Question about closing costs?

[Patrick McCracken]

Hi, new Pro member and have a question about the rental property calculator. I'm trying to figure out what needs to be included in closing costs. I see a lot of people use a low % (2-3%) for closing costs but shouldn't it be your first year taxes + closing costs? Example: I'm looking at duplex's in the 100,000 range. Taxes on the properties are around $4,000, and the typical closing costs + points are around $6,000. That's around $10,000 in closing costs, which is 10% of the purchase price. Obviously very different than the 2-3%.

Any insight would be greatly appreciated...thanks!

[Mitch Messer]

Hi @Patrick McCracken and welcome to BiggerPockets!

Yes, this is the great weakness of using anyone else's rental property calculator: It's far too easy to be fooled into believing that the assumptions encoded within will apply in every case and market. They won't!

It's true that, at closing, a buyer is typically required to pay their prorated share of property taxes. So, those costs might vary a bit depending on when in the year the sale takes place. But, while these taxes may be paid at closing, they're not really considered closing costs for the purposes of deal analysis. Rather, they are part of operating expenses.

All good rental analysis calculators should already have a line item for annual property taxes, for the purpose of calculating key financial indicators like net operating income, cash flow, and cash-on-cash return.

For items like closing costs, you will absolutely need to calibrate and adjust your analysis tool to reflect your actual market.