Closing cost analysis

[Anna Gordon]

Hello,

I am working on purchasing my first short term rental but haven’t found a good reference for analyzing the closing fees and understanding the funds needed for closing. I may be over analyzing it but I want to make sure I’m set up for success prior to committing. Thank you for all your guidance!

[Marshall Leipprandt]

@Anna Gordon I believe that at some point, you do have to just go for it. If real estate is what you'd like to pursue, you will have to pull the trigger sometime. However, I would not advise just going for it unless you feel that you are in the financial position to do so. For example, will you have enough left at the end of the month after incurring the cost of this new PITI (Principal, Interest, Taxes, & Insurance) payment along with all of the management fees and expenses that go into managing a STR? What about if the property didn't get any bookings for a couple months? Could you weather that storm?

It's all about balancing risk. STRs have a much higher upside but also the corresponding risk to go with it. I think that if you can negotiate a decent deal in the current market, have the sellers pay for some or all of your closing costs/fees, and maybe even negotiate some repairs that will be found in inspection, you will be on a solid path. 

In the meantime, start analyzing deals to get practice and to get the feel of what a good deal requires in your market. Even though you haven'y made any offers yet, you should start your preparation now. Here are some other things to consider: Will you be self-managing or hiring a property manager? Do local laws allow you to do stays under 30 days? Are you in an HOA that prohibits STRs or regulates them closely? How will you furnish the rental and will you be doing all of that yourself?

I don't necessarily think you should be doing anything differently, but here is what I would suggest:

1) Educate yourself, practice analyzing deals, learn your market, understand your goals and your personal financial situation / risk profile.

2) Get a pre-approval with a lender that you trust using a loan product that fits your goals. Have them walk you through estimated fees/expenses to be expected at closing so that you can work this into your analysis

3) Hire an STR experienced Realtor, tell them your goals and needs, and have them help you look in the markets that you've identified and look for deals that fit your goals and parameters.

4) Make offers at price points that fit your goals (CoC ROI, etc.).

5) Find a property that checks all of your boxes and pull the trigger.