Commercial loan advice

4 Replies

I’ve been calling around and talking to different local community banks about obtaining a commercial loan for a multi family purchase, and ran across a bank that only requires 10% down. Obviously numbers on a purchase have to work with only 10% down, what are the negatives to going that route versus the 20-25% all the other banks require? Thank you!

@Nicholas Jestus - Sounds like a good deal if you can get a loan with 10% down on a commercial product. I hadn't seen that yet, but one of the local NC banks was now going up to 85% LTV.

The downside is you are more leveraged, and carrying more debt. The terms will also probably not be as attractive as if you were to put 20-25% down.

Nicholas,

your payments per month will be more,more to pay off and your interest may be slightly higher than if you put more down but that does not matter if the numbers work and you are still covered to where you are not paying anything out of pocket and you are making enough to cover all your expenses. I do not see a downside to being more leveraged as @Andrew Kerr mentioned, that is more of a security blanket to keep you from getting sued, no money in the property. they may require more documentation, personal guarantee and maybe a lien on another property to help protect their interest. I think it is a good deal if the numbers work for you. 

Hi @Nicholas Jestus ,

The downside is that you make a decision based only on one piece of the puzzle. LTV is important, but so it is the interest rate, maturity, amortization period, fees, etc.

However, if you care comparing apples to apples and the only difference is the LTV, I see no downside as long as the numbers work. For me, that means that the asset still cash flows nicely after accounting for ALL expenses (taxes, insurance, management fees, repairs, capex, utilities, cleaning, etc.).

By getting a loan that requires less money down, you are able to use your money to buy other assets, have cash available for capital expenses, your asset is better protected from creditors, etc. So it is a good thing. 

Financial leverage is what makes Real Estate an attractive asset. Investors may have enough equity capital, but still choose to borrow anyway.  Down-payment requirement is only one of the factors to consider when funds are needed.  Just make sure to borrow money at a rate of interest lower than the expected rate of return on the total funds invested in the property.

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