Commercial real estate prices have increased quite a bit in many parts of the U.S., especially in Austin, Tx. Because of that I figured that people would like to learn the different ways to finance commercial real estate purchases.
If you are buying commercial real estate you typically fall into one of three categories:
- Owner/Occupier – your business will occupy space that you own
- Investor – You own the property and rent it to commercial tenants, however do not occupy
- Owner/Investor – You own the property and occupy a portion and lease out the remaining space
Below are 5 ways to finance commercial real estate if you are an Owner/Occupier or an Owner/Investor
- Small Business Association (SBA) Loans – These are real property loans (not equipment or cash flow) that are typically 504 or 7A loans. 504 loans are made up of 50% first loan from a bank and a 2nd loan of 40% from the government (aka debenture). 7A loans are 90% government guaranteed bank loans. There are advantages and disadvantages of using a 504 and 7A loans. Some of the advantages are the down payment requirements are small (10%), interest rates are fixed, you can finance building improvements, and have many options for lending sources. Some of the disadvantages are the requirements of origination fees, prepayment penalties, the need for collateral and personal guarantees, good cash flow, and years in business.
- Conventional Loans – With conventional financing banks will typically loan you 75% to 80% of the purchase price so you must come up with the other 20% to 25% in cash. Many banks would rather you originate an SBA loan because their risk is less since the government guarantees a portion of the loan.
- Seller Financing – You see a lot more of this when interest rates go up. Advantages are that you may be able to put down less money, avoid the need to pay for an appraisal, and avoid some origination fees.
- Third Party Lending – Do your friends or family have a large sum of money not getting much of a return? You might check with them to see if they are interested in loaning you the money. They could get a decent return and have the building as collateral if you defaulted.
- Cold Hard Cash – Nothing beats cash! If paying with cash the best option is to buy the property personally or as an LLC with personal money, and then rent the property to your business. Then your company pays you rent.