Buying commercial property without a down payment is possible but not easy. You must be creative, resourceful and willing to take risks. This article will show you how to buy a commercial property with no money down. You'll also learn the pros and cons of each strategy to enable you to make better real estate investing choices.
Understanding What No Money Down Really Means
No money down does not mean you can purchase a commercial property without expenses. You will still have to pay closing costs, fees, taxes, insurance and other associated expenses. What it does mean is that you can buy a commercial property without putting any of your money down as a down payment. The typical down payment for commercial properties ranges from 10% to 35%, depending on various factors.
A down payment serves as a security for the lender, but it can be a significant obstacle for investors who lack the necessary savings or equity. Consequently, some investors seek ways to buy commercial property with no money down or very little money down. This strategy can boost their return on investment and leverage their capital. However, it also presents challenges and drawbacks.
Ways to Buy Commercial Property with No Money Down
To buy commercial property without money down, evaluate options and consider the associated benefits and risks. Common methods for buying commercial property with no down payment include:
Get an SBA Loan
Consider a Small Business Association (SBA) loan if you're looking to buy commercial property but don't have a down payment. This loan is part of the SBA's program, designed to support and guarantee small businesses. With the SBA 504 or SBA 7 loan, you can get up to 90% of the purchase price financed at a low interest rate and long repayment term. The loan comes in two parts: one from a certified development company (CDC) and another from a conventional lender.
The CDC portion covers up to 40% of the purchase price, while the conventional lender covers up to 50%. The remaining 10% can be borrowed or gifted. This real estate loan is a good option because of its low interest rate, flexible eligibility criteria and extended repayment term. However, it requires strict property use and occupancy, has high fees and closing costs and has a lengthy application process that can take months.
Borrowing from Friends and Family
Borrowing from friends or family is an easy way to raise funds for your down payment or even for the entire purchase price. You can negotiate the loan's terms, including interest rates, repayment schedules and collateral. Borrowing from loved ones helps you avoid the hassle and expense of dealing with banks, build trust with lenders and reduce taxes. However, failure to repay the loan can damage relationships and cause emotional stress. Additionally, the loan may limit your options and flexibility for the property's future sale or refinancing. Borrowing from friends and family can expose you to legal risks if you don't have proper documentation for the loan.
Assume the Existing Mortgage
Assuming the existing mortgage of a seller is a way to buy a commercial property without needing a down payment or applying for a new loan. You take over the remaining mortgage payment on the loan. This method can save time and money, as you don't have to go through the process of getting approved for a new loan or paying closing costs. It can also benefit you with a better interest rate and terms inherited from the existing loan that the seller negotiated with the lender.
However, this method requires the lender's approval, the seller's cooperation and thorough due diligence. The lender may not agree to let you assume the loan or may impose additional conditions or fees. The seller may not be willing or may ask for a higher price or other concessions. Verify the status and state of the loan and property before taking over.
Lease to Buy
Leasing to buy is a method for purchasing commercial property without upfront payment. Essentially, you lease the property from the seller for a set period and have the option to buy it at a predetermined price when the lease ends. Your monthly rent covers both the occupancy and a portion of the purchase price, and you pay an option fee upfront to secure your right to buy the property in the future.
This method offers several benefits, such as the opportunity to evaluate the property's performance and potential before purchasing it, the ability to secure a favorable price and terms and the chance to build equity and credit. However, it also comes with some risks, including market fluctuations that may cause you to pay more than the property is worth, legal disputes and maintenance costs. Consulting with an expert or lawyer can help you navigate these risks.
Seller Financing
One way to purchase commercial property without a down payment is through seller financing. Instead of obtaining a real estate loan from a traditional lender, you receive funding directly from the property owner. This agreement typically involves regular payments over an agreed-upon period with a lien on the property until you fully repay the loan.
Seller finance eliminates the need to qualify for a conventional loan and allows for directly negotiating loan terms with the seller. It may also save you money on closing costs and fees.
On the flip side, finding a seller willing and able to finance the deal can be challenging. The seller may also require a down payment or balloon payment and the agreement may not protect you from foreclosure. Despite these potential drawbacks, seller financing remains a viable option for purchasing commercial property without a down payment.
Negotiate the Down Payment Based on the After Repair Value (ARV)
One way to purchase commercial property without an upfront payment is to negotiate the down payment based on the property's estimated value after repairs. Instead of determining the down payment based on the current market value or asking price, you'll base it on the property's ARV.
This strategy works best for properties that require renovation or rehabilitation. You can enhance its value by repairing and upgrading it, then use the increased value as your down payment or equity for getting a loan. This approach allows you to buy properties at a discounted rate, creating instant equity and qualifying for a higher loan amount. However, it requires a lot of research and analysis, execution and management of repairs and renovations and financing.
Offer a Higher Price with Better Terms
To buy a commercial property without a down payment, consider offering a higher price with better terms, such as a faster closing time, longer due diligence period, higher earnest money deposit, shorter contingency period, waiver of inspections or appraisals, leaseback option or referral fee. This approach can make you stand out from other buyers and win over the seller, creating a win-win situation. However, it can also increase risk, limit flexibility and require strong negotiation skills. By focusing on aspects beyond price alone, you may be able to secure a deal that benefits both you and the seller.
Work with a Business Partner
Buying commercial property with no money down can be achieved by partnering with someone with more money or experience. This way, you split the ownership and responsibilities according to your agreement. Partnering has benefits such as leveraging your partner's resources and expertise, sharing the risk and reward and learning from each other. However, conflicts and disagreements can arise due to differing goals and opinions and issues such as trust, communication, accountability and liability must be addressed. Partnering may reduce your control and autonomy, and you may not get the full benefit or ownership of the property.
Do Banks Support No-Money-Down Lending Strategies?
Banks may or may not support no-money-down lending strategies for buying commercial property. Some banks do, especially if backed by government programs and convinced by your business plan, credit history, income potential or collateral value. Still, some banks do not support such strategies, especially if risky or unconventional or if they are unsatisfied with your financial situation, credit score, debt ratio or cash flow. Therefore, research banks that are willing to lend and prepare a strong loan application to showcase your capabilities.
The Zero Down Guide to Buying Commercial Properties
Buying commercial property with no money down is an ambitious goal that requires careful planning and consideration of various strategies. While options like SBA loans, seller financing and lease-to-buy arrangements can make it possible, each has advantages and risks. Ultimately, success in acquiring commercial property without a down payment hinges on creativity, negotiation skills and a deep understanding of the market. Be prepared to navigate the complexities of real estate deals and financial arrangements to realize this goal.
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Frequently Asked Questions
Can you buy commercial property with no money down?
It’s difficult to buy commercial property with no money down, but some options are available, such as seller financing or finding a partner to invest with.
Is it smart to put more money down on commercial real estate?
Putting more money down on commercial real estate can lower your monthly payment and interest rate, but there may be better options depending on your financial situation and investment goals.
Do you need a down payment for an SBA loan?
Yes, SBA loans typically require a down payment of 10-15% of the total loan amount.
About Anna Yen
Anna Yen, CFA is an alternative investment writer with over two decades of professional finance and writing experience in roles within JPMorgan and UBS derivatives, asset management, crypto, and Family Money Map. She specializes in writing about alternative investment topics ranging from derivatives to real estate and cryptocurrencies. Her work has been published on sites like Quicken, the crypto exchange Bybit, and Credit.com.