In this article, I would like to talk about how much money you need to deposit when you buy an apartment building or commercial property.
First of all, I’d like to warn both beginning and seasoned investors: Gone are the days of quick and easy financing packages from lenders.
The market has changed dramatically since the “mortgage crash.” 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 is not to say that this will be the case for all financing projects, that is for sure. But we are talking about generalities for any type of investment property; whether it’s 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 buying 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 keep a close eye on the property’s finances. They may be using a higher vacancy factor, higher expense factors, and higher reserves than in recent years. Keep this in mind when looking for a loan.
Again, we are specifically talking about going the traditional financing route for a business loan package.
Let’s be honest.
Banks, credit unions, and other lenders are inclined to be 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 finance sellers in today’s market due to current loan requirements. Again, this is great news for buyers because if you can get a property with seller financing, you are eliminating a number of upfront costs to obtain a traditional loan.
Keep in mind that a tougher credit environment can benefit you as a buyer. Remember that everything in business runs in cycles, so use the current credit market to your advantage.