You are on a mission to buy a commercial property, with little or no down payment. Impossible? Not necessarily. With a little creative thinking and careful property selection, you may be on your way to owning a commercial property.
Commercial property, also known as investment or income property, is property that generates a capital gain gain or rental income. The property can be a warehouse or office building, undeveloped land, residential rental housing, or an apartment building.
There are financing options that can help you purchase your commercial property with little or no down payment. Let’s see some of them.
Bank – The Traditional Route
The bank may consider financing your business up to a certain percentage of the total amount. For example, the bank may agree to finance 90% of the total amount. You can propose a second loan to make up the difference. If you have a decent credit rating and a willingness to pay a higher interest rate, this scenario might work for you. However, you still pay monthly installments: On both loans, and since personal loans generally charge higher interest rates, this could be an expensive way to finance your business investment.
A second bank-related option is a “Promissory Note,” an agreement to repay a loan. This form of loan specifies the amount to be repaid, the interval and the amount of each payment, the date by which the loan must be completely paid off, and the interest rate. This financing can be used to make a down payment on the property.
Owners, partners, investors, notes
A motivated seller may be willing to finance the purchase. If this is the case, you can successfully avoid some of the usual financing hurdles, such as: loan applications, banks, and closing costs. You may be able to negotiate a favorable interest rate with the seller, there may also be little or no waiting, and best of all, you are not putting your money up front.
Consider investing with a partner or partners. This process can mean closing and banking costs, more paperwork, and less profit for you. A partnership plan should benefit you and be of interest to others with money to invest. Your partner (s) will discuss whether this opportunity offers a good investment deal, tax exemptions, prestige, and returns. Who could be some of your potential partners? Find your network of professional contacts: your accountant or doctor, club members, co-workers, and friends.
There are also investors looking for opportunities to finance deals. In this case, you will pay them for the use of their money. Investors will be attracted to your business project if it potentially offers security, liquidity, and a good return on investment. You may need to take a marketing / advertising campaign approach to attract investors. Consider running ads in newspapers, brochures, through investment clubs, and networking with everyone you meet. Create a website for the project and search the web for groups of potential investors.
Turnkey investing allows you to purchase a rental property managed by a turnkey provider. (The turnkey seller can accept a down payment of as little as 5% for investors.) This is sometimes called passive income in the sense that you own the property and the turnkey group manages it.
The principal lease is an old form of creative financing and is sometimes described as a “lease with a purchase option.” The main lease allows you to buy the property from the seller (with little or no down payment). Basically, you “buy” the rights and privileges to own, operate and maintain the property, but legal title does not change hands. When you close the deal, you receive fair title, not legal title. You also get the cash flow (above the principal lease payment), tax benefits, and all future capital.