Closing Costs on a Rental Property: What They Cover

Closing costs are the fees and prepaid items you pay at closing on top of the down payment. For a buyer they typically total 2% to 5% of the purchase price.

What they cover

Lender charges

• Origination or underwriting fee: 0.5% – 1% of the loan
• Discount points, if you buy the rate down
• Appraisal: US$500 – US$800
• Credit report and flood certification

Title and legal

• Lender's title insurance: required
• Owner's title insurance: optional, and worth buying
• Title search and settlement or attorney fee
• Recording fees and transfer taxes, which vary enormously by state

Prepaid and escrow

• Property tax, prepaid to the next due date
• A year of landlord insurance upfront
• Prepaid interest to the end of the closing month
• An escrow cushion, often 2 – 3 months of tax and insurance

An example

A US$150,000 purchase with a US$120,000 loan:

About 4.3% of the price, which is why budgeting a flat US$2,000 for "closing" is one of the more common first-deal cash shortfalls.

Which ones you can move

• Negotiable with the lender: origination fees, points. Comparing two or three lenders' loan estimates is worth real money.
• Negotiable with the seller: seller-paid closing costs are a normal ask, especially on a property that has sat. See the offer submission checklist.
• Shoppable: title and settlement services, in most states.
• Fixed: recording fees, transfer taxes, appraisal.

Prepaid items are not really a cost at all. You would owe the tax and insurance anyway. They are timing.

Related reading

How much cash do you need covers the full requirement including reserves. The calculator includes a closing-cost assumption in cash-on-cash return rather than flattering the result by leaving it out.