Common Upfront Costs New Real Estate Investors Overlook When Purchasing A Property (And How To Mitigate Them)

As a new real estate investor, there are a number of different ways to go about purchasing an investment property. Some of the more common methods include: going the traditional route by securing a mortgage loan from a bank or mortgage company, choosing an asset-based Hard Money Loan that looks at the quality of the deal, or even purchasing a property with cash. When you think about purchasing a property, the thought that comes to mind first — in the case where you take out a loan — is usually the down payment. And if you think about purchasing a property in cash, it’s more than likely that you just thinking about the price of the property and not the associated fees that play a part in the transaction. Below are the costs to make sure you are aware of when purchasing an investment property by some of the more common methods, and the tactics to lower these upfront costs 

Traditional Mortgage Loans

One of the methods for going about your purchase is by securing a mortgage loan. You can take on an actual conventional investment loan, or maybe you would like to purchase a small multi-family property and turn the property into a combined primary occupancy and investment property. Either way, the following are the costs to take note of:

  • Origination fee – what the lender charges to process the loan application
  • Underwriting fee – a charge by the lender to prepare your mortgage
  • Appraisal – Cost for having an official appraiser estimate the market value of your home
  • Credit Report charge – cost for the document that shows your credit worthiness
  • Title Fees – include the title search fee, costs for the lender’s title insurance policy and costs associated with issuing title insurance
  • Recording Fee – charge for the filing of your deed and mortgage with the county
  • Transfer Tax – the cost for the passing of title between parties 
  • Insurance – the cost to insure your property. The first year is generally paid upfront 

In addition to this, the first three months of the property taxes, and town, city and school taxes may be paid upfront and held by a third party. The same goes for the following year’s insurance. Ultimately, when budgeting, factor in that there may be another 5-10% outside of the down payment that will need to be accounted for

To ease the burden of these costs, there are grants and programs available, and the possibility of receiving seller’s assistance. In Philadelphia the First Front Door Program will literally give you $3 for every $1 that you spend up to $5,000 if you are a first time home buyer. These funds can go towards your down payment or closing costs. In addition to the First Front Door, you have the Philly First Home Program, which if eligible, you can receive a grant for 6% of the purchase price or $10,000, whichever is lower. And then you have seller’s assistance. For conventional loans you can be given up to 3% of the purchase price, while for the FHA loan can be given up to 6%. In addition to these possibilities, various lenders have their individual grants that they may offer. The associated costs to acquire your loan can seem overwhelming, but there are ways to keep them down

Hard Money Loans

Many investors including new real estate investors choose to use Hard Money Loans for their properties. These Hard Money Loans that come from individuals or private companies are often based on the property itself. The standard rule is that the cost of the property you are purchasing and the amount to renovate the property combined should be around 65% of the After Repair Value of the property. Typically, you are using a Hard Money Loan for distressed homes in order to force the appreciation of them to ultimately resell the property, or refinance and rent it out. You learn early on that with a Hard Money Loan anywhere from 85%-100% of the costs for the project can be covered by the lender, however there are also other associated costs to expect to pay. These costs will vary from lender to lender, but you can expect a combination of the following: 

  • Construction draw fees – the charge for money to be taken from the construction budget to pay the contractors and material suppliers
  • Lender origination fee – the cost to process the loan application
  • Lender’s attorney fee – the charges for the attorney who represents the lender
  • Appraisal and inspection fee – Cost for having an official appraiser estimate the market value of the subject property and a construction professional evaluate construction costs
  • Transfer tax – the cost for the transfer of real estate between parties 
  • Title fees – include the title search fee, costs for the lender’s title insurance policy and costs associated with issuing title insurance

It’s important to take into consideration that over the life of the loan there will be an interest percentage you’re required to pay (the interest rates for hard money loans are known to be high — hard money loans are meant to be short-term). There are also other loans that exist which operate similar to Hard Money Loans, whereby the interest rates may be lower but the qualifying terms more stringent. Pick your potion. Regardless of which one you choose, however, the upside is that the deal is evaluated based on the asset itself more so than your financial profile, the upfront costs may not be as high as a traditional loan, and you can close more quickly than with a traditional loan

Cash Purchases

There is always the choice to make your purchases with straight crash. Many investors are the most comfortable with this route because it doesn’t involve debt. Your cash may be able to go a lot further by combining it with other forms of financing, however with cash purchases you can close more quickly than anyone and you immediately own the property outright. Even with cash purchases, there are a few other costs to take note of outside of the price of the property itself:

  • Insurance – the cost to insure your property
  • Transfer Tax – the cost for the transfer of real estate between parties 
  • Title Fees – include the title search fee and costs associated with issuing title insurance
  • Recording Fee – charges for the filing of your deed and mortgage with the county

Real Estate investors who decide to purchase using cash will also need to think about the inspection and appraisal costs if they decide to hire for those services. The additional costs for your typical cash buyer can run that buyer up another 5-7%

Well there you have it. As you can see, there are a number of costs to think about outside of your down payment when purchasing a home, and even some additional costs that come with purchasing a home in cash. Using grants and other programs, however, these extra costs can be decreased quite a bit and if you’re creative or find a great deal you may not have to come out of pocket with all of that much. Your costs will depend on the city you’re in, the price of the home, your method of financing, and the type of assistance you qualify for. If you would like to talk about your specific case or approach you’re taking to accomplish your Real Estate goals, reach out to me at AB@mosaicbrokerage.com, or shoot me a message on IG @sirakinb 

Also, if you made it to this point in the article, please leave a comment below with your thoughts or questions!


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