Closing costs mess up Cash return.

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Closing costs mess up Cash return.

JJ Cole
Houston, TX · Member since 2011 · 25 posts · 0 votes

I typically buy houses worth 110-140K for 65-80K (cash) and then spend 8-15K on rehab before renting the out for 1150-1250/month. When I cash out refi. I end up have to pay $4k in closing costs on a 80-90K loan. Is this a reasonable closing cost? I think it is too much, it significantly reduces my cash on cash return, sometime by 50%. What do y'all pay in closing costs on a NOO cash out refi?

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  • Michael Seeker
    Investor · Louisville, KY · Member since 2011 · 1k+ posts · 1k+ votes
    14y

    Just did a cashout refi and costs were about 3500 on 135k loan. It is quite annoying, but that's what you get when you deal with banks on anything. You should also keep in mind that when you refi you "miss" a month of mortgage payment, so if your monthly payment is $800, you can really knock that off of the closing costs as you're essentially paying it in closing costs instead of in a mortgage payment.

    Banks suck, but they give you money at insanely low interest rates, so you have to make the sacrifice.

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  • Brett Clothier
    Rental Property Investor · Memphis, TN · Member since 2008 · 14 posts · 7 votes
    14y

    I agree with what Michael said. In this real estate environment, if you can do a cash out refi loan an an investment property, you pretty much have to take what you can get. As long as you are cash flowing, own in a stable neighborhood, and made a good buy, I wouldn't worry too much about the closing costs you paid. They seem to be fair.

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  • Chris ClothierBusiness Member
    Rental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
    14y

    JJ -

    How does it cut your COC return by 50%? Are you talking year 1 return?

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  • JJ Cole
    OP
    Houston, TX · Member since 2011 · 25 posts · 0 votes
    14y

    Thanks for the responses guys. That is what I was hoping to hear. Thought I was doing OK especially since these are loans beyond no 4. But I see on BP people buying with the 2% rule and I don't get anything better than 1.3-1.5% so I was trying at least to maximize cash return within that framework. I am doing 10.55% on my worst buy which happens to be my first SFR investment prop when I was a newbie to 178% on my last one so I am happy with that. Thanks again.

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  • JJ Cole
    OP
    Houston, TX · Member since 2011 · 25 posts · 0 votes
    14y

    Chris,

    Real life example on an 84K all-in cost prop, I am able to refinance 80K at 70%LTV. That means my cash in the deal is 4K. Now I have to pay 4k in closing costs which I will roll into the refi, so I will receive cash out of only 76K which means I now have double the cash invested in the prop at $8k thereby reducing my cash on cash return by half on whatever the stabilized cash flow is.

    JJ

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  • David Beard
    Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes
    14y

    Nice bank you got there, take that banker out to lunch OFTEN!

    The $4k of costs is certainly high for a SFR in this price range, but considering that you're extracting almost all of your investment, your ROI is still huge, so be glad you have access to CO money using your appraised value. The bank is just compensating for the risk of these loans, charging you up-front points and other bank fees.

    Typically you might pay closer to $3k.

    $800-1200 1 to 1.5 points
    $500 Bank fees (underwriting/processing/"cause we can")
    $400 Appraisal
    $400 Attorney/title search
    $600 Title insurance
    $200-300 Misc

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  • JJ Cole
    OP
    Houston, TX · Member since 2011 · 25 posts · 0 votes
    14y

    You're right David. A chunk of that amount is the broker's origination charge. But honestly I am keeping my fingers crossed they will come through like they say (I was surprised to find someone will to let me cash out without seasoning at appraised value). This is using Fannie delayed cash out refi. This is the first time I am trying this so I hope they come through.

    Also, I am actually hopeful that the costs will end up closer to 3500 since they said the closing company is trying to get me some discounts since I am closing multiple cash out loans simultaneously.

    Now after this the issue is finding more properties that I can use the same model with :-), they are getting to be few and far between.

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    14y
    Originally posted by Michael Siekerka:
    You should also keep in mind that when you refi you "miss" a month of mortgage payment, so if your monthly payment is $800, you can really knock that off of the closing costs as you're essentially paying it in closing costs instead of in a mortgage payment.

    Michael -

    While you may realize this, I just want to clarify for others reading who do not.

    You don't really "miss" a month of mortgage payments -- interest is paid *after* it accrues, so the month that you're supposedly missing is just being paid on the first of the following month.

    So, while technically it's true that you're missing a month of payments this year, that final payment gets paid at the end of the loan, "adding" a month of payments in the final year.

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  • David Beard
    Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes
    14y

    Hey, JJ, didn't realize that you were using a conventional Fannie loan under the new cash out rule:

    https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2011/sel1105.pdf

    I see that the loan amount you can obtain (without seasoning) is the lesser of:

    1. 70% of appraised value
    2. Original cash purchase price plus all financing fees (closing costs and prepaid items).

    I'll be interested to hear how this goes for you.

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  • Joe Smith
    Akron, OH · Member since 2012 · 77 posts · 2 votes
    14y
    Originally posted by JJ Cole:
    I typically buy houses worth 110-140K for 65-80K (cash) and then spend 8-15K on rehab before renting the out for 1150-1250/month. When I cash out refi. I end up have to pay $4k in closing costs on a 80-90K loan. Is this a reasonable closing cost? I think it is too much, it significantly reduces my cash on cash return, sometime by 50%. What do y'all pay in closing costs on a NOO cash out refi?

    That's about right.

    Fact is, the lender/bank doesn't get all that, a big chunk is title, etc.

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  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    14y
    Originally posted by JJ Cole:
    Chris,

    Real life example on an 84K all-in cost prop, I am able to refinance 80K at 70%LTV. That means my cash in the deal is 4K. Now I have to pay 4k in closing costs which I will roll into the refi, so I will receive cash out of only 76K which means I now have double the cash invested in the prop at $8k thereby reducing my cash on cash return by half on whatever the stabilized cash flow is.

    JJ

    I disagree with your analysis. I don't see any point where you have only $4k into the deal. You start with $84K into the deal, and then at the conclusion of the refi you have been funded to the point where you have only $8K into the deal - hence you have improved your COC by a factor of about 10. Face it, you don't get the loan without the closing costs, so you will be at $84K before the loan, and $8K after the loan.

    Now, that extra $4K of closing costs is painful, but you do get some tax advantages you can play with on that $4K. If any of it is points / origination, you get to amortize that amount for the duration of the loan and deduct the annualized amount as interest each year. The other costs are added to your basis in the property.

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  • Account Closed
    Wholesaler · Chicago, IL · Member since 2011 · 219 posts · 38 votes
    14y

    That does seem pretty high for closing costs from that cheap of properties. My title company charges 1% or around $1,000. I would look for another title company if I were you.

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