When investing in commercial real estate, investors have to consider the projected costs surrounding their investment. A savvy investor must have a working knowledge of what the closing and holding costs for the property will be prior to committing themselves to the investment. Working on the purchase price, and the market selling price is simply not enough to make an informed decision on whether a property will be a sound investment.
When real estate investors purchase property, their main goal is to sell the property for a profit. But during this process, the investor must take into consideration the amount of money they will need to pay out before the investment is re-sold. Holding costs are also known as carrying costs. When calculating the holding costs, investors must include the purchase price, and deduct operating income to come to an estimated figure.
Holding costs must be carefully considered when factored into an investment. Without calculating this cost, an uninformed investor could be faced with a disastrous situation. All to often, new investors only factor the purchase price, and the resale market value into their calculations. The result can be disastrous to the estimated profit margin if the investor must produce a further sum for their holding costs.
An example of such a situation is buying a property for 0,000 with an estimated resale value of 0,000. At this stage, the property would seem to be a sound investment with a very generous profit margin. But if the holding costs of the particular property over a six month period were to come to ,000, it could mean severe loss to the investor, rather than a generous profit.
Estimating Holding Costs
Investors must pay close attention to their estimated carrying costs before investing in a property. These include costs such as operating expenses, mortgage payments, capital improvements, as well as the selling costs of the property.
The best way to factor these costs before purchasing an investment property is to analyze the associated carrying costs over a six-month period by taking the sale price, and then deducting associated costs such as
Purchase closing costs,
Clean up and decoration of the property,
Resale broker commissions,
Resale closing costs
Take the purchase price, plus the carrying costs, and the total of the two should be deducted from the re-sale price of the property in order to get an estimation of the profit margin.
Knowing what to expect from holding costs should be one of a real-estate investor's main priorities when looking for a profitable investment. While these costs are important to factor, the savvy investor will always be able to creatively come up with solutions to decrease costs, or find ways to make an extra income from the property to make it more profitable.
Closing costs are an estimate of the projected cost once the property has been resold. These costs are often calculated by things such as the lenders experience with the real estate industry, and the area being invested in. The closing costs are only an estimation, which can mean that they will change over the term of the loan.
The lender has no control over how much the attorney or title company will charge for their expenses, but as a rule of thumb, investors should be able to rely on the final estimated expenses to be close to the estimations given in their good faith estimation from the lender.
The closing cost figures, as far as the lender is concerned, should be especially accurate, although in a situation where there are significant changes in the loan program, or the borrower's qualifications, the closing costs could be inflated.
No Closing Costs
While closing costs are essential to factor into an investment, there are options available to remove some of the associated closing costs for investors. However, it is important to note that even with advertised no closing costs, there will always be costs, such as attorney fees, insurance, local municipality, and title company, that must be paid.
The no closing cost programs offered by lenders are an option that applies to things such as application, appraisal, credit reporting, processing, underwriting, origination, and discount points. These costs only factor into about a third of the total closing costs of a property. Even with a no closing cost option, investors may still be required to pay other closing costs, such as title insurance, attorney fees and county recording fees.