Closing Costs

Closing costs are the fees and charges paid to complete a real estate purchase, beyond the price itself: lender fees, title insurance, escrow fees, recording charges, transfer taxes and prepaid items. A gross rent multiplier uses the contract price and leaves them out, which makes the multiplier slightly lower than the buyer's true cost.

The effect is small but real. Adding $10,000 of closing costs to a $500,000 price raises the GRM on $48,000 of rent from 10.4 to about 10.6. Where transfer taxes are high, the gap can be larger.

For comparing listings, the contract price is fine, because every property faces similar costs. For deciding whether a deal works, include closing costs in the cash invested. Cash on cash return counts them, and so does any honest estimate of when the investment pays back.

Further reading: Closing Costs on Wikipedia.