Is a 2nd lien mortgage possible for a commercial property?

Question

I know a really good book i need to read on how to finance this deal - Investing in Real Estate with No (and Low) Money Down - but as I await it's arrival, i'd appreciate any advice on a current deal.

The property is a commercial 8-plex. List is $850k and it is very close to meeting the 1% rule and will be if rents are brought up to the market rate. The deal is what i've been looking for and will more than cash flow and should have room to appreciate. Through a few sources, i can scrounge up about $85k or 10%. With it being commercial though, i assume i'll need 20 or 25% down. (Correct me if i'm wrong.)

In this case, the crux of my question is that I know you can get a 1st and 2nd lien mortgage for a primary residence, is this possible for a commercial loan? I don't think i'll be able to BRRRR out of the deal over a short span, because the property is mostly occupied. If I can bring rents up over the next couple years, I would hope to pay off the 2nd lien mortgage and eventually cash out refi once rents are optimized but that will take time. Given this, I don't know if hard money is really an option that makes sense.

How can i make this happen?

Tom S. · Answer

@Brad Wood  I have a number of commercial mortgages and a 2nd was always allowed.  Typically in the form of seller financing.  So 10% down from me and then 15% seller financing to meet the 25% down.

That said, I always (for me at least), had to do the 25% down first, close, and then execute the seller financed 2nd that would essentially reimburse me 15% of the amount I put down.  Usually would just do it as a 401k loan for a few days and then pay myself back, only a $100 admin fee out of pocket.  I have a number of variations of this, so sometimes into a commercial property for only 5% down of my own money.

Jaysen Medhurst · Answer

You will need 20-25% down on any commercial property, @Brad Wood. In this case, a 2nd is probably out of the question...especially now. Bridge loans are commonly used, but those tend to be used for renovations/re-positioning and not for additional leverage, as you're looking to do.

HML probably isn't an option here as it doesn't sound like there's enough value-add opportunity to make the numbers work.

Your best approach is either to bring in a capital partner or see if the owner with finance part of the down payment. Owner financing may or may not work depending on your lender. Some are fine as long as the deal is very strong. Others aren't because they insist that you actually have a full 20-25% equity.

BTW, there are 2nd mortgages in the commercial world, but they are usually a way to pull capital out of a deal. E.g. primary mortgage is 60% LTV and has great terms/yield-maintenance. Instead of refinancing the owner takes a 2nd mortgage for 20% LTV, bringing the total to 80%.

Brad Wood · Answer

Thanks for your reply on this Jaysen. It looks like I am going to have come up with another approach, which looks like it will be a cash out refi from my primary property.

Your last para was super helpful though. I didn't realize you could take out a 2nd mortgage on a commercial property in that way which may come in handy down the road.