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Volume 11: Issue 6 | Date: November 8, 2021
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COMMERCIAL LENDING NEWSLETTER
You are receiving this letter because you are one of my Spartans - my top-producing brokers and investor clients - of whom I am allowed to have 300. Removal instructions are below. Today we’ll discuss how much of a downpayment is need to purchase commercial real estate. As always, we have lots of cute, clean jokes, funny pictures, and a video explaining the COVID-19 vaccine for children 5 to 11yrs.
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Joke Du Jour
Two men were chatting in the living room while their wives were in the kitchen. One of the men was telling the other about this wonderful restaurant he and his wife had visited a few days earlier. "Wow, sounds great! What's the name of it?” "Hmm, what was it? Dear me, I'm having a hard time remembering. Oh, what's that flower with the pink blossom and thorns on the stem?” "You mean a rose?” "Yeah, that's it." Then looking over his shoulder he shouted, "Hey Rose, what's the name of that restaurant we went to the other night?”
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Here is What Blackburne & Sons Can Do
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New House Joke
Little Jimmy: "So your family got a new house! How do you like it?"
Little Tommy: "It's terrific! I have my own room, Billy has his own room, and Jenny has her own room; but poor Mom is still in with Dad.”
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- Today's Observation -
How Much of a Downpayment Do I Need
to Buy Commercial Property?
So you're thinking about buying a commercial property - maybe a small apartment building or an office building. How large of a downpayment do you need to buy a commercial property? If you are buying the property for your business, you might need as little as 10% down, if you use an SBA loan or a USDA loan. Otherwise, if you are buying an apartment building, you will need 20% to 25% down. If you are buying a commercial or an industrial property for investment purposes, you will need 25% to 30% down.
As a general rule, commercial real estate lenders are more conservative than conventional home loans lenders. Conventional home loans lenders will regularly make purchase money first mortgages that are 80% loan-to-value. You might say that 80% loan-to-value ("LTV") is the standard LTV for home loans, sort of the "default mode" for such loans. By the way, a conventional home loan is one where the loan is not guaranteed by the government. Examples of government-guaranteed home loans include FHA loans and VA loans. When the government is willing to guarantee the lender against loss, obviously the lender will increase its loan-to-value ratio.
Earlier I used the expression, purchase money first mortgage. A purchase money first mortgage is one where the loan is used to buy the property, as opposed to a refinance, where the loan proceeds might be used to start a business or pay for your kid's college tuition.
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The standard or "default mode" for a purchase money first mortgage to buy an apartment building is a loan of 75% loan-to-value. If you shop dozens of small banks and credit it unions located close to the property that you are buying, it would not be shocking if one of them - because they happened to be flush with cash - would offer to make you an apartment loan of 80% loan-to-value. Is a triplex an apartment building? No. Multifamily properties have five or more rental units. Loans on duplexes, triplexes, and four-plexes are actually considered home loans. Why? Both Fannie Mae and Freddie Mac will buy loans on one-to-four family dwellings. As a result, home loans of up to 80% LTV are common on four-plexes.
Okay, but what if you want to buy a small strip center or a small multi-tenant office building to provide income for your retirement? How large of a downpayment will you have to raise? In most cases, if you want to buy a commercial-investment property, you will probably have to put 30% down. If the deal is small, and if you shop 30 or more banks and credit unions located close to the subject property, you just might find one willing to allow you to put just 25% down.
What if the seller is willing to carry back a second mortgage on the property? Can you put down less money? Unfortunately not. Prior the the Great Recession, some banks allowed this; but these banks got crushed in the crash. Bank regulators will no longer allow second mortgages behind bank first mortgages - neither on purchase money deals, nor later, when there is sometimes TONS of equity. They won't allow it. The bank will make you you refinance the entire first mortgage to access that equity.
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But wait, as they say in the Ronco commercials, there's more. If you are trying to buy a commercial-investment property, and the seller is willing to carry back a second mortgage for some of the purchase price, you should apply to Blackburne & Sons. Unlike banks, we will allow such second mortgages.
Okay, but what if you are trying to buy a commercial or industrial property for your company to occupy and use? By all means, if your downpayment is an issue, you should apply for an SBA or a USDA loan. You have probably heard about the SBA loan program. If your business is older than three years, SBA lenders will lend you up to 90% of the purchase price of a building that you intend to use for your business. What if your business is less than three years old? The SBA will probably require that you you put 30% down.
You have heard of the SBA loan program; but what is this USDA loan that I mentioned above. The US Department of Agriculture, in order to bring jobs to financially depressed rural areas, has developed a program that is very similar to the SBA loan program. It's called the USDA Business and Industries loan program. Click here to apply for a USDA Business and Industries loan. When the system asks for "Loan Type," simply click on USDA B&I Loan.
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Video Training Courses For The Newbie Commercial Mortgage Broker
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Ghost Joke
A young American tourist goes on a guided tour of a creepy old European castle. At the end of the tour the guide asks her how she enjoyed it. She admits to being a bit worried about seeing a ghost in some of the dark, cobwebby rooms and passages. "Don't worry," says the guide. "I've never seen a ghost all the time I've been here.” "How long is that?" asks the girl. "About three hundred years…"
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Best Value on Training Courses
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Final Funny
Now that they are retired, my mother and father are discussing all aspects of their future. "What will you do if I die before you do?" Dad asked Mom. After some thought, she said that she'd probably look for a house-sharing situation with three other single or widowed women who might be a little younger than herself, since she is so active for her age. Then Mom asked Dad, "What will you do if I die first?" He replied, "Probably the same thing.”
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Members of the Blackburne Family of Companies
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555 University Ave, Suite 150
Sacramento, CA 95825
P: (916) 338-3232
F: (916) 338-2328
CA DRE #00829677 // NMLS #103430
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