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In this video, I’ll give you the top three reasons why the SBA 504 loan program is one of the best tools available today if you are a business owner looking to diversify your wealth using commercial real estate.
Hey everybody, welcome to my channel. I am your host, Leo Landaverde, business coach and Outsource CFO, helping you scale your business.
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So here are the top three reasons why you should consider the SBA 504 loan program if you want to stop paying rent once and for all for your business and instead becoming your own landlord by purchasing commercial real estate for your business.
Number one reason, the down payment. Only 10%. So 10%. If you were to go anywhere, any bank, any commercial bank, traditional bank, or community bank, your asset-based lender and the like, you’re not going to find anywhere near the 10% that you can put with the SBA 504 loan program. So that’s huge for your business. And depending on the size of the loan, your down payment can make a huge difference in your cash flow. You’ve watched my videos before and you know that I talk a lot about cash flow. Cash flow is the lifeblood of your business, and I’m constantly helping you watch your cash flow. So the least amount of money out of pocket, the best. So 10%, you can’t beat it. There’s another reason why also.
The loan size goes up to five and a half million dollars. Five or five and a half million dollars, depending on the type of commercial project that you’re looking into. That’s really good news. Imagine if you will, for a moment that you’ve outgrown your current office space and you have to move. Congratulations, now you have a really good problem. As you’re driving around town, you drive by a building that would be perfect for your new corporate office, except there’s a small problem. The building is listed for sale. You decide you don’t want to bother with renting in the middle of a change of ownership, so you drive off.
Stop right there. What if you could buy it. Say this was a small building and sell for about a million dollars. With traditional financing, you would need to come up with about $250,000 or about 25%. And you’d still need to come up with another 7%, or another $70,000 for closing costs. That puts you out around $320,000 in cash, out of pocket. That’s a whole lot of money for the privilege of owning commercial real estate. And all this money is coming from somewhere, probably from the working capital of your business. There’s a better way. With the 10% down, now instead of putting $250,000 down, you only have to put $100,000 dollars down. That’s $150,000 reduction in your cash out of pocket. That’s huge for your business. You get to keep the cash in the bank account for your working capital. There is no other loan program out there that can do the same. I know that most business owners don’t just have that kind of cash laying round, so this alone, this down payment option, a loan of 10%, it’s huge.
Number two, amortization. Amortization is a fancy term for capital reduction over time or the length of time it will take you to pay off the loan. So something to keep in mind is, the shorter the timeframe to pay back, the higher the monthly payment. The longer the timeframe to pay back, the smaller your monthly payment. So the timeframe is key. The way this loans work, they work on a 50/40/10 split. Let me explain. So let’s go back to that beautiful building that you find for your new corporate office for sale for a million dollars. Say we were to go with the 504 program. The first $500,000 will gold to the first lien, which is the participating bank or lender. So $500,000 will be the first mortgage on that property.
The next 40% would be secured through a CDC, a community development organization, that was backing the loan through the SBA. And the remainder 10% as your equity injection, the 10% you’re putting down. So remember that the longer the timeframe, the smaller the payment. The way that this loans work, they work on kind of on a blended amortization schedule because your first position is usually going to be between 20 and 25 years. Your second mortgage position, it’s a 20 year fixed, so your blended rate or your blended amortization will be a combination of the first and second, probably about 23 to 24 years, and that’s how it works.
Number three, interest rates. Last but not least interest rates. Here are the good news. Interest rates are at an all time low. Just to give you an idea what the interest rates are right now from a sample that I took, a 25 year commercial real estate, first position, 2.6% APR. A 20 year commercial real estate at 2.52, and from another bank, a 20 year commercial real estate, 2.64. Can’t get any lower than that. That’s almost competing with residential real estate. So, if you combined a 10% down payment to save on cash, with a loan amortization schedule which will be a blended rate, plus historically low interest rates, now you have the perfect vehicle for you to go from being a tenant, to being a landlord and controlling the real estate and creating wealth for generations to come. So remember, this is why you’re doing this. You want to go from having a business, to having another vehicle for you to create wealth.
All right, last but not least, I need to talk about requirements. So here are a few requirements you need to keep in mind to be able to qualify for this type of loan. Number one, you must be a for-profit business. Unfortunately, if you are a nonprofit, you don’t really qualify for this type of loan. You must occupy at least 51% of the office space if you purchase an existing building or 60%, if you’re doing new construction. Number three, your net worth must not exceed $15 million. That’s very, very good for most of us. I think most of us would qualify. And your average, two year net income cannot exceed $5 million in EBITDA. That’s really good news. So again, one, you must be for-profit two, you must occupied at least 51%. Three. Your net worth cannot exceed 50 million. And your average two year net income cannot exceed $5 million. Let’s do this.
Please comment below and let me know if this video was useful and if you have heard about the 504 loan program, and if you want to know more information about it. Also, if you want to join a community of like-minded successful entrepreneurs just like you, then join our Facebook group at the link below where I share tips, tactics, and strategies of how my clients are growing their businesses to seven figures and beyond.
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