Rental Property Investor · Summit, NJ · Member since 2015 · 18 posts · 8 votes
When using the BRRRR calculator, is it best practice to include prepaid homeowners insurance and prepaid property taxes paid at closing in the 'Purchase Closing Cost' section?
For example, when using conventional financing to purchase a property several costs and fees are required at closing such as origination fees, attorney fees, appraisal, inspection, recording fee, title, etc. However, there are also other payments needed upfront such as prepaid homeowners insuranceand prepaid property taxes. I was leaning towards excluding these two costs since they are already included as part of your monthly operating expenses. I also don't think they should be included in your invested capital (which would impact your returns) given they are operating expenses.
What does everyone think? Are there any other upfront payments paid at closing that you feel should not be included?
@Danilo A. - Yes I agree with that assessment. That prepaid is part of your monthly. The only small caveat if you want to get real nitpicky is I believe most lenders will require a little buffer for T/I. So if your insurance is 1k for the year, they'll require something slightly more (1,200 or whatever). That surplus money just sits to cover any rise in expense, so it's not really a fee but it is money you account for. Bottom-line that should not effect your decision to take down a deal.
@Tom Shallcross thanks for the reply. Agreed, that upfront payment gets held in an escrow account and gets released over time as the expenses are due. Glad we’re on the same page!