usually the one who pays the brokerage commission.
Typically, the buyer should expect to pay around three to five percent of the loan amount for the closing expenses. Thus, if you purchase a $250,000 investment property, the amount you have to pay could range from $7,500 to $12,500.
How to Lower Closing Costs
Keep in mind that it’s possible to negotiate the closing costs in a real estate transaction. How to reduce your closing costs has something to do with your knowledge about these expenses and how they’re calculated. It’s also crucial to know other alternatives that can lower your closing costs.
Reach Out to Multiple Lenders
It’s best to reach out to different mortgage lenders and see whether you can get an affordable loan offer. While interest rates may be the same across lenders, their mortgage fees might differ from each other. You can save hundreds or thousands of dollars because of this difference in mortgage fees.
Submit your mortgage application with various lenders within the same day. Try out applying with online lenders, banks, and credit unions to determine which loan offer suits your financial goal.
Moreover, don’t forget that everything can be negotiated. Mortgage lenders also compete for customers. So, there’s a possibility that one will agree to lower their fees just to have you.
Consider Borrowing Money from Your Own Bank
Having a long, harmonious relationship with your bank can help you get loyalty rewards, rebates, or discounts. Some banking institutions even lower their interest rates or waive their fees for their existing clients. Thus, you should visit your bank or credit union if you need to get a home loan.
Ask the Seller to Contribute to Pay the Closing Costs
During the initial negotiations, ask the seller to contribute to the closing costs. Sellers can agree to your request to facilitate the sale. However, never negotiate a week before the closing date because the seller will probably turn you down.
If the seller doesn’t say yes to chip in for the closing costs, you can negotiate with him or her to lower the purchase price. Sellers want to have a successful sale. Just know how to hit the soft spot of the seller.
Work with Your CPA
Your accountant knows which closing expenses can be deducted immediately and which will likely be depreciated over time. That's why you need to hire a CPA who has expertise and experience in real estate transactions.
For instance, title insurance, property survey, attorney fees, recording fees, and brokerage commissions can be deducted. Property taxes and mortgage interests have the possibility to depreciate over the period when you’re paying them.
Close Toward the End of the Month
Experts say it’s smart to push the closing date toward the end of the month. Remember that you’re paying interest every day once you become the owner of the rental property. Closing on the 29th day of the month can help you save money since you will only be paying interest for a day or two.
However, other real estate experts argue that it’s better to close at the beginning of the month since you’ll have two months free of mortgage payment. Well, at the end of the day, it’s up to you which one is beneficial.
The closing costs on an investment property you want to buy can be heavy on your budget. The good thing is there are ways to lower your closing expenses. For example, you can shop around multiple lenders and look for an affordable loan offer. There are also points for negotiation over the various fees associated with the closing of the property. Follow the strategies in this blog article to save money on closing costs.