When buying a house whether for investment purposes or not, the first cost that comes to a real estate investor’s mind is the mortgage deposit. Well, the mortgage deposit is in fact one of the many associated fees when buying a house. Diversifying your real estate investment portfolio and buying an investment property is accompanied by several costs that one might overlook. Often times, homebuyers incur unexpected fees when buying a house leaving many burdened. To avoid going over your budget and being unable to fulfill all financial obligations, we have broken down the fees that you need to consider.
Make sure to enumerate all the costs that accompany purchasing a real estate property and include them as part of your budget. Whether unexpected, upfront, or legal fees, all costs need to be itemized to ensure a lucid purchase.
Home Inspections Are the First Fees When Buying a House
The major expenses that precede closing fees are inspections. It is important to note that there are two types of real estate inspections: general inspection and termite inspection. In a general home inspection, a real estate inspector is paid to assess the livability of the property to be purchased. The inspector evaluates the following components: roofing, full exteriors, structural elements, full interiors, plumbing, electrical, heating, and air conditioning. Often times the termite inspection is included in the general inspection. However, if it is not, ensure to get a termite inspector to search for wood-destroying insects. Generally the price of real estate inspections wavers around $500, depending on the state.
Related: Why You Should Get A Home Inspection Before Investing In Property
Closing Fees When Buying a House
There are a number of fees that you need to pay out in full as you close on a property deal. These expenses are paid to moneylenders, insurance companies, and local authorities. These costs can take a toll on your investment financing if not planned properly. We recommend that you save 4-7% of the rental property’s value to accommodate for these fees. The fees are as follow:
- Appraisal Fees: Usually the bank or other lender hires a real estate appraiser to confirm the fair market value of the property. This is because the bank wants to loan you a fair amount that aligns with the value of the real esate property. Generally speaking, the appraisal fees when buying a house range between $150 and $400, depending on the state.
- Title Insurance: Typically verified prior to the property purchase, the title insurance protects you against loss as a result of disputes over ownership of a real estate property. This is to protect you from claims against the house. Generally, these fees are within the $400-$1,200 bracket, of course, depending on the state.
- Origination Fees: The origination fees are fees that the bank charges for issuing a loan. These fees cover the loan’s administrative work. Usually, it is 1% of the value of the real estate property. In some cases, you can negotiate this fee and often request a waiver.
- Private Mortgage Fees: The property buyer usually pays these fees when buying a house to a bank’s insurance company. Private mortgage fees are insurance that the bank enforces, only if the down payment of the mortgage is less than 20% of the real estate property value. These fees are to protect the bank, if any case the bank needs to repossess but remains unable to sell given the remaining loan balance. The fees can reach as high as $2,500.
- Credit Report Fees: The bank or other lender usually incurs this fee on the homebuyer. Since the bank will be collecting interest fees, you can negotiate to waive the credit report fee. These fees could cost somewhere between $25 and $400, depending on the loan and the real estate property.
- Survey Fees: The property buyer pays a surveyor to draw and ensure the legal boundaries of the real estate property. Generally, the cost of this service ranges between $140 and $400, depending on the state.
- Government Recording Fees: These are fees that the homebuyer pays for recording and holding the information regarding a property sale. These fees range between $25 and $1,400, depending on the location and the home’s value.
Related: The 6 Hidden Costs of Owning Rental Property
Recurring Taxes and Insurance
Aside from all the one time startup fees that are necessary for the closing of a property transaction, taxes and insurance fees can add a whole lot to your budget. However, good news is that you are getting protection for your home. The following are other insurance fees and taxes which are not listed in the closing fees section above but which real estate investors should have in mind:
- Property Taxes: Property tax is paid as part of the monthly fee on your loan. The lender collects this tax and then pays the local government at the end of the year. You are subject to pay other municipal taxes or fees for sewer or water. They can waver around 1-2% of the home value. Fortunately, however, you can deduct property taxes from your taxable income.
- Homeowner’s Insurance: This is a policy to protect your home and its contents. Usually, the insurance covers any damage to the real estate property and liability or legal responsibility for any property damage. The cost for the insurance varies widely and depends on multiple factors, including the state. The cost averages $1,000 yearly.
Related: Everything Real Estate Investors Should Know About Tax Season
Maintenance and Repairs
Fees when buying a house for real estate investment purposes do not only entail closing, tax, and insurances fees. In fact, maintenance and repair costs can drain your budget, if not previously planned for. We recommend that you do all maintenance and repair work early on, upon closing the transaction and prior to renting out to tenants. Plan to set aside about 1% of the value of the home for these fees.
First-time buyers often overlook these fees when buying a house or record them incorrectly in their transactions. Understanding clearly the fees listed above will save you a lot of money. Often times, if you are aware of them, you can negotiate to waive. We recommend that you further seek your state authorities to ensure that you comply with all requirements and fees. Check out Mashvisor’s website to learn more about all the associated fees! Mashvisor’s rental property calculator will give you estimates of these fees to facilitate your investment decision.