Out-of-the-Box SBA Alternative
Have you ever heard of a Small Business Administration (SBA) Loan?
SBA Loans are famous because they are the only type of loan that allows you to buy a commercial property with just 10% down.
If you ever thought about buying real estate for your business to operate in, an SBA Loan is a great alternative.
This email is NOT about how to obtain an SBA Loan, but rather how to get a loan that mimics an SBA loan - an alternative if you will.
To understand why this alternative is advantageous and how it could expand on the options offered by an SBA Loan, I have to spend a few sentences describing what it takes to buy a commercial or business property:
To buy a commercial or business property:
You need between 25% to 35% down, you can't work your way around this.
You need money for the closing costs, again, you can't work your way around this as you could on a Residential Purchase.
You have to have a credit score of 680 or more.
You need 3 years business and personal tax returns.
You need a Net Worth at least Equal to the Loan Amount. Usually for this they ask you for a Personal Financial Statement.
You need about 6 to 9 months reserves, in other words, you have to show that you have enough cash after you close to afford to pay up to 9 months of mortgage, property taxes & insurance.
In general, the net income from your business that you need to qualify for the loan, has to be about 1.25 times the complete mortgage payment.
You have to be up to date in all your financial statements and have a professional CPA or Accountant backing you up. An accountancy service that you pay on the side might not be sufficient.
You need to perform an Environmental Study of the property, costing $7K+ (often about $15K)
You need a commercial appraisal which runs into $5K+.
Many lenders won't start on your loan unless you put a deposit of $10K+.
As you can see it is not that easy to qualify for one of these mortgages.
This is why most people lease their business property.
But think about it, if you have a 5 years lease, the rent might be in the neighborhood of $8,000 plus utilities—for a medium sized office. Then most leases have what they call "rent escalations" or increases year over year.
Over 5 years, your company would have spent about $480,000! and none of that money is yours!
Think about all the money your business is generating for the Landlord!
This is why, once your business has crossed the 3 years mark, it makes sense to sit down and evaluate whether or not, by having a business mortgage, you could also build equity in your business property in addition to whatever it is that you do!
Rent is going to be paid one way or the other, but when you have a mortgage, a portion of that money comes back to you! It doesn't go to make your Landlord richer, it is a bonus "phantom income" as I call it, that comes to you!
This is why SBA Loans are so popular, you only need 10% down making it possible to buy your own premises much sooner!
Apart from this 10% down feature, everything else on my list above applies to being able to get approved for an SBA Loan.
It is paperwork-intensive and the underwriting of an SBA Loan could take 3 months!
The reason it is time consuming, is because you have 3 pairs of eyes!
The SBA does NOT lend you the money, rather, they guarantee that if you default, they would pay the lender. Similar to what FHA loans do in Residential.
The first piece of an SBA Loan is a regular bank loan for about 50% of the purchase price. That's the first pair of eyes. This means your loan package has to be "Bank Grade", just that requirement alone, disqualifies many business owners.
Then you have another financial piece on top for 40% of the purchase price, a second loan, this get's you to 90% of the purchase price. That second piece is another financial instrument that has its own underwriting!
And lastly, the SBA itself needs to approve the whole transaction, the third pair of eyes!
What if:
You could get a Business / Commercial Loan and buy a business property with only 10% down, similar to the SBA Loan.
You did not need Tax Returns
You did not need to show Business Income NOR Personal Income
The money for the 10% down payment and closing costs could come from anywhere (on a bank loan you have to prove where the funds came from)
Minimum Credit Score is now 650+
No Net Worth Requirement
No Reserves Requirement
No CPA / Accountant Reports
Instead of spending thousands on an Environmental Study you would sign an Affidavit
No fees to start the loan
30 Years Fixed Rate (most Commercial Loans have a Variable Rate)
30 Years Amortization (most Commercial Loans have a 10 or 25 years Amortization, making payments higher than 30 years amortization)
Interest Only Option Available (not a common feature of Commercial Loans)
Reasonably Priced Commercial Appraisals
and what if you could use this loan to purchase:
A single family Residence used for Business (difficult with a Commercial Loan)
A Condo - for business purposes (not possible with a Commercial Loan)
A 2 to 4 Units Residential Multifamily Property
A 5+ (5 or more Units) Multifamily Property
A Mixed Use with 5+ Units Multifamily Property
An Office
A Retail Location
A Warehouse
A Self-Storage or,
Automotive Location (usually shunned by Commercial Lenders)
The Single Family advantage is huge!
There is a whole line of business in Assisted Care: Assisted Living and Caring of Elderlies. These facilities are run from Single Family Homes. Most lenders will not lend for a home being used for Assisted Living! but with this loan you can buy as many homes as you wish! We already have clients in this line of work who are taking advantage of this loan program.
It gets better:
Because this is a commercial loan, it does NOT show up on your credit report! why is that important? because regular lenders cap you at how many loans you can have.
And...last but by no means least:
You can close in the name of your Corporation or LLC, just as with a regular Commercial Loan.
The cost:
A regular commercial loan runs you between 1% to 2.5% in origination points. Rates, more or less, range between 6.5% to 7%, depending on the type of property.
We can do this loan for 3% in origination points and the rate is between 8% to 9%.
So yes, it is more expensive but for 1% to 2% more you get this incredible flexibility!
I have never seen a healthy business that could afford a 7% loan but couldn't afford an 8% loan.
How is this loan able to offer 10% Down?
Remember what I said at the beginning? That you had to put 25% to 30% down? Well, this mortgage banker found an ingenious work-around.
Only the SBA can get away with 10% down. So what they did is they allowed Seller Financing to be the second piece or the second loan! (If you are able to put 25% or 30% down you don't need Seller Financing)
In other words you come up with 10% down and the other 15% to 20% down comes from a private deal you make with the Seller! The deal can be anything you and the Seller agree, there are only two conditions:
The Seller Carry Back Note has to have a minimum period of 3 years. It can be a lot longer! 15 years or more! this could create a great tax savings for the Seller.
There has to be a payment on the Seller Carry Back Note. The mortgage banker does not care what that payment is, does not care what the interest rate is either, does not care how long the term is, as long as it is at least 3 years.
Other than those parameters, you and the Seller are free to make any deal you both see fit!
This loan allows you to break the Tenant Trap and become the owner of your own productive piece of Real Estate! This is niche lending at its best!
Stop making your landlord rich!
Build wealth on your own real estate while making money in your business!
