10 Options to Raise Funds for Buying Commercial Property in 2022

Unless you're buying commercial property with cash, you'll need someone to loan you the rest of the money. Knowing how to buy commercial property with little or no money – especially if it's your first real estate deal – isn't easy. Fortunately, raising the required funds is possible once you've identified all the available lending options. What follows are ten creative ways to secure the financing you'll need before investing in a commercial property.   

Conventional Loans 

With a conventional loan, you make a specified down payment. The lender then provides the rest of the money in exchange for a lien on the property. Although most loan originators allow borrowers (for example, those desiring to live in the investment property) to put down as little as 5% of the purchase price, that’s not always the case.  

As opposed to buyers who flip properties soon after purchasing them, conventional loans are the preferred lending method for buy-and-hold investors with several income-generating rental properties. Most conventional mortgages have a 15, 20, or 30-year term because lenders are hesitant to finance loans with shorter terms.   

Furthermore, conventional loans are so popular that it makes shopping around for the best rates and financing terms easier than with other types of loans. They are also simple to understand and come with fewer regulatory requirements than FHA or VA mortgages.  

As an aside, making a 20% down payment will keep you from having to pay the private mortgage insurance (PMI) that is customary when securing a conventional loan – leaving you with more cash in your pocket every month! 

Federal Housing Authority (FHA) Loans 

Backed by the federal government, or, more specifically, the Federal Housing Administration (FHA), these loans incentivize buyers (typically homeowners) by only requiring a 3.5% down payment. Rather than directly loaning the money, the FHA guarantees the loan through a private lender and shoulders much of the risk. 

By taking on much of the default risk and providing commercial down payment assistance, it’s easier for the average borrower to qualify for an FHA loan versus a conventional loan. As an added buyer incentive, the lender can offer a more competitive interest rate.  

The downsides to taking out an FHA loan include a requirement to live in the property for a minimum of one year and having to pay a mortgage insurance premium (MIP) for the entire duration of the loan.  

203 (k) Loan 

Much like an FHA loan, a 203(k) loan caters more to homeowners than investors – starting with the fact you must live in the property to qualify. These types of loans only require a 3.5% down payment and allow you to roll any refurbishing costs into your mortgage. For instance, if you are buying a distressed property for $200,000 that needs $20,000 of work, under the terms of a 203(k) mortgage, your loan amount would be $220,000.  

The advantages of taking out a 203(k) loan include the ability to finance the entire project through a single lender. It also provides you with the flexibility to buy foreclosed and distressed properties along with move-in-ready properties.  

Keep in mind that with a 203(k) mortgage you must make the property your primary residence and that all contractors must first be approved by the lender.  

Veteran Affairs (VA) Loan 

Can you buy commercial property with no money down? The answer may be “yes” if you’ve ever served in the US military. VA loans offer a zero-down payment option to active service members, veterans, and select military spouses, along with the lowest interest rates in the mortgage industry.  

Additional benefits of a VA loan include the fact that no mortgage insurance is required and that the closing costs are much lower than those associated with a conventional loan. Yet another advantage of taking out a VA loan is that you can buy multiple properties as long as you don't exceed the total amount you qualify for.   

However, like an FHA loan, borrowers are required to live in the property for at least one year – including any multiple properties that they purchase. There's also more paperwork at closing, along with an additional VA service fee added to your total loan amount. 

Adjustable-Rate Mortgage (ARM) 

This loan type is also self-explanatory: your interest rate fluctuates up or down depending on the market. In most cases, your ARM's interest rate is adjustable for the loan's full term (15-year, 30-year, etc.). However, there are also "hybrid" ARM vehicles out there, with a fixed rate for a specified number of years that then changes to an adjustable rate.  

Because interest rates are so unpredictable, ARM loans can be risky for investors that own multiple properties and wish to hold onto them for several years. ARMs are ideal for investors seeking short-term financing options, including those experienced at flipping properties for a profit.

Private Equity

If your goal is to buy a million-dollar commercial property without being a millionaire, another option is to secure financing through private investors. Potential sources of private equity include friends, coworkers, family, or fellow commercial property owners.  

Although cash derived from private investors will probably cost you more than a conventional loan, negotiating flexible repayment terms is usually much easier. In addition, you'll probably be able to avoid many qualifying "hoops" that you'd have to jump through with other types of mortgages.  

The cons of taking out a private equity loan include hiring a lawyer to draft the financial contract and making a larger monthly payment due to factors that include a shorter loan term and higher interest rate. And, if things don't go as planned, you could find yourself facing off in court with an angry lender or two when least expected. 

Hard Money 

Another way to purchase commercial real estate with no money is through a “hard-money” lender. Like a private equity loan, a hard money loan uses a hard asset (In this case, your property) as collateral to secure the loan. Commonly applied for by buyers who like to flip properties, hard-money loans are shorter in duration than other types of loans.  

Although most lenders will offer up to 80% of the purchase price before any improvements, they must also ensure that the property is worth the risk if you default on the loan. As a result, you can expect a heftier interest rate (10% or higher) while also forking over more for loan origination fees. 

Real Estate Syndication 

Governed by the US Securities and Exchange Commission (SEC), a real estate syndication is more structured than most any other type of loan. While not strictly limited to real estate, syndication financing can be used to buy other assets – for example, trucks for a trucking company or a commercial fishing boat.  

In a real estate syndication, a deal sponsor will identify an opportunity for a group of investors to invest in. The sponsor conducts feasibility studies to determine the investment's earning potential and future value.   

Seller Financed Real Estate 

These real estate transactions are between a private seller and a buyer. Once a price is agreed upon, the seller then finances the buyer’s purchase in exchange for holding the property’s note (promissory note). In most cases, the buyer is required to make a down payment to the lender.   

When doing a seller-financed real estate deal, it is advisable for all parties to hire professionals to draft both the contract and the promissory note. This legal contract should include essential details such as interest rates, loan terms, payment schedules, and potential penalties in the event of a violation.  

Because no banks or third-party lenders are involved, a seller-financed sale can usually be completed in much less time. The buyer benefits by getting better loan terms, while the seller avoids paying a hefty tax bill for capital gains all at once. 

Home Equity Line of Credit (HELOC) 

Ideal for homeowners who want to finance home improvement projects, a home equity line of credit (HELOC) can also be used to purchase a commercial property if you've lived in your home for a while. For example, if you've owned a home for 20 years while paying down the mortgage principle and benefitting from appreciation, you've built up equity. 

Let’s say the appraised value is $250,000 and your loan payoff is $100,000. You can then take out a HELOC against the equity ($150,000) and use those funds to purchase a commercial property.  

Compared to other loans, a HELOC is a cheap financing alternative you can pay off at your leisure. Once you have experience, HELOCs are a strategic way to leverage your wealth and acquire more through real estate investments.  

The disadvantages of a HELOC include the fact that you are increasing the cost to retain your existing home, along with having to deal with the uncertainties that come with having an adjustable-rate loan.   

Innovative Commercial Property Solutions for Investors in Chicago 

As a potential property owner, it pays to be organized and informed when applying for and securing financing. As part of our Brokerage Services offerings, our team of commercial brokers has extensive experience buying, selling, and leasing properties throughout Chicago and its neighboring suburbs. At Millennium Properties, our brokers work with tenants, owners, buyers, and sellers to locate, negotiate, and close the best deal possible – including loan terms and rates.  

We understand all the factors that affect commercial property – whether it’s an office building, industrial warehouse, a multi-family housing complex, retail center, or specialized property. Millennium Properties has the market knowledge and experience to anticipate new developments and market trends. Contact us today to learn more about how our brokers can help you lease a space, sell your building, buy a new property, or request a property valuation. 

Anne Barer

About Ro Crawford

Ro has extensive background in several sectors of the Real Estate industry including residential and commercial assets. Ro is responsible for developing a comprehensive marketing plan for each property as well as managing the company’s social media accounts. She designs, writes and edits offering memorandums, press releases, proposals for new business, eblasts and more. For questions, comments, or suggestions related to our blog, you can contact us via our website.