multi family % of closing cost as a rule of thumb

18 Replies

when buying a multi family property whether a 25 unit or a 60 unit. what percentage of the purchase price is typical to  pay in closing cost?

what are typical closing cost other than what I listed below?

Title, inspection, appraisal, prorated taxes, prorated insurance, what else?

I use 5% as a safe, conservative number just to leave myself some cushion in case unforeseen items come up.

@Elehue Pierce , I buy 100 to 400 unit deals and the closing costs range between 3 to 5% of the purchase price. However the closing costs are specific to each deal so the percentage is helpful but you should try to use actual costs when you can. Here are closing costs I factor into my deals:

  • Title
  • Inspection
  • Appraisal
  • Prorated taxes
  • Prorated insurance
  • Mortgage broker
  • Loan application fee
  • Real estate attorney
  • Securities attorney
  • Acquisition fee
  • Survey
  • Working capital
  • Capex reserve
  • Certificate of Occupancy
  • Deposits for utilities
  • Transfer tax - if applicable
  • Zoning
  • Loan assumption fee - if applicable

@Brian Adams gave you a great list and it's true that the costs vary from deal to deal and some are percentages and some are not.  For example, your legal fees are not likely to be a percentage but rather an hourly rate or flat fee regardless of deal size.

I'd also add a few items to Brian's list:

  • Due Diligence (if you hire a third party to do it--and you should)
  • Lender legal -- depending on the loan amount and type of loan 
  • Rate caps -- some variable rate bridge loans require that you purchase a hedge
  • Insurance -- don't count on paying a prorate. Most lenders will require the first year to be paid in full plus two month's prorate to fund the impound account.
  • Immediate capital improvements -- if your property condition report specifies that specific repairs need to be completed right away (there's always something) your lender will likely require that you impound the funds to complete those repairs.

@Brian Adams

@Brian Burke

 Great lists.  I always love when brokers quote a cash on cash return, but somehow miss the short list of items beyond the down payment.

Yeah, @Jeff Greenberg , I see inexperienced syndicators make that mistake too.

It goes along with a question we see here on BP a lot:  "I want to buy a $1 million building but I need to put down $250K.  How do I raise the $250K."

I say forget the $250K...you need to raise closer to $400K, maybe even more. Why? See the list of costs above. And, don't forget to calculate your IRR and COC with the $400K not the $250K!

@Brian Burke lol not just the syndicators, but all levels of investors.  

The other is to budget for the capital repairs even if the lender doesn't require it.  I had the lender require that we resurface the parking lot for $2500, which actually cost $11,000. At the same time they ignored the trip hazard concrete sticking up in the parking lot, and the half dead tree leaning over cars.  It is better to over raise then have to scramble or have a capital call, to get the property on track.

I want to thank everyone for answering my question. The answers are really eye opening and it's quite a bit to absorb. As a newer investor it's crucial to have a mentor/coach that you can lean on, and help you navigate thru this business. I have realized that that's the only way to go. In addition, when I first got into the business I thought I was going to acquire properties with ease and have a ton of cash flow per month....Well it doesn't quite work like that, if it were that easy everyone would do it.

Thanks guys

@Brian Adams would you mind sharing how you underwrite for working capital as part of closing costs? Do you do a dollar amount per/unit or a percentage of purchase price??

I would greatly appreciate this. Thank you,

Daniel

@Daniel G. , for me it is deal specific and I don't really have a formula. If the asset is more of a value-add vs. a momentum play I build more in for working capital as surprises always popup. 

I wish I could be more helpful to you. 

@Brian Adams Thank you Brian, I appreciate your response and other input throughout the BP forums. Congratulations on your recent acquisition.

@Brian Burke - this is a bit off the initial topic but it relates to your post - I completely concur that IRR is probably the best metric for evaluating a property and i have seen @Ben Leybovich mention that on multiple occasions as well. However, how do you estimate that at the front end of an investment as it seems to be a trailing metric because it includes expenses over time which are impossible to know at the outset (I dont mean the IRR formula as that seems to be the easy part)? I usually use COCR because at least then i can put in some estimates of about 20% for vacancy and expenses. I would really like to use IRR though if there is a way you use to estimate it as that is undoubtedly more realistic.

Thanks in advance for this and all of your thoughtful advice on these types of REI deals.

@Ian M. it's true that you have to make assumptions on expenses. Same is true for calculating COCR however. Financial forecasting is an inexact science, you have to make assumptions on income, expenses, timing, exit value, capital structure, etc. and then calculate your IRR. Will your IRR end up being exactly what you forecast? Never. But, if you are making conservative assumptions you should be able to achieve the forecasted IRR (or, preferably, more). And if you apply your assumptions consistently, you should be able to fairly compare one investment alternative to another.

@Ian M. - I hate it, but I have to agree with @Brian Burke . CCR is a static metric which assumes a certain cash return on investment. But, this assumption is not necessarily prognosticated upon any dynamics - just static $$ assumptions. By contrast, the IRR underwrites cash flows which synthesis into a periodic cash return. The essence of underwriting not just the end cash, but the cash flows which take us there, requires underwriting all kinds of dynamics underpinning those cash flows. This frame of mind is very different...

Now, as to projecting the exit, first of all, the IRR underwriting does just that - requires us to project the exit of capital. This is a crucial difference. Furthermore, the exit has to be based on some sort of logic, and when done correctly this logic is a function of cash flows in one way or another. Yes, it's a guess, but it is a very educated guess...

Originally posted by @Brian Burke :

@Brian Adams gave you a great list and it's true that the costs vary from deal to deal and some are percentages and some are not.  For example, your legal fees are not likely to be a percentage but rather an hourly rate or flat fee regardless of deal size.

I'd also add a few items to Brian's list:

  • Due Diligence (if you hire a third party to do it--and you should)
  • Lender legal -- depending on the loan amount and type of loan 
  • Rate caps -- some variable rate bridge loans require that you purchase a hedge
  • Insurance -- don't count on paying a prorate. Most lenders will require the first year to be paid in full plus two month's prorate to fund the impound account.
  • Immediate capital improvements -- if your property condition report specifies that specific repairs need to be completed right away (there's always something) your lender will likely require that you impound the funds to complete those repairs.

@Brian Burke

 Brian - who are some good third party due diligence firms?

@Yousif Abudra I use my property management company.  Most management companies in the large multifamily space perform DD services, and given their knowledge of the market and the product in the area they are well positioned for it.  Plus, they have to live and die upon the sword in which they wield...if they get the management contract anything missed during DD will fall swiftly in their lap after takeover and they'd much rather avoid unpleasant surprises.

@Brian Adams @Brian Burke

I was surprised not to see at least a Phase I on your lists of closing costs. 

My understanding was (is?) that when financing is involved, unless there is a recent (within 3 years?) report available, which it rarely is, lenders require a report as a CYA.

@Oren K. , yes a cost for a Phase I is part of the closing cost list.

I know this is an old thread, but I ran across this page that list closing cost and loan origination percentages, based on the loan type:  https://fitsmallbusiness.com/multifamily-financing/

It is interesting how you hear about the "no money down" purchases.  Maybe @Brandon Turner could run through the real-life numbers (settlement statement) of his most recent multi-family purchase for all of the "extra" costs beyond the downpayment.   Maybe there is a post somewhere that walks through a real-life example.

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