Closing costs are the fees and prepaid items you pay to complete a real estate purchase, sale or refinance, on top of the price itself. For a buyer they commonly include lender fees, loan points, the appraisal, title insurance, escrow or attorney fees, recording fees, and prepaid property taxes and insurance.
A common planning range for buyers is 2% to 5% of the purchase price, though the real figure varies by lender, loan type and location. Say you buy a $200,000 rental with 25% down. The down payment is $50,000, and closing costs at an assumed 3% add $6,000, so you bring $56,000 to closing before any repairs or reserves.
That extra $6,000 changes your return. If the property produces $4,200 a year in pre-tax cash flow, it looks like 8.4% on the $50,000 down payment, but the real cash-on-cash return on $56,000 is 7.5%.
The most common mistake is counting closing costs only once. A flip pays them when you buy and again when you sell, and a BRRRR deal pays them at purchase and again at the refinance. Sellers have their own, often including agent commissions and transfer taxes. Ask the lender for a written estimate early and put every line into your analysis.