Commercial Real Estate Loan Options

[bmurphyfl]

My wife and I are seriously considering buying the building she works in. However, this is our first experience in buying commercial real estate and we are just starting the process. So, I was hoping some of you would be able to help me with a few basic financing questions.

The building is an older building that was once a residential building but was long ago converted into offices. There are four offices that can be rented plus four garages that are also rented. Everything is currently rented to professional practices and has been for a while.

We have enough in our investments and savings to come up with a downpayment equal to 15% of the value of the building. I could borrow from my 401K to get that amount up to 20% but I'd prefer not to do that.

Are there commerical loans available that allow you to put down less than 20%?

If not, any other suggestions? A private loan with the seller? Should I go ahead and borrow from my 401K?

Any other suggestions that you have for us as we start this process?

Thanks.

[speedcake]

I am interested in the same advice.

Are you looking to hang on to the building long term? Or trade up as soon as possible? I assume that would affect how big the down payment would need to be.

[erikl2]

Commercial and Multifamily loans are very different than single-family mortgages. Some characteristics:

-20% down
-10 year term
-Heavy prepayment penalties
-Stricter income qualifications

[bmurphyfl]

Are you looking to hang on to the building long term? Or trade up as soon as possible? I assume that would affect how big the down payment would need to be.

We are looking to hold onto to it for a long time. My wife's practice is in the building and she likes the office and its location. So, unless she decides she needs to move her office, we would hold onto it for a long time.

[TheWakeUpBomb]

Commercial and Multifamily loans are very different than single-family mortgages. Some characteristics:

-20% down
-10 year term
-Heavy prepayment penalties
-Stricter income qualificationsThat's not exactly true. There are options for commercial properties up to 90% - typically an 80/10 with 10% down. You'll pay a higher rate on the second, obviously.

There are also plenty of 15 year terms out there, and commercial loans without heavy prepayment penalties.

[bmurphyfl]

I just spoke with a lender at the company that my wife financed her practice through about financiing the purchase of the building. He said that he could offer us a SBA 7(a) loan which requires only 10% down.

The term would be 25 years and the rate would be fixed for the first five years at prime+1.75% which currently would be 7.75%. After the five year fixed period the rate would float to whatever prime+1.75% would be at that time. There would only be a prepayment penalty for the first three years. After that, we could start adding extra money to each payment without any penalties.

The closing costs would be the SBA Guarantee Fee of 2%-3% of the loan, a one-time packaging fee of $1,000, a commercial appraisal of about $2,900 and an environmental transaction screen of $800.

Are any of you familiar with SBA 7(a) loans? Am I missing anything that I should be aware of?

[Barbara]

I just spoke with a lender at the company that my wife financed her practice through about financiing the purchase of the building. He said that he could offer us a SBA 7(a) loan which requires only 10% down.

The term would be 25 years and the rate would be fixed for the first five years at prime+1.75% which currently would be 7.75%. After the five year fixed period the rate would float to whatever prime+1.75% would be at that time. There would only be a prepayment penalty for the first three years. After that, we could start adding extra money to each payment without any penalties.

The closing costs would be the SBA Guarantee Fee of 2%-3% of the loan, a one-time packaging fee of $1,000, a commercial appraisal of about $2,900 and an environmental transaction screen of $800.

Are any of you familiar with SBA 7(a) loans? Am I missing anything that I should be aware of?

How confident are you that the building will stay leased? How confident are you that the building isn't in need of any big capital improvements. How old is the roof, for instance. Will the bank require you to escrow money for taxes, insurance and big repairs?


If you don't really know much about investing in real estate, you can go to www.ccim.com, which is an excellent resource. In fact, just last week I took their Financial Analysis for Commercial Investment Real Estate (or something like that) course. It's pricey but very informative, especially to a newbie.

What does your wife do?