Down Payment For Commercial Properties

What is the Minimum Down Payment Commercial Property

How much do you need to put down to buy income producing property? Many investors are looking to buy commercial real estate income producing property with as little down payment as possible. They are doing this from many perspectives. Some investors have little or no money (are they really investors?); some have limited funds and just want the lowest down payment while other investors have the resources yet choose to leverage their money and use other peoples money. Finally many people just do not know. So first thing is to establish down payment standards. This is very hard to do because unlike residential lending with FNMA, FHMLC and FHA as standard conventional programs with universal guidelines Commercial Lending is mostly portfolio. Portfolio lending means each lender makes there own guidelines including the required down payment.

Standard Down Payment and Usual Lenders

  • Loan Amount Down Payment Usual Lenders
  • Under $500k            25% to 30%        Local Banks / Small Cap Funds
  • $500k to $2 Mil       20% to 25%        Banks, FNMA, Life Companies, Funds
  • $2 Mil Plus               15% to 25%         Life Companies, Funds, FHA, FNMA

These standards are based on varying guidelines and standards. A Real Estate Investor may find different terms from a local lender. Also the down payment required is based on an acceptable property with a buyer with acceptable credit profile.

Why Such Large Down Payments

There are many reasons for the large down payments. First is these are all investment properties and therefore the investor must make an investment. There is greater risk to the lender if the investor has little or no investment in the property. Additionally, the smaller the units, the less the diversification. This means that if there are 6 units 1 0r 2 vacancies move the property from profitability to loss. For larger units say 100, you can have 10 vacancies and still be at 90% occupancy. If there is a need for rental units in the area, the rent is in line with market rents, and there is competent management then the property will be profitable, even with a smaller down payment.

There are opportunities for smaller down payments but the property must have equity and the seller must be agreeable to creative financing options. But to think card blanche lower down payment would only mean greater problems than we have in the real estate market.

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100% Financing For Commercial Income Producing Properties

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.

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Down Payment Assistance to Finance Commercial Properties

Finance Commercial Properties

Most real estate investors know the the requirements to finance commercial real estate and income producing properties include the down payment, a borrowers credit, the type of property and the income that the property generates to pay for the loan. There are other requirements but these are the most important and are generally universal from one lender to another. Based on these underwriting guidelines the the greatest barrier to most investors is having the substantial finances necessary to meet the required financial investment, net worth and reserves necessary to purchase income producing commercial real estate. The little known and even less used down payment assistance program for commercial income producing real estate is just what is needed to bridge this gap.

Down Payment Assistance

In residential real estate sales there are many down payment assistance (DPA) programs. Most are for first time home buyers and or low to moderate income home buyers. The funds are given by non profit organizations, banks and federal state and local government entities. There are no programs for investors or borrowers who were not going to live in these properties as their primary residences. But there was a program that allowed the buyer of a home who was getting an FHA loan to get DPA from a non profit agency. Based on that criteria there were non profit organizations like Nehemiah, AmeriDream,  Genesis or Partners in Charity that would give assistance but would get their money back plus a fee from the seller. Though they sent their money to the closing, the seller would have funds sent to them from closing and the settlement agent would represent all parties to ensure all funds are given to them in escrow and then release simultaneously. This means the seller gave the money. FHA outlawed the use of this program in 2008. Today the Commercial Investor DPA program works in a similar fashion,  allowing investors to purchase income producing property with little or no financial investment.

Creative Financing for Commercial Income Producing Property

The residential seller assistance programs offered through the aforementioned non profit organizations was in fact creative financing. My definition of creative financing entails two necessary key components. First the seller is willing to work with the buyer. Secondly, there is equity in the property. If you are a buyer or seller and you want to make a transaction happen based on the value of the property contact us. We can employ the DPA program or other programs to ensure this is a win – win situation for both buyer and seller.

UPDATE

Many investors have misunderstood this program. The Down Payment Assistance is Seller Funded. The Seller Must have Equity in the property they are willing to give you. When the purchase transaction is structured properly that equity can serve as down payment. funds must be sent to the table and the seller (through the escrow agent) will send funds back to the investor that sent funds on behalf of the buyer.

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