In this article, I’d like to talk about how much money you need to put down when buying an apartment building or commercial real estate.
First of all, I would like to warn new and experienced investors alike: Gone are the days of quick and easy financing packages from lenders.
The market has changed dramatically since the “mortgage crisis.” The impact on the residential market has undoubtedly affected commercial real estate of all kinds. The current reality is that financing will generally require:
1) More time.
2) More effort.
3) More information for lenders.
That’s not to say that this will be the case for all funding projects, that’s for sure. But we are speaking in general for any type of investment property; whether it be an apartment building, a shopping mall, a single-tenant store, or anything that is considered commercial real estate.
Most lenders will generally require a 20 to 25 percent down payment to finance any type of commercial real estate. This is not a hard and fast rule, but it will generally be the case when you buy an investment property.
What I have seen recently is that although the appraisal value is very high vs. purchase price, the lender will still require 20 to 25 percent of the purchase price.
Even with a 20% down payment, a lender will take a close look at the finances of the property. They may be using a higher availability factor, higher expense factors, and higher reserves than in past years. Keep this in mind when looking for a loan.
Again, we’re specifically talking about going the traditional financing route for a commercial loan package.
Let’s be honest.
Banks, credit unions, and other lenders are leaning towards being very conservative in today’s market.
This is good news for buyers and can be used as a fulcrum in negotiations with the seller.
You will also find that more sellers will be willing to do seller financing in today’s market due to current loan requirements. Again, this is great news for buyers because if you are able to get a property with seller financing, you are eliminating a number of up-front costs to get a traditional loan.
Keep in mind that a tougher credit environment may benefit you as a buyer. Remember that everything in business works in cycles, so use the current lending market to your advantage.
