Commercial Loans Blog

How Much of a Downpayment Do I Need to Buy a Commercial Property?

Posted by George Blackburne on Thu, Oct 28, 2021

Screen Shot 2021-10-27 at 8.35.09 PMSo you're thinking about buying a commercial property - maybe a small apartment building or an office building.  

How large of a downpayment do you need to buy a commercial property?

If you are buying the property for your business, you might need as little as 10% down, if you use an SBA loan or a USDA loan.  Otherwise, if you are buying an apartment building, you will need 20% to 25% down.  If you are buying a commercial or an industrial property for investment purposes, you will need 25% to 30% down.

 

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As a general rule, commercial real estate lenders are more conservative than conventional home loans lenders.  Conventional home loans lenders will regularly make purchase money first mortgages that are 80% loan-to-value.  You might say that 80% loan-to-value ("LTV") is the standard LTV for home loans, sort of the "default mode" for such loans.

By the way, a conventional home loan is one where the loan is not guaranteed by the government.  Examples of government-guaranteed home loans include FHA loans and VA loans.  When the government is willing to guarantee the lender against loss, obviously the lender will increase its loan-to-value ratio.

Earlier I used the expression, purchase money first mortgage.  A purchase money first mortgage is one where the loan is used to buy the property, as opposed to a refinance, where the loan proceeds might be used to start a business or pay for your kid's college tuition.

 

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The standard or "default mode" for a purchase money first mortgage to buy an apartment building is a loan of 75% loan-to-value.  If you shop dozens of small banks and credit it unions located close to the property that you are buying, it would not be shocking if one of them - because they happened to be flush with cash - would offer to make you an apartment loan of 80% loan-to-value.

Is a triplex an apartment building?  No.  Multifamily properties have five or more rental units.  Loans on duplexes, triplexes, and four-plexes are actually considered home loans.  Why?  Both Fannie Mae and Freddie Mac will buy loans on one-to-four family dwellings.  As a result, home loans of up to 80% LTV are common on four-plexes.

Okay, but what if you want to buy a small strip center or a small multi-tenant office building to provide income for your retirement?  How large of a downpayment will you have to raise?

 

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In most cases, if you want to buy a commercial-investment property, you will probably have to put 30% down.  If the deal is small, and if you shop 30 or more banks and credit unions located close to the subject property, you just might find one willing to allow you to put just 25% down.

What if the seller is willing to carry back a second mortgage on the property?  Can you put down less money?  Unfortunately not.  Prior the the Great Recession, some banks allowed this; but these banks got crushed in the crash.  Bank regulators will no longer allow second mortgages behind bank first mortgages - neither on purchase money deals, nor later, when there is sometimes TONS of equity.  They won't allow it.    The bank will make you you refinance the entire first mortgage to access that equity.

But wait, as they say in the Ronco commercials, there's more.  If you are trying to buy a commercial-investment property, and the seller is willing to carry back a second mortgage for some of the purchase price, you should apply to Blackburne & Sons.  Unlike banks, we will allow such second mortgages.

 

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Okay, but what if you are trying to buy a commercial or industrial property for your company to occupy and use?  By all means, if your downpayment is an issue, you should apply for an SBA or a USDA loan.

You have probably heard about the SBA loan program.  If your business is older than three years, SBA lenders will lend you up to 90% of the purchase price of a building that you intend to use for your business.

What if your business is less than three years old?  The SBA will probably require that you you put 30% down.

 

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Okay, you have heard of the SBA loan program; but what is this USDA loan that I mentioned above.  The US Department of Agriculture, in order to bring jobs to financially depressed rural areas, has developed a program that is very similar to the SBA loan program.  It's called the USDA Business and Industries loan program.

Click here to apply for a USDA Business and Industries loan.  When the system asks for "Loan Type," simply click on USDA B&I Loan.

 

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Topics: downpayment to buy a commercial property