In this article, I would like to talk about how much money you need to put down when you buy an apartment building or piece of commercial real estate.
First, I would like to warn both beginning and experienced investors: Gone are the days of easy fast financing packages from lenders.
The market has drastically changed since the “mortgage meltdown”. The impact on the residential market has certainly affected commercial real estate of all types. Today's reality is that financing is typically going to take:
1) More Time.
2) More Effort.
3) More Information For Lenders.
That is not to say that this will be the case for every financing project – that is for sure. But we are speaking in generalities for any type of investment property; whether that be an apartment building, a strip mall, a single-tenant store, or anything that would have considered commercial real estate.
Most lenders are typically going to require 20 to 25 percent down payment to finance any type of commercial real estate. This is not a hard and fast rule, but is generally going to be the case when you are buying an investment property.
What I have seen recently is that even if the appraised value is very high vs. purchase price, the lender will still require 20 to 25 percent of the purchase price.
Even with the 20% down payment, a lender will be closely looking at the financials of the property. They may be using a higher vacancy factor, higher expense factors, and higher reserves than in recent years. Keep this in mind as you are shopping for a loan.
Again, we are specifically talking about going the traditional route of financing for a commercial loan package.
Let's face it.
Banks, credit unions, and other lenders are lending towards being very conservative in the current market.
This is good news for buyers, and can be used as a leverage point in negotiations with the seller.
You will also find that more sellers will be willing to do seller financing in the current marketplace because of the current lending requirements. Again this is great news for buyers because if you can get a property with seller financing, you are eliminating a number of up-front costs for getting a traditional loan.
Keep in mind that a tougher lending environment can be to your benefit as a buyer. Remember that everything in business runs in cycles, so use the current lending market to your advantage.