Closing costs insane...is it real estate a good investment?

Question

Just spoke with a loan officer in the Florida panhandle. She explained there would be around $18,000 total in closing costs to purchase a 250k-300k home...approx $11,000 standard closing costs plus $7,900 in "discount points" (I don't know how discount points get added to an amount instead of subtracted...so if someone can explain that, I'd appreciate it)

My general question is; for a rental investment property (ready to rent, not a flip), is now a decent time to buy? I'm fairly ignorant on home buying (only bought 2 houses in my life) but putting down $18,000 for closing costs seems ridiculous to me. I'd rather put my money into a CD for growth then reattack the rental property in a year or two. Whats the opinion on that from those smarter than I?

Thanks for the feedback!

James Wise · Answer

Discount points is something you pay to buy a lower rate. They should be optional.

Tyler Kellogg · Answer

Wow, lots of of good info on this thread. I like the idea of sellers paying closing costs...I do want to invest in real restate, and I think that may be a good way to prevent cash from coming out of my pocket. I appreciate the info on discount points as well...doesn't seem worth it to buy down the interest rate when I can refinance if the market comes back down.

I truly appreciate the help toward getting my real estate portfolio where it should be!

K S. · Answer

Traditional buy and hold of a turnkey property is so bad that you're better off investing in the S&P 500. I just made a post showing that even in the best times over the last 16 years that 100k invested in a single family home sold today would net you less than 100k invested in the S&P 500 cashed out today. My figures came out to 270k cash in pocket over 16 years and 500k cash in pocket had I invested that 100k into the S&P 500 accounting for all selling costs, depreciation recapture, federal taxes, capital gain taxes, PM fees, maintenance etc.

If your plan is not to buy distressed properties and renovate them for section 8 tenants or whatever hustle you have to do, then I would just invest in my companies 401k matching program andt he S&P 500 and retire in 20 years. A few single family homes will not only put you into debt for the next 30 years but will kill your potential net worth from my experience. Just use a mortgage calculator to see you'll need a 50% down payment to break even. This isn't 2012 anymore. Any issues, HVAC, roof tenant issues or vacancies will crush you since you're not cashflowing at 8%. Single family homes are terrible if you're not living in them like a normal family. Multi's might be better or you can take advantage of the new ADU laws and build but seems like 0 people on bp talks about that. They just want to buy a house and "cashflow" and others will brag about their 2012 portfolio to somehow discredit these points lol.

Raymond J. Rodrigues · Answer

@Tyler Kellogg, good day to you. Those discount points can vary from lender to lender. It is also dependent on your credit score, occupancy type, percentage of down payment that you're looking to put, etc.

I recommend getting a second opinion to ensure that you're getting a good deal. Happy to answer any questions that you may have. Feel free to reach out.

Dustin Sanders · Answer

@Tyler Kellogg  just replying to this because @James Wise is correct. I had a lender on one of my properties that tried pulling a fast one on me and adding the discount points for an additional few thousands. I had no idea until the closing disclosures got sent over to me the week of closing. I told them to remove and the interest rate went up of course though this allowed for way less at the closing table and much quicker returns in terms of Cash on Cash Return!

hopefully this helps!

David M. · Answer

@Tyler Kellogg

So, aside from explaining discount points...

What are the "closing costs?"  You need to separate out the "escrows / prepaids" and your actual "costs."  The former include such costs as the homeowner's insurance (customarily paid at closing) and the funds used to setup the escrow for the mortgage, property tax, and insurance payments.  Sure its a cost to owning/buying the property, but its still your money until the bills come due.

Actual costs, e.g. one time costs, are such as recording fees, Title search and insurance, costs associated with the actual closing, lender fees, etc.

If you break it out, which the lender is generally federally required to give you a Good Faith Estimate, you'll be able to see this.  The actual costs is what you should be looking at as the "cost" to make the purchase.  I would agree that the prepaids are taking money out of your pocket, but they are for recurring costs and wehn you sell one day, whatever remaining balance of that rolling account comes back to you --- its your money.

As always, the devil is in the details.  Be happy to chat about this if you like.  Good luck.

Ricardo Hidalgo · Answer

I live and own on the panhandle currently buying in the current market. I would ask the seller to pay for your title, closing cost, escrows and prorations up to $11,000. (yes I've done this with buyers recently). Then try to get all repairs done to limit maintenance cost. Instead of going for discount points which will bring down your monthly payment for 50-90 dollars depending on rate, try to get a better entry price when you buy, improve it and refi when rates go down. That way you just improved a property and had all or majority of upfront cost paid by seller. Most of my Va buyers have been getting over 90% of their closing cost covered.

John Karg · Answer

Hi Tyler,

As others have mentioned, discount points are usually optional but can sometimes be required on certain loans. A good lender will suggest creative ways to lower your closing costs, such as getting a credit from the seller or financing underwriting fees. Feel free to reach out if you have questions!

Nicholas L. · Answer

@Tyler Kellogg

yes, closing costs are often higher than folks think, and in my opinion they represent a significant cost that gets overlooked on BP.  In Pittsburgh for example there is a city transfer tax on top of the state transfer tax - and if I as a buyer offer to pay all taxes to make a stronger offer, that's 5% of the purchase price just in taxes alone, before all of the other closing costs.  bottom line - real estate is expensive to transact.

(points will vary based on your financing, and state and city costs will vary of course - if you don't use a loan then there aren't any loan origination fees or points.)

so - is RE still a good investment?  yes. but - if you've listened to any of the recent BP podcasts or webinars - it's difficult to cash flow right now, and David Greene and others have started to put a lot more emphasis on building equity and investing long term.  it's basically impossible right now to buy something off the MLS, rent it out, and net several hundred dollars a month.  interest rates are too high and demand is too strong.

Jaron Walling · Answer

Mortgage points are fees you pay the lender to reduce the interest rate on the loan. Paying for discount points is often called “buying down the rate” and is totally optional. Given you're not under contract those are just estimates and you can make adjustments. It depends on your goals and what the lender offers.

Throwing $18k into a CD is fine but you're posting in probably the biggest online REI forum?... I'd rather produce cash-flow, pay no tax on it, and build equity via principle paydown and appreciation. Right now is a great time to buy especially during the winter. I've purchased few properties in the past during the slow months and paid way under asking. If someone is listed right now there motivated to sell. Find the motivation and buy a deal or don't buy anything. Waiting a year or two does nothing for you.

Closing costs insane...is it real estate a good investment?

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