If you’re in the midst of buying a new investment property, you’re probably looking to save as much money as possible during the purchase process. Real estate investing is a complicated, delicate numbers game, and it’s true every penny counts. Pinching those pennies improves the amount of return on your investment you’re able to recoup.
The road to a purchase is paved with fees
Closing a real estate transaction is an expensive, lengthy and often frustrating process. The sheer number of fees you’re expected to pay may shock you—so will the number of hoops you’re expected to jump through in order to complete the purchase.
To close most real estate sales, the buyer is on the hook for escrow fees, attorney fees, appraisal expenses, title insurance, credit report fees and much more. While you may enter a transaction expecting to just pay the down payment and be on your way toward earning a profit, chances are you’ll end up spending thousands of dollars just in fees to complete your real estate acquisition!
Savvy real estate investors, however, can leverage the closing process to better negotiate the terms of the sale and save some money on the price of their purchase.
Whether you’re hoping to keep a property and use it generate passive rental income or are planning on fixing and flipping your investment, learning how to lower your initial purchase costs can help you dramatically improve your positive cash flow.
Reducing closing costs
It may seem like the fees associated with closing your real estate transaction are non-negotiable. They are, after all, fees: you’re paying them to your lender, real estate attorney or agent. But in fact, there are many ways you can work with all parties involved in your transaction to minimize the amount of money you’re expected to pay on closing:
•Know where to identify savings: Once you’ve figured out the closing costs you’ll be on the hook for, determine where you may be able to shop around and save. Some fees are absolutely non-negotiable, while others may be more flexible. It all depends on the terms of your loan agreement. Common services you can shop around for and negotiate include surveys, escrow agents and pest inspectors.
•Shop around for title services: You’ll need to pay for title and settlement services to close your real estate transaction. In most cases, your lender provides you with a title and settlement service they recommend. This service may offer you a good value, because many lenders negotiate a bulk discount with the providers. But it’s worth shopping around to find out for sure.
•Ask the seller for assistance: If you’re working with an extremely motivated seller, you may be able to convince them to cover some of the closing costs. You may encounter sellers eager to get rid of their properties for a variety of reasons. They may not always be willing to help you with closing costs, but it’s worth asking.
•Consider no-closing cost mortgages: If you’re strapped for cash at the time of closing, you may want to ask about a no-closing cost transaction. In this type of deal structure, the lender rolls up all associated closing costs into your mortgage. While this may be tempting, it’s not often recommended – you’re starting out your mortgage owing more on your investment than it’s actually worth.
•Ask for discounts: While your lender may or may not offer any discounts, it never hurts to ask. Some banks offer discounts for existing customers, which is especially helpful if you’re already a real estate investor with outstanding accounts with that financial institution. Other banks may offer discounts for military veterans or members of professional associations.
Obtaining the best price
Of course, the closing costs are only a small part of the total amount of money you’ll have to pay to acquire a new investment property. You should also be working to lower the total amount you expend purchasing your investment. Here are some of the ways to ensure you’re getting the best possible deal on your real estate investment:
•Work with an experienced agent: One way to ensure you’re getting the best possible price for your real estate investment is by working with a trusted local real estate agent—someone who’s intimately familiar with your target market. It’s helpful to work with the same real estate agent across multiple transactions, so you can build rapport with one another.
•Time your purchase correctly: Closing on a real estate deal in the winter can help you save a significant amount of money on the price of your property. Generally, real estate markets are much cooler between January and March. Timing your transactions correctly can help you maximize your budget.
•Shop around for a mortgage: You should never go with the first mortgage you’re eligible for. Instead, shop around for mortgages from several different lenders. You may want to consider the benefits of obtaining a mortgage with a trusted local financial institution, like a credit union or a family-owned bank.
•Improve your credit score: If you have an adequate credit score, but not great, you should work to improve it. Poor credit may be impacting your ability to secure the best rates and lending products. Oftentimes, people with less-than stellar credit scores end up paying significantly higher interest rates and may be required to purchase mortgage insurance.
Learning how to better negotiate and manage the costs associated with real estate investing can help you execute deals when it comes time to close. This, in turn, provides you with a much more favorable return on your initial investment and allows you to work toward your personal financial objectives much more effectively.
Remember, the first steps in your investment are often the most crucial. Saving money upfront, negotiating favorable terms and safeguarding your personal balance sheet are all priorities for any investor. Doing things right from the outset equates to better returns and long-term fiscal stability from your investment.