Lending for Commercial Real Estate
There are a number of ways to effect 100% financing of your income producing commercial property. They are creative financing alternatives that provide buyers with an opportunity to purchase apartment buildings, office buildings and mixed use buildings with little or no down payment. These alternative financing methods include:
- Asset Backed Lending
- Self Directed IRAs
- Down Payment Assistance Programs
Asset Backed Lending
If you have securities like stocks or bonds there are lenders that would lend up to 90% of the value of these securities. This can serve as the full loan or the down payment. In either case you will still own your securities, they will just be the collateral on a loan.
Self Directed IRAs
If you have substantial assets in a IRA, 401k or 403b those assets can be placed into a custodial account that will allow you to purchase commercial real estate where the owner would be the Self Directed IRA. If you do not have enough to fully purchase the property, your Self Directed IRA could make loans. They could lend you the money for the down payment for your income producing property.
Down Payment Assistance Programs
If the building you are purchasing has enough equity and the seller is willing to work with you, you can establish seller funded down payment assistance. The Down Payment Assistance Company will actually provides the down payment. The seller pays the DPA Company to provide the assistance based on the equity in the property.
100% Lending for Commercial Property
All programs will provide up to 100% financing depending on the resources available. Now is the time to use your resources and creative financing options to purchase discounted commercial income producing property.
Commercial Real Estate Investing
There are many income producing commercial real estate properties that are being offered below market that are great investment opportunities. The problem or barrier for most real estate investors buying these properties is the down payment required to acquire them. As a rule general rule to purchase income generating apartment buildings and mixed use multifamily properties one should be prepared to spend 25% to 35% of the purchase price for the down payment. Plus the investor must have closing costs and reserves of 6 months or more. This is a substantial investment that eliminates many potential buyers. This can often be overcome by these creative financing strategies for commercial real estate investors.
This is a highly misunderstood concept in real estate. My simple definition has two parts. Creative Financing requires a property with substantial equity and a willing and motivated seller. If the seller is motivated yet there is no equity there is no opportunity to utilize creative strategies to acquire the properties. By the same token if the property has enough equity and the seller is neither willing nor motivated no strategy will work.
3 Creative Strategies to Purchase Commercial Real Estate
- Seller Financing and / or Carry Back: There are many ways to structure a deal where the seller can finance the property or hold a second mortgage for a short time and then the buyer can refinance the loan. Many lenders requires the loan to be seasoned one or two years. Yet there are lenders that we work with that will refinance immediately requiring no seasoning. These deals close within 3 to 6 months from the initial seller financing contract.
- Transaction Funding Programs: These are programs where a private lender will finance the loan from One to forty – five days. The key is to have a buyer ready to close immediately or to be able to refinance at once. This only works when the end lender is aware of the transactional financing and they require no seasoning. As in point #1 above most lenders require one to two years of ownership seasoning so having the proper end lender is important.
- Down Payment Assistance Program: If the property has equity and the seller is willing to use it to help the buyer acquire the home, then a down payment assistance program similar to Ameri-Dream or Nehemiah (programs used to purchase residential properties financed by FHA loans) may be a great option for you. Ultimately the Down Payment Assistance Company (DPA) gives the down payment and the seller reimburses the company at closing. This can only happen if there is substantial equity in the building.
As previously stated creative financing requires substantial equity in the commercial income producing property that the seller is willing and motivated to use to strategically sell there property as soon as possible. Lower the price simply is not the answer because the main problem still exist. Commercial Real Estate Investors do not have 25% to 35% for down payment plus closing costs and reserves. Let a professional help you structure your deals to make them close.
Get a Real Estate Investor Rehab Loan.
There are great opportunities for real estate investors today. This may be the best market for real estate investing in our lifetime. But unfortunately traditional financing is not so readily available. There are creative options for financing purchase and rehab income producing real estate projects for investors. Whether you are investing in commercial multifamily housing or mixed use investment properties there are lenders to finance purchase or refinance these rehab projects, even with little or no down payment. Since there is no secondary market for these types of projects your deals will fall into one of two categories. Your deal will either be a non conforming investor rehab loan or a hard money rehab loan.
Non Conforming Real Estate Investor Rehab Loan.
There is no such thing as conforming investor rehab loans. Conforming means there is a secondary market that your loan conforms to the guidelines and can therefore packaged with other similar loans and sold in bulk to institutional investors on wall street. The secondary market would the have established guidelines that all projects would have to conform to. Since this market does not exist the first category of loans are considered non conforming or portfolio loans. Any rehab loan funded in this category will meet guidelines that are similar to conforming mortgages. These loans would meet the general guidelines as all other loans except they require substantial rehab and are investment properties. This means the borrower, real estate investor, would need good credit, verifiable income and assets, an ability to repay the loan, acceptable down payment and reserves, and employ licensed bonded contractors to do the rehab. The advantage to the portfolio real estate investor rehab loans versus the hard money loans is that the rate and fees are usually substantially lower. The disadvantage is there are many more qualification criteria and it takes longer to fund a deal. But, if you qualify and have the time and money for the down payment it is to your advantage to utilize this loan versus a private investor rehab loan.
Hard Money Loans.
Though the rates are much higher ( 10% to 15%) and the fees will be from 4% to 10% hard money loans could actually be more profitable to real estate investors than non conforming financing. First of all these loans generally fund in 2 to 4 weeks. Secondly, the qualifications are less stringent and therefore you can do more deals. Truly you may qualify for a hard money loan when you will not for a non conforming loan. As such you may have no other option.
Qualifications of Non Conforming and Hard Money Investor Loans.
Both programs require you to purchase property where the after rehab value is 65% or less. Both programs require you to have an acceptable exit strategy. Non Conforming programs will always require a down payment of 20% to 35% of the purchase and rehab costs. Hard money loan programs may or may not require the down payment at all. Both programs will make sure the contractor has the experience and licensing to complete the renovation. So if you have the experience, property with substantial equity, exit strategy and assets you can make lots of money by purchasing and renovating investment property.