"Investment Property Fee" in closing costs??

Question

I just got a quote for a loan on a triplex. Purchase price is $140k, and the quote lays out each line item that I'll be charged for.

One of the lines says "Investment Property Fee - 2.125% - $2,231.25

I haven't seen this before. Has anyone else? Should I try to negotiate it down (or negotiate it away entirely) or switch to a different lender? Or is this normal?

Thanks in advance!

Sylvia B. · Answer

One of the silliest notions on BP.

If you could charge more rent for a house simply because there is a mortgage on it, that would make sense, but it doesn't work that way.

Two landlords rent identical houses in the same city for $1,000. Their maintenance, insurance, taxes, pm, and other expenses are identical, say $500/month. Landlord A owns his house outright, and puts $500/month in his pocket. Landlord B has a mortgage, for which the payment is $400/month, leaving him $100 to put in his pocket. Now tell me, who is paying that mortgage?

Chris Mason · Answer

I've never seen it presented that way, BUT they are not just pulling it out of thin air. Tell me if you see something familiar in the below, direct from fanniemae.com:

Oh, look, that 2.125 number.

If it is what it is presented as, then you should be getting a better rate than basically anyone else getting a rental property loan. You pay that investment property hit in your rate, or in your discount points, or in a combination of the two, ALWAYS (or the lender would be losing money for doing your loan - that LLPA exceeds typical net profit, it would be like buying shoes for $10, paying your seller a $2 "special shoe" fee, and then selling them for $11... you lost a dollar. Investment property loans are "special shoes," fannie mae dings/fines you for them,  but you can make up for it to break even on that ding with a higher rate or fees).

Most of the time that LLPA is just baked into the rate, which is why we often read that "investment property loans have higher rates." I've done rental properties at below 4% in the last month, but the >2 points was disclosed as points, not as a LLPA or "investment property fee." (Same exact dollar amounts, just a rose by another color)

Here, they're just being transparent about it rather than baking it into rate or discount points. But the feedback in this thread is telling me that consumers do not like this level of transparency.

If you are paying that AND getting the significantly higher investment rate, move on since someone is taking you to the cleaners. I'll assume that is not the case -- usually when someone is silent about the rate, that means they have no complaints about it.

Again, I've never seen a LO/lender elect to disclose it like that. I'll give them kudos for transparency. But that firm or person cannot be the first person ever think about doing it that way, and if no one does it than I can only guess it is for a reason (eg, here you are posting on BP that you dislike the transparency and would prefer the wool over your eyes and a higher rate). The feedback in this thread is telling me that this loan originator/lender/broker/whatever is being too transparent, and that I should always keep it baked into rate or disclose it as discount points. Roger that.... I actually liked the idea (took me 2.125 seconds to figure out what the lender was doing) until I read the comments in the thread.

Chris Mason · Answer

Yup, which is what most people do without realizing it.

What people say is "investment properties have higher rates," what they mean (without realizing it) is "investment property mortgages have way higher fees, which can be offset and swapped out for a higher rate instead if you so desire."

Bob Okenwa · Answer

Always try to negotiate junk fees or threaten to find another lender.

Paul Defngin · Answer

Lenders try to get cute with how they label fees. It’s no wonder our industry creates so much confusion and misunderstanding.

I’ve seen other lenders call it LLPA. This one is the first. Investment property fee?!?  LOL. Irregardless of what they call it; it’s discount points.  The question you want to ask is what is the par rate for an investment property then compare it to this rate with the so called “investment property fee” at the upfront costs you’re being charged. Then look at what the actual monthly savings are and then determine how long it will take for you to break even, and whether it makes sense to pay that much upfront.

Remember that your tenant is paying the mortgage.

Good luck.

Clark Kirkpatrick · Answer

Thanks for the responses, everyone!

@Chris Mason I actually do appreciate this level of transparency... this is why I asked on here instead of just assuming it was some scam. I noticed that my fees were lower in a similar mortgage I got a few months ago, but the interest rate was higher on that one as well. Interesting.

Do I have to pay that as an up-front cost, or can I elect to not pay the discount points and instead accept a higher interest rate?

Thanks!

Chris Mason · Answer

Question I have for CPAs.

Taxpayer/borrower/investor/whatever A buys a rental property. They pay a tad over 2 discount points, it is documented as such.

Person B buys a rental property. They pay a tad over 2% of the loan balance in "investment property fee." Nowhere in the paperwork is there any mention of this fee being to buy down the rate or points or any of that.

On the back end, it is the exact same thing, for the exact same reason, no difference, except in how things are labelled. They end up with the exact same interest rate, and just for kicks these two people are otherwise perfectly identical in all other ways.

Are there scenarios where A and B will have different write-offs at the end of the year? What about if it's a refinance? And let's assume you the CPA (or you the IRS auditor) have not read this thread and just see that person A paid $x in "discount points" and person B paid the exact same $x in "investment property fee."

Guifre Mora · Answer

@Clark Kirkpatrick are there any other origination fees or lender fees? It might be labeled differently.

David K. · Answer

I've never heard of that. Switch lenders.

"Investment Property Fee" in closing costs??

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