Using Bank & Seller Financing for minimizing money down?

Question

I'm looking at a property around $900k and wondering how I could possibly get a commercial loan to fund 75% of it and use either seller financing for 20% and cash for the remaining 5%. Do commercial lenders care where an investor gets their down payment from as long as the DCR meets their criteria?

Or alternatively, if I have a self-directed solo 401k, instead of trying to get a non-recourse loan, could I get a tradition recourse commercial loan for 75% and use my self-directed solo 401k to pay the other 20% in cash, and pay 5% out of pocket? In that scenario, could I say the self-directed LLC owns 20% of the property and I own 80%? (Then of course all profits/expenses would be split 80/20 going forward.)

@Brian Murray in BiggerPockets Podcast #126 used seller financing and bank financing to purchase his first commercial property and I'm wondering if this really is feasible or not.

I'm trying to find creative financing options for a great property/opportunity.

Dan Wallace · Answer

When it comes to commercial lending there are several guidelines and rules that can vary by lender. From my experience the issues that come from using an owner carry for the bulk or entire amount of the non-bank financed portion is that underwriters to want to see cash or skin in the game from the buyer. An owner carry is just not the same as cash equity. The terms of the owner carry can also be problematic. Can the property cash flow the additional debt burden? Also, is there some sort of balloon or due clause on the owner carry that could jeopardize the project and therefore the bank/conventional lender's loan.

Some suggestions would be to try and structure the owner carry on as lucrative terms as possible and push out any balloon or call provision. If the cash flow is strong enough to carry all of the debt burden you may have a chance but in general lenders want to see cash into a deal.

Jason Bilbrey · Answer

Assuming that the DSCR is still 1.25 (which is what most commercial lenders want to see) or above even with both a bank loan and a seller financing loan, in people's experience does the bank care as long as there is a strong enough DSCR?

For example: Let's say I could get a commercial loan for 80% of the purchase price at 5% interest, and a seller-financed loan for another 15% at 8% interest, and put in 5% cash from my own pocket and the DSCR was still 1.5...would the commercial lender be OK? Would it typically be bank has 1st lien and seller has 2nd lien?

I'd really love to hear some real world experience from people have have actually pulled off a combo of bank/seller/cash funding to get an idea of what people have been successful with...

Justin Windham · Answer

@Jason Bilbrey

There are rules against using your retirement funds in a way that benefits (or transacts with) yourself or any other disqualified person. You could also run into issues investing Solo 401k funds into an asset that you have a recourse loan on.

Jason Bilbrey · Answer

@Heather Easterbrook It's a 12-unit multifamily property. I've seen many investor stories where people used bank and seller financing to buy a property as long as the financials back it up. With commercial loans the banks often don't care as much about the finances of the buyer as long as the finances of the investment are solid. I think the risk to the seller doing financing would be greater since they wouldn't have first lien position.

@Justin Windham There are no rules prohibiting an investor from partnering with their self-directed 401k or IRA. It's also not a loan from the IRA account to me (which technically I believe a solo 401k actually allows, but not an IRA except for primary residency), each "entity" would have a legal portion of ownership of the property. I believe the only restriction I might face is that I couldn't perform any sweat equity on the property which actually would be prohibited because of the partial ownership by my own retirement account.

Heather Easterbrook · Answer

What type of property is this? There are a wide range of commercial loans available. In order to qualify for the best loan options, it requires full doc and a down payment.

If that isn’t an option, there are lenders that allow some seller financing. The max amount can vary by lender depending on the DSCR, property location, financial strength of the buyer, experience, etc.

Justin Windham · Answer

@Jason Bilbrey

Because of the prohibited transaction rules, using your Solo 401k to fund the portion of the investment you're lacking probably won't work.

Using Bank & Seller Financing for minimizing money down?

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