Page written by Chris Godfrey. Last reviewed on November 27, 2024. Next review due October 1, 2025.
Owning commercial real estate (CRE) can be a solid business strategy – boosting your cash flow and giving you a stellar ROI. However, you’ll need cash – and lots of it – to acquire any business property, as lenders will typically demand a down payment as a requirement of their financing.
So, what do you do if you lack the funds for a deposit? Read on to discover how to buy commercial real estate with no money down.
A down payment – or deposit – is a percentage of the purchase price of the commercial property you are buying. Lenders typically demand a down payment as a margin against your default or the real estate declining in value. They also want a down payment because it shows your commitment to the deal. You’re less likely to walk away from your commercial property loan and surrender the real estate if you get into financial difficulty when you have your own cash at risk.
The sum you may have to pay as a down payment on commercial real estate may be determined by the lender as a fixed percentage – such as 15% or 20% of all the loans they make. Or, the down payment may be calculated on a flexible basis, using different factors to judge how much cash the borrower must put into the deal.
Common factors used to determine a flexible down payment include:
Generally, the stronger your credit, cash flow and cash reserves, the lower the down payment you may have to pay.
It is tough to buy any kind of commercial real estate without putting some cash into the deal. Lenders want to see you have ‘skin in the game’ to reduce their risk and show your commitment to the long-term stability of the transaction. However, just because it’s tough to buy commercial property without supplying a down payment does not mean it’s impossible. Here are some creative tactics to help you avoid paying a cash deposit on that business property you want:
In a ‘rent to own’ deal, you’ll need the property seller to work with you in a transaction that can be a win/win for both parties. To start, you ask if the seller is willing to lease the property instead of selling it for cash. If they agree, you arrange a lease that gives you control of the real estate with an option to buy at fixed time in the future – say 3 to 7 years. During the period of the lease a set percentage of your rent payments go towards buying the property when you exercise your option. Effectively, you build a down payment over time instead of paying it all upfront. (You also get the chance to test the real estate out, making sure it meets your business needs without a major financial commitment).
When you execute your purchase option the accumulated down payment funds are applied to the property price as your cash deposit. This will allow you to seek a commercial mortgage that is less than 100% of the value of the property and meet the lender’s ‘skin in the game’ requirement.
Note – This option will only work if the seller does not need to sell the property immediately and is prepared to wait, collect rent and sell when you execute your purchase option.
SBA 7a loans are provided by banks, credit unions and online lenders who are part of the federal Small Business Administration (SBA) lender network. Partially backed by the US Government, these loans can provide up to $5million to qualifying borrowers with repayment terms as long as 25 years. Some SBA lenders may be willing to provide 100% loans to buyers of commercial property, which eliminates the need for a down payment. However, meeting the rules of eligibility for SBA loans can be tough. As well as an approval process that can take several months, organizations will typically need to have been in business for at least four years and have annual revenues over $180,000. Your personal FICO credit score will also need to be at least 680.
‘Seller financing’ is exactly what it sounds like – the seller acts as the bank, financing your acquisition of their property. This means they hold the note on the property and retain the mortgage while you make loan payments to them. Seller financing can also be a good option for buyers with credit issues, as sellers may not perform the extensive background and credit checks that traditional lenders demand.
The downside of this tactic is that you’ll likely need to pay above market interest rates or agree upon a higher purchase price in order to make the seller comfortable with no down payment.
Commercial real estate mortgages are typically the most economical way to buy commercial property. These types of loans are long term – often up to 30 years – and often come with the lowest interest rates of any type of business financing. Some commercial mortgages may be obtained with down payments of 10% or less, while others may be available as interest only for a set number of years before reverting back to full amortization.
There are three basic types of commercial real estate mortgage:
Commercial mortgages may be obtained by approaching banks, credit unions and online lenders one by one, or you could use the services of a loan marketplace that will immediately introduce you to a choice of CRE loans from different lenders. Some marketplace platforms can also give you advice and help you with the application process. This can be especially useful for borrowers who have never taken out a commercial mortgage before.
For a commercial mortgage or any type of business loan, working with business finance experts can make all the difference when applying for funding. Contact Swoop to discuss your borrowing needs, get help with your application and to compare high-quality commercial mortgages and business loans from a choice of lenders. Get into US commercial real estate with a low or no down payment. Register with Swoop today.
Chris is a freelance copywriter and content creator. He has been active in the marketing, advertising, and publishing industries for more than twenty-five years. Writing for Wells Fargo Bank, Visa, Experian, Ebay, Flywire, insurers and pension funds, his words have appeared online and in print to inform, entertain and explain the complex world of US consumer and business finance.
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