Last week we helped my buddy buy a building in Brooklyn Center for his business. This isn’t just a plug for our commercial real estate services. Our client also did a bunch of cool stuff in his purchase that made the building easier to buy. And it’s stuff you can do too!
1) SBA “building hacking”: Have you heard of “house hacking” where someone buys a home and then rents out the rooms? Or when they buy a duplex and live in one side while renting out the other? Well you can do something similar with commercial properties.
As long as your company will occupy 51% or more of a building, you can use an SBA loan to purchase it. SBA loans have lower down payment requirements. Usually 15% down compared to 25-35% or more for conventional loans.
He also has two tenants in the building. Those tenants will pay him rent each month, and that rent will go to offset his mortgage obligations. If your business has been renting space, this can make a huge difference in your bottom line!
2) Seller carryback: Commercial banks are not terribly concerned on where you get the downpayment for your property. It can be cash, or line of credit, or private money. It can even come from the seller! Here part of the downpayment came from the seller in the form of an interest-only, medium-term loan.
This can reduce the amount you have to bring to closing, but can also reduce your monthly debt service obligation. Interest rates for commercial are getting better, but with seller financing you can set your own terms.
3) Buy with a holding company: The business that will be operating in this new space did not buy this building. A holding company that was created specifically for this purchase bought the building. That holding company will be signing a lease with the client’s business and charging them market rent.
Commercial buyers do this because a property’s value is in part determined by the income it generates. So a building where the owner is not charging themselves rent is worth less than one where the owner is using a holding company.
You can do lots of stuff with this extra equity. You can use it to have a smaller downpayment. You can get a line of credit against it for operating expenses or to buy other properties.
Commercial real estate investment is so creative and interesting. That’s why I love it! If you want to talk about strategies to get your business into its own space, let’s talk!