Finding the right mix of loan and down payment

I am ready to invest in commercial property and have a good portion of money earmarked for the investment. My question is this: Is it better to use the least amount down and pay tons of cash for interest - or - is it better to sink it into equity and pay less interest.

I understand I could use leverage to buy higher value property, but I am a little concerned about being vulnerable if interest rates continue to climb but the rent stays the same. The property I am looking at has a tenant with minimal escalation through 2008. On the other hand, savings rates are anemic so it doesn’t make any sense to leave cash there.

What are your thoughts on finding the right balance of down payment and equity? Thanks.

I usually suggest to my clients that they should put down 20-25% and if the interest payments are too high they can buy down the rate a little. With each property and scenario it would be a different blend of the two.

There are now some decreasing fixed rate commercial mortgages on the market. They can be attractive if you put atleast 20% down, but the rates tend to be a little high. There are other products that have rates that are 1.5% - 2.0% over the 10 Year treasury yield, these can also be very attractive. The are some lenders that will give you 100% financing if you “pledge” you assets, this can also be very attractive if these assets are long term and have a higher yield than the subject property.

The options for financing are just a diverse as the types of properties out there.

My suggestion is this:

Keep your investments diverse.

I save/invest 60% of my income from loans/sales of real estate. I reinvest 10% into marketing, 25% goes into a money market account, 15% into stock IPOs (CMG…Gotta luv it) and 10% into a FOREX account. This mix works for me but may not work for someone else.

A high LTV loan works IF the money that could be used for a downpayment can yield more in another investment vehical. Otherwise, you should put as much down as possible.

You can invest in real estate, stocks, bonds, futures, currencies, etc. What it all boils down to is risk. How much risk are you willing to take on? What kind of return do you expect from your investments a month, a year, ten years from now?

I don’t know if you will find my reply helpful, but you are asking the right questions and thats a great start.

Good information Patrick. Your third to the last paragraph in your response is the key for me. Basically, if I understand you correctly, it’s if I can’t get a better after tax yield somehwere else, I should put it into the real estate deal that I’m looking at. Of course I’ll leave myself reserve for contingencies like new roof, defaulting renters, etc., but otherwise I’ll sock as much down as I can unless I have a better place to take the money.

I have been very fortunate and should be able to accumulate about the same amount of investment nest egg in another couple of years. If I can, then perhaps I can also borrow against the first property to get access to bigger properties on the next deal. I assume the bank will see the equity from my big down payment on the first deal and be willing to lend against it. I guess otherwise, I’d need to hoard cash until deal two. Do you think lenders will shy away or charge a premium interest rate for what I am considering for deal two?

In my experience commercial lenders prefer to “cross-collateralize” commercial properties over residential.


You should probably put 20% down on commerical property. Decent program would be 2 points, 7.75% rate for 5 years fixed and a 25 yr amorization, with no prepay. Depending on the commerical deal that your doing if the appraisal value came in higher that the purchase price, do a sellers assist. There is no regulations on assists in the commerical realm of things. So at least get your closing costs taken care of.

There is also a possiblity to finance your 1st as you said. You have to remember cash flow is king, mortgage debt is deductible and well… workable. At 80% loan to value of your reisdence, you could depending on the program pay as little as 400k for every 100,000.00 this opens up debt to income ratios and well as cash flow.

Your commerical property you should buy as a company, either LLC or INC. This help structure cash flow, taxes, and liabilities…
Also, if you open a company f some sort, most banks today if your credit is good will give a unsecured line of credit up to $100k tied to the business. You can usually do this stated. This way it gives you additional working capital that is not tie to your personal credit report but the companies tax ID thus giving you monies but not reflecting your debt for ratios…

Tom P.

Hi Tom,

Excellent information. I really appreciate the benchmark loan terms. Those are better than the starting point terms from a banker I talked to last June when I started looking. He quoted a fixed rate (of 6.25% last June when rates were lower) for three years, then moving to prime plus 3/4% fixed for every three years after on a 20 year amortization. He also wanted 1.25x debt coverage ratio.

I will work on the seller assist. I hadn’t considered it, but you are right if I can get them to go for it why not cover closing costs.

Regarding the company form, I have an LLC formed and will use it for the deal. I appreciate the advice about the company, I hadn’t considered it because of all the tax filings I recalled from an earlier company. It migt be a different situation though because it had employees and therefore all the payroll mess. It might not be the same with this business.

Thanks to everyone on the board. I have picked up a lot and look forward to more.