How to Get Commercial Real Estate Loans with No Down Payment

Getting a commercial real estate loan with no down payment may seem like a daunting task, but it's not impossible. Some lenders offer 100% financing options, which can be a huge relief for investors with limited capital.

However, these loans often come with higher interest rates and fees. For example, a 100% loan might have an interest rate of 8-10% compared to a 20% down payment loan with an interest rate of 5-7%.

To qualify for a no down payment commercial real estate loan, you'll typically need a strong credit score and a solid business plan.

100% commercial real estate financing is available up to (and sometimes over) $5 million for owner-occupied properties with an SBA loan.

You'll need good personal credit to qualify for these loans. A stable cash flow for your business is also essential, and you'll need to show this for approximately the last 1 to 1.5 years.

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To qualify, your business must have a debt service coverage ratio of approximately 1 to 1.25x. This means that your business's income should cover its expenses, including loan payments, by at least 1 to 1.25 times.

These loans are available for established businesses moving from renting to owning or for businesses undergoing an expansion by purchasing a competitor. They're also available for established, cash-flowing businesses that are expanding by opening new locations.

No down payment loans are available for transactions where you're purchasing a business (without real estate) from a competitor, as long as they share the same NAICS code and are in the same geographic area.

100% financing is not available for new businesses or for purchasing a competitor's business that does not have the same NAICS code.

Here are some examples of special use properties that are eligible for 100% LTV commercial real estate financing:

You can potentially put no money down to acquire a commercial property using a few options. These methods may not be the easiest or most convenient, but they can be an excellent way to start building your portfolio before you have any money.

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One option is to use the 504 loan, which allows the business to borrow the down payment from another source. Some 504 lenders will allow this and some may require that the business owner borrow the money for the down payment and prove that they can afford the payments on the borrowed money from their take-home pay or other income.

It is also possible to rollover various types of retirement accounts (tax and penalty-free) to be used for down payment.

Gift Funds are another option, as the SBA allows the use of gifts from friends or family.

You can have investors supply you with the funds for down payment in exchange for a percentage of ownership in the business, but you will typically need some of your own "skin in the game."

The seller can hold a second mortgage for half of the down payment, but it must be on "full standby", meaning no payments for 24 months, or on "partial standby", which means you need to make "interest only" payments.

Here are some specific property types that may be eligible for 100% SBA financing:

Keep in mind that SBA 100% commercial real estate financing is NOT for investment properties (multi-family, apartments, single family, single tenant, multi-tenant, etc.).

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SBA loans offer 100% financing for commercial property with rates between Prime + 0% and Prime + 2%. This means that even with a floating rate, you can expect a relatively low interest rate.

For well-qualified small businesses, SBA loans often come with a 25-year amortization and a 2, 3, or 5-year fixed rate. Stronger businesses and medical practices may qualify for even lower fixed rates, sometimes below the Prime Rate.

The Prime Rate at the time of this update is 8.5%, and the Federal Reserve Board of Governors has stated that they intend to drop the Fed Funds Rate, which the Prime Rate follows, at least once later this year.

Some SBA lenders are getting creative and more flexible due to the dramatic rise in rates over the last 2 years. This has resulted in more competitive terms and below-market rates, including some loans at or below the Prime Rate.

Worth a look: Current Prime Rate for Commercial Loans

If your business doesn't qualify for 100% SBA financing, you may still qualify for a low down payment and some SBA lenders may allow the borrowing of the down payment for an SBA loan.

Here are some ways to finance the down payment:

Note that some lenders may not allow borrowing the down payment, and some may require a minimum down payment of 2.5% of the purchase price.

Alternative financing options can be a game-changer for commercial real estate investors looking to acquire properties with no down payment.

FHA 203(k) Loans can be used for mixed-use commercial properties with up to four residential units, requiring only a 3.5% down payment.

SBA 7(a) Loans can be structured with as little as 10% down, making them a versatile option for various commercial real estate purposes.

Seller Financing with Minimal Down Payment can be negotiated directly with the seller, offering more flexibility than traditional bank loans.

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Some lenders will consider the value of your business assets as collateral, potentially reducing the need for a large cash down payment.

You can also explore local and state government programs that might offer grants or low-interest loans for commercial real estate development.

Here are some alternative financing options to consider:

The types of loans available for alternative financing can be a bit overwhelming, but let's break it down. The most common types of loans include SBA 504 Loans, which can offer up to 100% financing, but typically require a 10% down payment that can sometimes be covered by a separate loan.

Some SBA 504 Loans can result in no money down from the borrower, but qualifications include having a credit score above 650, demonstrating business experience, and proving the ability to repay the loan. Hard money loans, on the other hand, offer 100% financing based on the property's value rather than the borrower's creditworthiness.

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Hard money lenders often focus more on the property's potential than the borrower's financial history, but interest rates are typically higher. USDA Business and Industry Loans can also offer up to 100% financing for businesses that meet specific criteria, such as operating in an eligible rural area and demonstrating the potential for job creation or preservation.

Seller financing is another option, where the property seller acts as the lender, potentially offering 100% financing. Qualifications vary widely as they're negotiated directly with the seller, but typically include a strong business plan and proof of ability to make payments.

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Seller financing is a viable option for buyers with credit issues, as sellers often don't perform extensive background and credit checks. This means you can still acquire a property even if you have a less-than-perfect credit history.

You'll likely have to pay above market interest rates or agree to a higher purchase price to make the seller comfortable with a 0% down payment. This is a trade-off for the convenience of not having to come out of pocket for a down payment.

A 5 to 7 year balloon is common in seller financing deals, which means the loan will come due and need to be paid off in full at the end of that period. You'll then refinance the property to pay the seller off.

To keep your monthly payments as low as possible, negotiate a 30 year amortization, but keep in mind that you won't have as much equity built up in the property when you go to refinance.

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Some banks do support no-money-down lending strategies for buying commercial property, especially if backed by government programs and convinced by your business plan, credit history, income potential or collateral value.

Research is key, as some banks may not support such strategies, especially if they're unsatisfied with your financial situation, credit score, debt ratio or cash flow.

Every bank has a different loan program, so it's essential to talk with different lenders at different banks to understand their loan terms and options.

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Larger financial institutions may be hesitant to work with a first-time commercial investor on a no-money-down strategy, but other larger financial institutions may support it.

Credit unions may be willing to be more flexible and provide a lower interest rate if they're local to the area and are in a growth stage.

Hard money lenders can also support you with a different type of loan and financing options, like a bridge loan, which can be a good idea for new investors who need short-term capital to acquire and renovate a project before refinancing it into a no-money-down deal.

Hard money lenders typically require some "skin in the game" for commercial deals and charge higher rates, but if you have done your due diligence and feel confident about the property value after the renovation of a value-add deal, it's possible that you can get all of your liquid money back out of the deal when you refinance.

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Securing a commercial real estate loan with no down payment can be a challenging process, but understanding the steps involved can make it more manageable. To start, you'll need to meet the lender's basic requirements, which include having good personal credit and stable cash flow for your business.

It's essential to have a solid credit score, as lenders view it as a crucial factor in determining your creditworthiness. A high credit score can make a significant difference in the loan approval process.

To demonstrate your business's financial stability, lenders will want to see evidence of consistent, strong cash flow from your business operations. This means you'll need to provide financial projections and market analysis to show how the property will generate income to cover loan payments.

If you're considering a loan with no down payment, you'll need to be prepared to negotiate with lenders. Don't settle for the first offer, as you can shop around and compare terms from multiple lenders to find the best deal.

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Here are some key requirements to keep in mind:

These requirements may seem daunting, but understanding them can help you prepare and increase your chances of securing a loan with no down payment.

Preserving capital is a significant advantage of no down payment commercial real estate loans, allowing you to keep your cash reserves for business operations, renovations, or other investments.

One of the most notable benefits is the ability to acquire property without depleting your cash reserves.

With no down payment required, you may be able to afford more expensive properties or multiple properties simultaneously, increasing your purchasing power.

This can be a game-changer for investors looking to enter the commercial real estate market sooner.

However, these loans also come with potential drawbacks, including higher interest rates and larger monthly payments.

To compensate for the increased risk, lenders typically charge higher interest rates on no down payment loans, which can significantly increase the total cost of the loan over time.

You'll need to carefully consider these risks and weigh them against the potential benefits before making a decision.

Here are some of the key risks to be aware of:

Commercial real estate loans with no down payment are available, but they often come with higher interest rates and stricter terms.

You can explore options like SBA loans, which offer favorable terms and flexible repayment schedules. These loans can help you secure funding for your business without requiring a significant down payment.

SBA loans typically require a good credit score and a solid business plan to qualify. Borrowers can expect to pay a higher interest rate, around 7-9% on average.

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Refinancing and negotiation are key components of securing a commercial real estate loan with no down payment. You can refinance your commercial building with little or no equity through an SBA lender if your financials and tax return show enough income to qualify.

The key to qualifying is having a strong financial story, and every transaction has its own unique circumstances. Ultimately, the lender decides what they feel comfortable approving.

Offering a higher price with better terms can also be an option, but it may impact or destroy the cash flow of the deal.

If you own a building and lack sufficient equity to refinance with a conventional or bank loan, this program could be a good fit.

The SBA provides rules for lenders, but ultimately, it's up to the lender to decide what they feel comfortable approving.

You might qualify for an SBA loan if your recent financials and tax return show enough income to qualify, despite previous struggles with property value, financials, or COVID-19.

Every transaction has its own story, and the key to qualifying is being strong on paper recently.

Additional reading: Using Rental Income to Qualify for Conventional Mortgage

It's possible to offer a higher price to get the seller and/or lender on board with a zero-money-out-of-pocket acquisition.

This approach can be complicated, as it may impact or destroy the cash flow of the deal. However, it's worth considering if the seller is willing to negotiate.

By offering a higher price, you may be able to secure a better deal, but be aware that it could also affect the interest rate.

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No matter how appealing a no-money-down strategy sounds, it's essential to be aware that not every acquisition will be successful using one of these tactics, and that's okay.

Keep in mind that no-money-down tactics can be challenging to pull off, but the most prosperous commercial real estate investors are ultimately the most persistent and inventive.

Before attempting to construct a deal, make sure you have all of your bases covered by consulting with your lawyer, CPA, and other expert advisors.

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