Want to start your real estate portfolio through commercial properties, but don’t have the money, or qualifications to apply for a conventional loan? Wondering how to buy commercial property with no money?
As a real estate investor, I know how hard it is at the start. For the very first apartment complex I bought, I sold smaller properties but still didn’t have enough for a bank down payment. I needed a way to creatively finance that first purchase.
Luckily, you don’t have to give up just yet – securing funds for a down payment isn’t quite as hard as people make it out to be.
This article will outline the many ways an investor can successfully finance a commercial property plus the pros and cons from both a buyer and seller perspective.
TL;DR
- Buying Commercial Property with No Money Down: The article explores creative financing options for real estate investors who lack the funds for a traditional down payment.
- Lease-to-Own Arrangements: One strategy involves finding properties with lease-to-own arrangements, allowing flexibility for the buyer and potentially leading to faster sales for the seller.
- Cash Substitutes and Creative Financing: The article suggests using personal property, skills, or trades as alternatives to a traditional down payment, emphasizing the advantages of creative financing for negotiation and avoiding strict bank processes.
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Can You Buy Commercial Real Estate with No Money?
Yes. it’s completely possible to buy commercial real estate property with no money. Investors can find ways to spend as little money out of pocket as possible — You just have to be creative with your financing options.
You will still have to fork over some cash for related expenses like closing costs, fees, taxes, insurance, and other associated expenses. You’ll also need cash reserves to operate the property unless it has significant cash flow from day one.
7 Ways to Finance Commercial Real Estate Without A Down Payment
Down payments are a requirement for most loans since they serve as insurance for the lender but may be a very difficult hurdle for investors who don’t have the capital to finance the property out of pocket.
Luckily, I have 7 financing options and strategies that can help you finance real estate deals without any money down:
1. Lease To Own
One option is to look for a commercial property that has a lease-to-own arrangement.
Also known as rent-to-own, This strategy works with the seller “renting” the property to a tenant and offering the option to buy it during the lease.
What makes a lease-to-own option different from a standard lease agreement is that a portion of your monthly payments to your landlord will be applied to the purchase price of the property.
Why should you do this?
With lease-to-own, you can either occupy the property and live in it, use it for business space, or sub-lease it to other tenants to make up the monthly payments to the property owner.
Additionally, your payments can also add up to the purchase price of the property so you don’t have to shell out a sizeable down payment.
My favorite part of lease-to-own arrangements is that they can help you assess whether you like a property or not without outright buying it. If the property doesn’t work for you, you can walk away– no strings attached.
Why would the seller do this for you?
Sellers offer lease-to-own arrangements because of two main reasons:
- Lease-to-own arrangements can lead to faster sales and lower vacancy risk since the property is now accessible to a wider range of buyers. These potential buyers are either in the process of saving up for a down payment or individuals with poor credit scores.
- Since buyers are willing to jump on the opportunity to own the property at a later date, sellers can leverage this demand and command a higher selling price.
2. Seller Financing
Instead of having to go through banks and subjecting yourself to rigorous qualifying requirements and time-consuming approvals processes, you can go with seller financing.
Also known as owner financing and purchase money mortgages, seller financing is a viable option for buying commercial property with no money.
Seller financing works with the property owner/seller acting as the “bank” and financing the buyer in exchange for monthly payments based on your agreed loan terms.
Why should you do this?
First, seller financing eliminates the middleman (the bank) and allows you to directly negotiate and set loan terms with the property seller.
The seller can even waive down payment requirements, closing costs, and extra fees, and factor it into the purchase price or the agreed interest rate instead.
Depending on how good your negotiation skills are, you can buy commercial real estate without shelling out your own money or taking out a second mortgage.
Why would the seller do this for you?
The main reason why sellers would do this is that the potential returns can beat an outright cash purchase. Since sellers know that buyers will line up to get the opportunity to buy a property with no money down, sellers can impose a higher price and/or interest rates (compared to a traditional lender) to maximize their profits.
Sellers who are having trouble selling their property can also be motivated to offer seller financing. This was the case with my first multifamily commercial property.
Key Considerations
Depending on the loan terms, sellers can also demand a down payment or a balloon payment to protect them if the buyer defaults. Speaking of defaults, sellers still win in the end since they’ll usually require in the agreement that the seller retains the right to foreclose and repossess the property just like a traditional lender.
Additionally, while this may sound like an easy way to buy commercial property with no money, finding a seller who is willing to finance you is very difficult due to the nature of the loan. I have experienced this myself — it took a while before I found someone willing to finance me through the deal.
3. Subject-to Mortgage
If you discover your seller is in a tight spot and does not have the financial capacity to continue the mortgage, you can offer them a “subject-to” mortgage arrangement.
“Subject to” mortgages means that you’re taking on the existing mortgage of the property and letting the owner/seller walk away from their loan. You then pay the existing mortgage payments either through a lump sum or a monthly payment option.
Why should you do this?
Subject-to mortgages are one of the most effective ways to buy a commercial property with no money or need to apply for a loan.
Not only do they save you money since you don’t have to pay closing fees but they also save you time by not going through the rigorous (and often time-consuming) approval process banks are infamous for when taking out a conventional loan.
Additionally, you can also gain advantages such as a more favorable interest rate and terms derived from the existing loan that the seller arranged with the lender.
Why would the seller do this for you?
Sellers do this arrangement simply because they want an exit strategy if they’re in a bad financial spot or have lost interest in the property and want to cut their losses.
Think of subject-to-mortgages as a “get-out-of-jail” card for the seller.
Key Considerations
If you’re interested in doing this financing option, I recommend reviewing the loan documents thoroughly and cooperating with your seller to verify the status of the loan.
Why? Some properties’ original mortgages have a “due-on-sale” clause which requires the borrower to repay their outstanding loan in full once the property is sold or transferred in any way.
This clause is a protective measure for the lender to ensure that the original terms of the mortgage agreement, including interest rates and repayment conditions, are maintained.
It prevents the borrower from transferring the property to another party without the lender’s involvement and approval. Additionally, the lender may not agree to let you assume the existing mortgage and may even sanction you with additional requirements or higher fees.
4. Partnerships
If you have a close friend, relative, or business partner who has more money or experience than you, you can consider offering them a partnership to buy commercial real estate properties.
Why should you do this?
Partnerships enable you to leverage your partner’s resources and expertise. If someone lacks in financial or experience, you and your partner can cover each other’s shortcomings and learn from each other’s mistakes.
Additionally, since you both split the ownership and responsibilities of your commercial property, you also share the risk and reward that comes with owning one.
Key Considerations
Partnerships need a lot of trust to work, and they come with several complications such as:
- sale or lease the property
- property management tasks such as maintenance and repairs
- How will the profits be divided between you two?
- Do you take the down payment from your partner with the promise of reimbursing them later, and keep your name alone on the mortgage or do you jointly secure the mortgage and share the monthly repayments?
Be cautious about legal conflicts in the future. In a partnership, sometimes one party needs to relinquish some control and may even need to forfeit full ownership or benefits of the property due to conflicts and disagreements.
5. Government-Backed Financing
If you have a business classified as a Small and Midsize Enterprise (SME), you can apply for a Small Business Association (SBA) loan to buy a commercial property with no money down.
SBA loans are government-backed agencies partnering with financial institutions to directly or indirectly finance SMEs that meet their strict eligibility requirements.
Hotels are a great example of a commercial property that qualifies for a SBA loan. It’s the financing arrangement I currently have in place for two of my hotels.
Why should you do this?
Since the government guarantees this loan, banks are incentivized to grant these loans to those who qualify since the government will reimburse the lender if the borrower defaults on their mortgage.
Investors utilizing SBA 504 or SBA 7 loans can secure financing for up to 90% of the purchase price, with extended interest rates and repayment terms.
The SBA 504 loan will be divided into two components — your loan will first be provided by a certified development company (CDC) to cover up to 40% of the purchase price, and the other half will come from a conventional lender to cover the remaining 50%.
Key Considerations
While SBA loans do not need any down payments, the financial institution may require you to put down at least 10-30% since they are shouldering the loan and are within their legal right to impose one, according to the SBA.
Additionally, SBA loans have high closing fees, has a time-consuming application process, and strict eligibility requirements such as a minimum owner-occupancy rate of 51% or more, the ability for the property to repay the loan from existing liquidity.
6. Seller-Provided Down Payment
In some cases (and thorough convincing), you can ask the property seller to pay the down payment on your behalf.
Why should you do this?
In order to get your foot through the door through such an arrangement, you need to sweeten the pie by paying higher than their selling price — meaning you have to pay larger monthly payments in exchange for purchasing the property with no money down.
For example, you want to buy a commercial property listed at $1,000,000 and the bank requires you to put down a 20% down payment. To convince the seller to pay the down payment out of their pockets, you can propose increasing the selling price to $1,200,000.
This way, the seller will give front your $240,000 down payment in exchange for a $40,000 profit down the line.
Why would the seller do this for you?
Since the property owner/seller is taking on a very considerable risk for you, they are incentivized to increase your monthly payments. The higher the purchase price, the higher the monthly payment.
7. Cash Substitutes
If you have no money to shell out for a down payment, you can use personal property, trade, or skill that is as good as cash in the eyes of the seller instead.
Why would the seller do this for you?
A seller interested in something other than money is very rare but still possible. For example, if you have a skill or trade that the seller might find valuable such as plumbing and construction, you can offer them your services in lieu of a down payment.
Additionally, any valuable unused property you own like cars, boats, pricey furniture and appliances can also be used as a replacement for a down payment. However, this largely depends on the seller.
Key Considerations
Openly communicating with what the seller wants as a cash substitute is a must to help build trust and prevent any misunderstanding in the foreseeable future.
Additionally, since down payments have significant upfront costs, you should ensure that your chosen cash substitute can be easily convertible to cash when needed and comes with proper documentation that can be easily verified.
Why Use Creative Financing in Your Commercial Real Estate Deals
The main reason why investors like me prefer going through creative financing to secure a down payment is to increase their leverage, negotiate directly with the property owners/sellers, and not deal with the strict and time-consuming approval process of banks.
Sellers also know of this fact and some of them even actively push through these deals mainly to avoid paying taxes or gain tax benefits from it. Additionally, there are sellers who may be old, ill or want to get rid of their property quickly for personal reasons.
Wrapping Up
These are just one of the many ways to buy commercial property with no money downs. My advice as a fellow investor? Work smart, not hard – the most successful real estate investors are also the most creative.
However, like with any real estate investment, you should always research the property and know about your available financing options before sealing the deal to negotiate better terms with your seller and/or lender.
For example, if you have a property that’s been on the market for quite a while or is openly advertised as a must-sell, communicate with the seller. chances are, they are more than willing to negotiate.
FAQ
How do I avoid a 20% down payment on investment property?
Yes, it’s possible to purchase real estate property without shelling out a 20% down payment through creative financing options such as seller financing and subject-to-mortgages.
Is commercial office space a good investment?
Commercial properties have high returns but are largely dependent on property type and condition.
The office space market has been hit very hard with the shift in remote work and some properties are having a hard time getting financing as of late 2023.
What is a good ROI for commercial real estate?
The average yearly return on investment (ROI) for commercial real estate properties in the US is around 9.5%
Mike Stohler
Mike Stohler is the co-founder and managing partner of Gateway Private Equity Group, bringing over 20 years of experience in real estate investing. He has managed over 1500 apartment units, bought and sold complexes, and transitioned into hotel investing where he now syndicates projects in the US and internationally.
