“100 Percent” Financing for Investment Properties

At Green Commercial Capital we help a lot of small business owners with 100% financing and because we promote that fact, we get a fair number of calls from real estate investors looking for a small business loan for rental property with the hope that 100 percent investment property financing exists.  Well, it does and it doesn’t, which gets me to the subject of this post.

SBA loans can be used for some passive investment property-type businesses:

• Self-Storage
• RV and Boat Storage
• Car Washes – especially the automated variety
• Laundromats – especially automated
• Any other business where the owner can be involved but also be relatively absentee. This is because the SBA allows “third-party management companies” as long as they do not have too much control over the business.* Also, many businesses operate successfully with minimal oversight as long as they have the right/trusted employees in place.

Please note that truly passive investment properties are not eligible, so no multi-family, apartments, etc.

Who is Eligible for 100% SBA Financing

Only those business owners who are already successful, but there is another way to kinda/sorta create 100% financing which I will elaborate on below.

“Already successful” means you have been in business long enough to prove you are a capable operator, and if that is the case, you DO NOT need a down payment to expand your business by starting up a new location or buying a competitor as long as you have enough remaining SBA eligibility.

And, this works whether you are buying just a business or a business with real estate.

So, for purposes of this post, IF you already own a self-storage, RV boat storage, or some other somewhat passive SBA-eligible business and you have a good enough and long enough track record, then you can use an SBA loan to finance your next one as long as you use the same exact entity/same corporation/LLC and have the exact same partners at the same percentages.

As for creatively creating 100% financing…

I put 100 Percent in the above headline in quotes because while this post is about whether or not 100 percent investment property financing is possible, it is, in reality a viable means of getting to “100% financing” in a small corner of the overall investment property landscape and there a few ways to get there. The first being what I have outlined above and the second would be borrowing the down payment.

The SBA allows you to borrow the required down payment from a source other than the SBA lender, as long as you can prove that you can make the payments on the borrowed money from some other source of income – including income from a spouse.

Additionally, if buying an existing business, the seller is allowed to financed half of the down payment in the form a second that would be on “full standby” – which means you cannot pay the seller back until you refinance or pay off the SBA loan.  So, in this case, you only need 5% down and it can be borrowed.

Furthermore, there are ways to use certain retirement accounts to come up with the down payment tax and penalty free.

100% Investment Property Financing Eligibility Requirements

Admittedly, there is a lot of nuance to this and some lenders won’t use the SBA rules to the fullest extent, but here is the skinny if you are contemplating doing this.  At the very least, you need:

• Good credit and good credit scores
• Good job/source of income
• Investment property experience OR enough “business savvy or real world experience” to get a lender comfortable with your ability to own or manage a somewhat passive business like self-storage

AND

• 5% (if getting help from seller) or 10% down (that you can borrow) and you must be able to prove that you can handle the payments for that borrowed money from your “regular” income or income from your spouse

As mentioned above, we get a lot of calls from experienced (and aspiring) commercial real estate investors looking for no down payment commercial loans or 100% investment property financing.  Sometimes these people are very unqualified and sometimes they have what it takes, but they may not know it yet.

Most of the time they are calling about multi-family or apartment loans and each time I have to tell them that we cannot do it, because the SBA does not allow it, BUT what I can tell them is that it is possible to structure 100% financing of self storage/mini-storage, boat and RV storage facilities and other somewhat passive businesses.

Self Storage Or Apartments?

Lots of real estate investors are aware of self storage and think of it as “investment property,” but many who are contemplating purchasing investment property do not know as much about mini storage since multi-family and apartments are generally what is most talked about by real estate investors.

Ironically, mini-storage can be financed as an owner occupied business property with an SBA loan.  The reason for this is the majority of self storage businesses are owned by “mom and pop” small business owners who either actively manage the property, have an employee who manages it or have an arrangement with a 3rd party manager, but nevertheless are “involved enough” in the day to day operations to be considered a “small business” and therefore able to pass the SBA eligibility test.

What I have found is that many borrowers have the ability to come up with the down payment either by borrowing against their home, an investment property, from a finance company, a relative or a retirement account.  Gift funds are okay too and you can have “investors” as long as you have either enough of your own skin in the game (or some other quality that causes a lender to feel that you are a good risk) and you keep any investors under 20% ownership.

Even those real estate investors I have helped who own 1-4 family or apartments and who had some self storage knowledge had no idea you could buy or build a facility with 10% down and that the 10% could be borrowed.  In each case, they started thinking about how nice it might be if they could take the majority of the “human” element out of the their business.  In other words, if someone does not pay their bill you can quickly and without much drama say goodbye to them as a tenant as opposed to evicting a family.

SBA Mini-Storage Highlights

Here is a rundown of some of the good and bad:

1. You only need 10% down for a purchase or for ground up construction.
2. If you are doing ground up construction, you can actually finance enough operating capital into the loan to get the property to breakeven.  (You might want to re-read that, because this means the first few years of payments on the loan are baked into the loan).  Think about that.
3. The facility must breakeven 24 months after Certificate of Occupancy per SBA rule.
4. A feasibility study from a reputable consultant may be required for construction with some lenders.
5. Some lenders do not like previous bankruptcies and some SBA lenders are okay with a bankruptcy if it is at least a few years old.
6. Some lenders will not do loans under 500K/others will go as low as 350K or possibly lower.
7. The max loan with 10% down is between $7 and $9 million and usually requires that you be very strong AND have additional real estate collateral.
8. The max loan with 15% or 20% down is much higher ($20 million+) and case by case.
9. It is possible to use a professional third party management company to run the facility.
10. If you are only putting down 10% AND you have more than 25% equity in another property, you may have to live with having a small lien on that property for additional collateral, but this can be case by case as well.
11. The SBA loan fees are not cheap, but they are financed along with most other closing costs.
12. The 10% down SBA program only has a short 3 year prepayment penalty and the penalty is only 1% after year 2.
13. Many people are using this program to get a facility built and leased up with 10% down on the total project costs with an eye towards refinancing after 3 years when their self storage facility is worth a lot more.
14. All of the above applies for Boat and RV Storage although if building outdoor Boat and RV Storage you may need some structure on the property (canopies, small building, etc.) to be eligible with some lenders.

Bottom line, this “SBA loan for real estate investment” offers incredible leverage and an excellent way for you to get a small business loan for “rental property.”

Please get in touch if you would like more info:  jking (at) green commercial capital (dot) com.

Here is another post with more detail re: SBA self storage loans or you can also visit our main site here.

If you own a small business and you are looking to finance 100% of a property that your business will legitimately occupy at least 51% of, then you can get some good info here.

*Businesses would be considered ineligible for SBA financing if they grant anyone other than the owner too much control over day-to-day operations — including decisions related to employees, financial management, and access to or control over the company’s bank accounts. In that situation, the business would be viewed as a passive entity and therefore not eligible.