What is the Minimum Down Payment Commercial Property?
How much do you need to put down to buy income producing property? Many investors are looking to buy commercial real estate income producing property with as little down payment as possible. They are doing this from many perspectives. Some investors have little or no money (are they really investors?); some have limited funds and just want the lowest down payment while other investors have the resources yet choose to leverage their money and use other peoples money. Finally many people just do not know. So first thing is to establish down payment standards. This is very hard to do because unlike residential lending with FNMA, FHMLC and FHA as standard conventional programs with universal guidelines Commercial Lending is mostly portfolio. Portfolio lending means each lender makes their own guidelines including the required down payment.
Standard Down Payment and Usual Lenders
- Loan Amount Down Payment Usual Lenders
- Under $500k – 25% to 30% – Local Banks / Small Cap Funds
- $500k to $2 Mil – 20% to 25% – Banks, FNMA, Life Companies, Funds
- $2 Mil Plus – 15% to 25% – Life Companies, Funds, FHA, FNMA
These standards are based on varying guidelines and standards. A Real Estate Investor may find different terms from a local lender. Also the down payment required is based on an acceptable property with a buyer with acceptable credit profile.
Why Such Large Down Payments
There are many reasons for the large down payments. First is these are all investment properties and therefore the investor must make an investment. There is greater risk to the lender if the investor has little or no investment in the property. Additionally, the smaller the units, the less the diversification. This means that if there are 6 units 1 or 2 vacancies move the property from profitability to loss. For larger units say 100, you can have 10 vacancies and still be at 90% occupancy. If there is a need for rental units in the area, the rent is in line with market rents, and there is competent management then the property will be profitable, even with a smaller down payment.
There are opportunities for smaller down payments but the property must have equity and the seller must be agreeable to creative financing options. But to think card blanche lower down payment would only mean greater problems than we have in the real estate market.