When acquiring a property, probably the first expense you'll incur is Real Estate due diligence. You will want to pay for third-party inspection reports from inspector to tell you about the physical mechanics of the property. You'll want to travel to the property and see what the properties in the neighborhood are like. When you open up escrow on a property, you are going to have an earnest money deposit that sits at a title company, which is your pledge that you will take this purchase contract seriously. The earnest money deposit is refundable if you back out within the appropriate time frame in the contract or it's applicable to the purchase price if you go all the way to closing. The closing expenses are going to be variable depending on which area of the country you decide to invest in. It is very typical that there's an escrow fee that the title company charges for coordinating the escrow. In some States it's a closing attorney and in some it's a title company. The escrow fee is usually about $600. Half is usually paid by the buyer and another half is usually paid by the seller. That is somewhat negotiable, but typically it's half and half. Another expense is a title insurance. Who pays it, whether buyer or seller, will usually vary. Very typically, the seller is going to pay for the title policy to the property to insure that they really did own the property, and the buyer is going to pay the lender's policy. If there's a lander involved then the person borrowing the money pays for the lender's policy. If you are borrowing money, you will also have loan fees. The lender might have a loan origination fee which is somewhere between zero percent and 1-1.5% of the amount borrowed. They also have document prep fees which are typically somewhere between $300 and $1,000 depending on your lender. Also, you will have transfer taxes. Some transfer taxes may be State specific, county specific or city specific, so you really have to get down to where the properties are that you are buying. Transfer taxes payment can be very nominal, just a couple hundred dollars, or it could be large, up to one percent of the the purchase price. Also, you will have prepaid items. Prepaid items are recurring expenses on the property that you pay in advance. One of the recurring prepaid expenses is prepaid interest. Usually the buyer prepays interest till the end of the month they are closing in. There are also going to be prepaid property taxes. Sometimes they are paid all the way to the end of the year and sometimes just six months of property taxes. Also, you will prepay your insurance policy, which you will usually pay from six months to a year in advance. There will be some minor recording fees when you record your documents. It's a very county specific expense and it's somewhere around a hundred to two hundred dollars for actually recording the deed. So, those are the closing costs when you are acquiring a property. Sometimes you can ask the seller for a credit for your closing costs. If you are buying an owner occupied property, typically the lender will allow you to have up to three percent of the purchase price as a credit for closing costs. If you buy an investment property, typically two percent is the maximum that your lender will allow the seller to give the buyer as a credit for closing costs. That's a negotiable item. You can negotiate with a seller who pays which closing costs.
When you actually own a property, some of the operating expenses are your taxes. Property taxes vary immensely and every county has their own way of evaluating property taxes. Property taxes could range anywhere from just under one percent of the purchase price per year to up to three percent of the purchase price per year. So you really have to understand where your property is to determine what the property taxes are for that property. Another big expense is insurance, and the insurance amount will also vary depending on the location of the property. Generally, if you are in a high risk hurricane zone, you will have to pay more premium. If you are in a flood zone, you will pay a lot of money for insurance. For example, on a one hundred thousand dollar property, the insurance might be as low as five hundred and maybe as high as twelve hundred dollars depending on where the property is located. It will also depend on your individual credit score. Your credit score will impact your cost of insurance. The other big expense that you are looking at is property management. Property management is usually between six and ten percent of the gross rent collected plus up to fifty to a hundred percent of the first month's rent as a tenant leasing fee. The other expense you will be encountering is property maintenance. The maintenance costs will vary depending on if it's a new property or an old property. I generally like to use somewhere between thirty dollars a month on a very low end and up to a hundred or two hundred dollars a month for property expenses. It really depends on how big the property is, whether it is in a good shape when you bought it and how old it is. The other expense to really consider is any type of homeowner association dues and it really depends on the local market who pays which utilities, but almost always the tenant pays everything. If the landlord does have an expense, it'll be sewer, garbage and sometimes water. The tenant almost always pay their own electricity.
