When buying a multi-family building as an investment property, closing costs can add up to a large amount, and thus should be calculated with careful attention since the investor needs to estimate if he has enough funds for the down payment and the closing costs prior to closing the deal.
It is also important to estimate how much cash is needed to put aside for the closing costs prior to closing since one of the bank’s conditions when approving a mortgage is making sure the buyer has enough funds for the down payment and closing costs together.
Appraisal Fee: This requirement is helping the bank to assess the market value of the property, so that it can estimate the LTV (loan-to-value). If the appraised value is $500,000 and the LTV is 80%, then the bank is willing to loan $400,000 out of the total assessed value. Appraisal fee is usually a must with insured mortgages, but for conventional mortgage, it can sometimes be waived at the discretion of the bank that provides the mortgage. Appraisal fee depends on the size of the multi-family buildings and other considerations. The appraisal directly correlates to the size of the building: the larger the building, the higher the appraisal’s fee.
Phase 1 Environmental Fee: Environmental analysis of the property and all surrounding uses or conditions to make sure the property and its surrounding aren’t contaminated from any past use of chemical, oil tanks and other hazards. Usually this fee is associated only with insured mortgages only and not with conventional ones.
Inspection Fee: Inspection fee includes careful inspection of each unit in the building to make sure there is no structural problem with any of the units and the building overall. Inspection should be done only by a professional, since missed issues by him can later on cost you a lot of money to repair. The more units to inspect, the higher the fee that is charged by the inspector.
Land Transfer Tax (LTT): This fee depends on the province the multi-family building is purchased in. Specifically, if the property was purchased in Toronto, the land transfer tax needs to include Ontario LTT and Toronto LTT.
Legal Fees & Title Search & Disbursements: Each transfer should be reviewed legally by a lawyer. A lawyer is in charge of completing the transfer of the deed, preparing the mortgage, and conducting various searches such as, title search.
Land Survey Fee or Title Insurance Fee: A recent survey of the property is usually a requirement of the lender. If non is available, then title insurance can replace it.
Mortgage Application and Processing Fees: This overall fee depends if the mortgage is insured or not. If the mortgage is insured, then the investor needs to pay both the insurance company (CMHC or GE) and the lender itself. CMHC charges processing fee and mortgage insurance premium depending on the amount being loaned and the amortization period. On top of that, each lender charges application fees as well. The lender’s application fee depends on the institution the money is being lent from.
Reserve Fund: Reserve fund should be added to the closing costs to make sure that in the first couple of years (before any cashflow has been accumulated) there is enough money to be spent in case “big item ticket/s” need/s to be fixed/replaced, such as leaked roof, furnace stopped working, etc.
It is very important that you search around for different professionals before deciding on which one to go with. Your considerations when choosing should include price, reputation, and efficiency.
In conclusion, the total amount spent on closing costs can start from 2.5% of the purchase price and go up to much higher amount depending on various factors, such as the amount put into the reserve fund, the province you choose to buy your investment property in, etc
Lihi Pearl: B.Eng, MBA
Lihi Pearl is the VP of L & L Real Estate Investment Inc. which specializes in buying, selling, managing, and arranging mortgage financing for multi residential apartment buildings located all over Ontario, Canada.