Small business owners often assume that owning commercial property is unattainable because many conventional real estate loans require a 20-40% down payment. However, what if we were to tell you that there is a program specifically designed to help small businesses buy commercial property with a little as 10% down! The Small Business Administration (SBA) 504 loan program is an affordable option for small business owners to acquire fixed assets—land, buildings, construction renovations, and even equipment upgrades. The SBA 504 loan with its low upfront costs, coupled with other favorable terms, can make owning a new commercial property for your business a reality.
Buying commercial real estate can be an exciting and profitable endeavor for investors, but it also requires a substantial amount of capital upfront. One of the biggest challenges is determining how much you need for a down payment on a commercial property loan. This guide will explain everything you need to know about down payments for financing commercial real estate.
What is a Commercial Property Loan Down Payment?
A down payment refers to the amount of money you pay upfront when taking out a loan to purchase a commercial property It is a percentage of the total loan amount that you pay at closing
For example, if you purchase a $1 million commercial building with a 20% down payment, your down payment would be $200,000. The remaining $800,000 would be financed through a commercial loan.
Down payments reduce the risk for lenders by ensuring the borrower has “skin in the game” The higher the down payment, the lower the risk for the lender
Typical Down Payment Percentages
Down payment requirements can vary greatly depending on the loan program, lender, and type of property. Here are some general guidelines:
- Conventional Loans – Typically require 20-30% down for investment properties. 10-20% down if owner-occupied.
- SBA Loans – SBA 7(a) and 504 loans can be as low as 10% down.
- Portfolio Loans – Some lenders may offer portfolio loans for as little as 15% down.
- USDA & FHA Loans – Offer options with 0% down for eligible properties.
Lender requirements ultimately depend on the perceived risk of the deal, borrower’s credit profile, and relationship with the lender. Stronger borrowers can sometimes get lower down payments.
Commercial Property Types & Down Payments
Down payment requirements also differ depending on the type of commercial real estate:
- Office Buildings – Often require 20-25% down.
- Retail Properties – May need 25-30% down due to higher risk.
- Industrial Warehouses – Can get by with 15-20% down payments.
- Multi-family – May only need 15-20% down if property cash flows well.
The perceived risk of the property type influences down payment requirements. Discuss options with your lender.
Why Down Payments Matter
Beyond just meeting the lender’s requirements, the down payment amount significantly impacts your deal. Here’s why down payments are so important:
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Less Risk – Higher down payments leave you less leveraged. This provides a safety cushion if the market dips.
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Increased Cash Flow – More equity and less debt means greater cash flow after debt service.
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Easier to Obtain – Large down payments make lenders more comfortable, increasing loan approval odds.
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Better Loan Terms – Borrowers with substantial down payments tend to get better interest rates and fees.
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Increased Return – With less invested, you see higher returns on your capital when the property appreciates.
Evaluate these trade-offs when determining your down payment amount.
Sources for Down Payment Funds
Where will the down payment funds come from? Here are some options real estate investors commonly use:
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Cash Savings -Saved up through business earnings or other investments.
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Home Equity – Tap equity from an existing property by refinancing.
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401K/IRA – Use retirement savings via a 401k loan or IRA withdrawal.
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Business Partners – Partner with others to collectively fund the down payment.
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Private Lenders – Borrow from individuals at higher interest rates.
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Hard Money Loans – Asset-based loans from specialized lenders.
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Seller Financing – Seller carries back part of the purchase price.
Each option has pros and cons to weigh based on your specific situation.
Tips for Funding Your Down Payment
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Start saving early and be patient – commercial deals take time to materialize.
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Build up cash reserves in your business to tap when needed.
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Maintain a strong credit profile to keep financing options open.
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Consider using multiple sources to piece together your down payment.
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Seek sellers willing to finance a portion of the purchase price.
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Discuss lender relationships to get prequalified for financing.
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Connect with private lenders before you find a property.
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Weigh the opportunity cost – capital sunk into a down payment can limit you.
Is it Possible to Get 100% Financing?
It is possible in certain circumstances to get 100% financing, meaning no down payment is required. Here are two options:
SBA 504 Loan – This program provides 90% financing that can cover the entire purchase price for eligible deals. An SBA 504 loan is ideal for owner-occupied, job-creating properties.
Seller Financing – Some sellers may be willing to finance 100% of the purchase price at a higher interest rate with a short-term balloon payment due. This avoids needing a down payment, but is high risk.
Outside of these exceptions, most deals will require at least 10-20% down from the buyer.
How Much Should You Put Down?
Determining the ideal down payment amount involves weighing several factors:
- Your available capital and financing options
- The property type, location, and financials
- Loan amounts and terms available
- How quickly you need to recoup your capital
- Your risk tolerance
In general, it’s smart to put down as much as you are comfortable with. Aim for 20-30% down if possible, especially when starting out. As you become more experienced, you can explore lower down payment options.
Is a Large Down Payment Always Better?
While high down payments reduce risk, they aren’t always the best strategy. Putting down more than needed reduces your return on investment.
For example, if you buy a $1 million property – a 20% down payment ($200k) at a 7% capitalization rate means you earn a 35% return on your $200k.
But with only 10% down ($100k), presuming identical terms, your return doubles to 70% despite the added risk.
Evaluate the trade-off between risk and return based on your own preferences. There are merits to both aggressive and conservative down payment strategies.
Wrap Up
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Down payments for commercial loans typically range from 10-30% of the purchase price.
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Requirements depend on the lender, loan type, property class and your financial profile.
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While large down payments reduce risk, don’t put down more than necessary for your situation.
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Explore creative sources beyond cash savings to fund the down payment.
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Weigh risk vs. return to strike the right balance for your investment goals.
With the right down payment strategy, you can secure financing, reduce risk, and maximize returns on your commercial real estate investment.
What are other Benefits of the 504 Program?
Long-term, Fixed, Interest Rates
Market instability or inflation expectations often cause an increase in monthly payments for many property owners. The good news is that the SBA 504 loan is unaffected by market volatility. The 504 program allows borrowers to finance the purchase of their commercial property with below-market, long-term fixed interest rates. Ultimately, 504 borrowers can hedge against rising interest rates and stabilize their occupancy costs for the entire life of the loan. Business owners who know their occupancy costs can more easily budget and focus on future financial growth.
No additional Collateral Needed
The only collateral you will need is the asset you are purchasing.
When a commercial real estate loan entails a balloon payment this means you will have to pay a large sum at the end of your loan’s term OR refinance your loan. NOT with the 504 loan –borrowers avoid this requirement altogether.
In addition to the acquisition of commercial property, the SBA 504 loan program also allows business owners to finance equipment and other fixed assets, such as fixtures, furnishings and machinery with a service life of at least 10 years. Some equipment financing examples include: commercial printing equipment, medical & dental machinery, and gym equipment.
Low Down Payments with SBA 504 Program
The 10 percent down payment is one of the best benefits of the SBA 504 program. In some cases, such as a single use property, or if the business is less than two years old, owners may be required to provide a 15% down payment. Yet in either scenario, the minimum down payment is significantly less than the 20-40 percent required for a conventional loan.
For example Roebbelen Contracting , a commercial construction company, recognized that they could not afford the upfront costs of conventional real-estate financing. Instead, they took advantage of the 504 program’s low down payment to secure their commercial property.
“What appealed most to us about SBA 504 Financing was the 10 percent down payment,” Roebbelen COO Rob McLean explained, “If we had to come up with a down payment of 30-40 percent, it may not have made sense for my business.”
Down Payment For Commercial Real Estate
FAQ
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