Key Takeaways
- Buying commercial property can help you build equity and gain more control over your business location, but it also brings upfront costs and ongoing responsibilities.
- Down payments for commercial loans typically range from 10% to 30%, depending on the loan type, property type, and your financials.
- Financing options include conventional commercial loans, SBA loans, seller financing, and partnerships. The right fit depends on your business, the property, and your finances.
Your business needs a place to grow. At some point, you may start wondering whether that place should belong to you.
Buying commercial property can give you more control over your space and an opportunity to build equity as you pay down the financing. But leasing has advantages, too, including flexibility and fewer property ownership responsibilities.
If you’re considering buying a location for your business, understanding the process—and the ways to pay for it—can help you decide whether ownership fits your next chapter.
Read on to learn how to buy commercial property and the seven ways to finance your purchase.
Considerations for buying commercial property
Each property type comes with a few practical details to sort out. Before you get too far into your search, check whether local zoning allows your business to operate there and whether you’ll need permits for renovations or a change in use. A former retail shop, for example, may look like the perfect spot for a restaurant—but turning it into one could require additional approvals.
How you plan to use the building can also shape your financing options. Some loan programs are designed for businesses that occupy the property, while others accommodate properties rented to tenants. Mixed-use buildings and special-purpose properties may have additional lender requirements, so knowing what you’re looking for can help you focus on financing that fits.
7 ways to finance commercial property
Financing options vary widely for commercial real estate. Compared to residential mortgages, commercial loans often have higher interest rates, shorter terms, and stricter qualification requirements.
Conventional commercial loans
Similar to buying a house, you can buy commercial property with a commercial loan from a traditional bank or credit union. Commercial loans allow you to buy, remodel, or refinance your business property. These loans typically require a 20% to 30% down payment. While they are amortized over 20 to 25 years, they usually have a balloon payment at the end of 5 to 10 years.
SBA 504 loans
The SBA 504 loan lets you borrow up to $5.5 million to buy commercial property when the building will be at least 51% owner-occupied. You'll make a 10% down payment, and the bank funds the rest. SBA loans have a government guarantee, which makes lenders more willing to approve applications they may not otherwise approve. Some loans may require a 15% to 20% down payment if you're a startup or buying a special-purpose property.
SBA 7(a) loans
The SBA 7(a) loan can provide you with up to $5 million dollars to purchase real estate. You can also use this loan for working capital, purchase equipment, or to buy an existing business. Down payments start at 10%, and the loan term can extend up to 25 years for real estate purchases.
Seller financing
Seller financing can be a great option when properties have been listed for a long time. The seller acts as the bank. As a result, you can negotiate every factor of the loan, including the interest rate, down payment, loan term, monthly payment, and fees.
Home equity loan or HELOC
A home equity loan or home equity line of credit (HELOC) can help you buy commercial property without having to qualify for a commercial loan. If you have enough equity in a primary or rental property, you can buy the commercial building outright. Home equity loans typically have lower interest rates than other business loans, and they may be easier to qualify for.
Keep in mind that if you don't make your payments, you risk losing your home.
Home equity investment (HEI)
With a home equity investment (HEI), you can leverage some of your home equity for a lump-sum payout. You don't have to worry about monthly payments, which lets you keep more cash on hand to reinvest in your business. Instead, you'll share a slice of your home's change in value when you sell, refinance, or use another source of funds.
There are also no income or credit requirements to get an HEI. You can pay your investment back at any time during the 30-year term without a prepayment penalty.
Partners or private investors
Finding a partner or investor can also help you buy commercial property using debt or partial ownership. With a private loan, you can negotiate all of the loan terms, including interest rates, repayment period, monthly payment, and fees. If they want equity, you'll give up some ownership in your property. With an equity partner, you'll avoid another monthly payment, but you'll give up some control over how to run the property.
How to buy commercial property
Buying commercial property takes a few more steps than buying a home, so allow enough time to complete all the steps.
1. Compare buying vs. lease terms
Buying commercial property is great if you plan to stay in one location and have consistent cash flow coming into your business. Renting can be a better option if you have less money available and prefer to reinvest profits into growing your business instead of buying a property.
2. Get your finances in order
You'll need documents for your personal life and business operations to show the lender. The lender will review your credit reports, tax returns, financials, and bank and investment statements. Compare the estimated commercial mortgage payment against your current rent to determine whether your business income can support the loan.
3. Build your team
You'll need a team of experts to guide you through the process of buying a commercial property. These experts include a commercial realtor, real estate attorney, financial advisor, and banker. Each expert plays a key role in ensuring you can comfortably afford the property and in understanding how this purchase fits into your personal and business finances.
4. Find and evaluate properties
Whether you're buying a commercial building for your business or as an investment, the number one rule in real estate is location, location, location. Research vacancy rates, market conditions, recent sales, and local crime statistics. Find out whether zoning laws could affect your ability to conduct business in that location.
5. Complete your due diligence
Once you find a property you want to buy, do your due diligence. Have the property inspected, complete an environmental review, and make sure you can get a title on the property. If your property has tenants, ask the seller for a copy of their leases and payment history. Compare their rents versus market rates, then determine whether it makes sense to renew when their lease expires.
6. Close on the purchase
After your financing is approved and due diligence is complete, sign the final documents and pay your down payment and closing costs.
Is buying commercial property right for your business?
Owning your business location can offer stability, control, and an opportunity to build equity. It can also tie up cash and add responsibilities that leasing leaves with the landlord.
The decision comes down to how the property supports your business—and whether the full cost leaves room for everything else your business needs.
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Frequently asked questions
Is a commercial property investment a good idea?
If you own a business that you plan to be in one location for a long time, buying commercial property can be a good investment. You can build equity in your property and avoid rising rent.
What credit score do I need for commercial property?
While there isn't a set minimum credit score, most lenders require a personal credit score of 680 or higher. It can also depend on your business credit score and cash flow. A higher credit score can help you get a lower interest rate and qualify for more generous loan programs.
How much is a down payment on commercial real estate?
You'll generally need a down payment between 10% and 30% when buying a commercial property, depending on the loan type and property. SBA loans allow you to put down 10%, while conventional loans can be as high as 30%.
Can I use home equity to buy commercial property?
Yes! You can use your home equity to buy a commercial property outright or use it as a down payment. You can pull cash out through a home equity loan, HELOC, or home equity investment.
What are the ongoing expenses of commercial property investment?
Whether or not you have a loan, you'll still have ongoing expenses as a commercial building owner. These expenses include property taxes, insurance, utilities, repairs and maintenance, and other operational costs. Set aside money in reserve for larger expenses like replacing a roof or an air conditioning unit that will eventually happen. You can also pass some of these costs to your tenants by signing them to a triple net lease.
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