Investing in Commercial Real Estate

There are plenty of below market income generating commercial real estate offered that make excellent investment opportunities. The problem or barrier for most real estate investors buying these properties is the down payment required to purchase them. As a general rule of thumb, to purchase income-producing apartment buildings and mixed-use multi-family properties, one should be prepared to spend 25% to 35% of the purchase price for a down payment. In addition, the investor must have closing costs and reserves of 6 months or more. This is a substantial investment that eliminates many potential buyers. This can often be overcome with these creative financing strategies for commercial real estate investors.

Creative Financing

This is a very misunderstood concept in real estate. My simple definition has two parts. Creative financing requires a property with substantial capital and a willing and motivated seller. If the seller is motivated but there is no equity, there is no opportunity to use creative strategies to acquire the properties. Similarly, if the property has enough equity and the seller is unwilling and unmotivated, neither strategy will work.

3 Creative Strategies for Buying Commercial Real Estate

1. Seller Financing and/or Transfer: There are many ways to structure a deal where the seller can finance the property or hold a second mortgage for a short time and then the buyer can refinance the loan. Many lenders require that the loan be one or two years old. However, there are lenders we work with who will refinance immediately with no preparation required. These offers close within 3-6 months from the initial seller financing contract.
2. Transaction Financing Programs – These are programs where a private lender will finance the loan in one to forty-five days. The key is to have a buyer ready to close immediately or be able to refinance right away. This only works when the end lender is aware of the transaction financing and requires no preparation. As in #1 above, most lenders require a year or two to prepare for the property, so it is important to have the right final lender.
3. Down Payment Assistance Program: If the property has equity and the seller is willing to use it to help the buyer purchase the home, then a down payment assistance program similar to Ameri-Dream or Nehemiah (programs used to buying residential properties financed by FHA loans ) may be a great option for you. Ultimately, the Down Payment Assistance Company (DPA) makes the down payment and the seller reimburses the company at closing. This can only happen if there is substantial equity in the building.

As stated above, creative financing requires a substantial interest in the property that produces business income that the seller is willing and motivated to use to strategically sell the property as soon as possible. Lowering the price is simply not the answer because the main problem still exists. Commercial real estate investors do not have 25% to 35% for the down payment plus closing costs and reserves. Let a professional help you structure your deals to close.