Closing Costs

Closing costs are the fees paid to complete a property purchase: lender origination and points, appraisal, title insurance, escrow, recording, and prepaid taxes and insurance. On an investment purchase they run 2 to 4% of price and belong in total cash invested, the denominator of cash on cash return.

On a $250,000 purchase, 3% is $7,500. Leaving it out of the denominator overstates the return: $4,756 of cash flow is 7.0% on $67,500 (down payment plus repairs) but 6.3% on $75,000 with closing costs included. Every real calculator has an input for it.

Seller credits reduce closing costs and therefore cash invested, which raises the return without changing the property. Lenders usually cap credits at 2 to 3% of price on investment property. Points paid to buy down the rate are a closing cost too; they raise the denominator and lower the payment, and whether the trade helps depends on how long you hold the loan.

Further reading: Closing Costs on Wikipedia.