Opinion: Why 20% down has become the exception in commercial real estate

“I can’t remember the last commercial real estate acquisition I financed with only 20% down.”

Not because banks suddenly became dramatically more conservative. Not because buyers became more risk-averse. The math simply no longer works.

As an investor, commercial real estate broker, property manager and private lender, I’ve watched this shift unfold in transaction after transaction over the past several years. One of the most common conversations I’m having today isn’t about finding the right property—it’s about helping buyers and sellers understand why financing looks so different than it did just a few years ago.

For years, commercial real estate investors could begin underwriting almost any acquisition with one basic assumption: plan on bringing approximately 20% down. It wasn’t a guarantee, but it was a reliable starting point. Interest rates were historically low, debt was inexpensive and many income-producing properties generated enough cash flow to satisfy lender requirements while still supporting an 80% loan-to-value ratio.

Today, that assumption has become outdated.

Across nearly every commercial asset class, investors are discovering that 25% to 30% equity is becoming the new normal. In many cases, the change isn’t because lenders have fundamentally changed their underwriting philosophy. Instead, it’s because the cost of debt has fundamentally changed the economics of commercial real estate financing.

This shift is something every buyer, seller, broker, lender—and even appraiser—needs to understand.

It isn’t about loan-to-value anymore

One of the biggest misconceptions I still encounter is that commercial financing is driven primarily by loan-to-value.

Many investors begin evaluating a transaction with a simple assumption:

“If I’m buying a $2 million property, I’ll borrow $1.6 million and bring $400,000.”

Unfortunately, commercial lenders don’t begin their analysis there.

The first question isn’t, “What percentage are we willing to lend?” The first question is, “Can this property’s income safely support the mortgage payment?” That’s where the Debt Service Coverage Ratio (DSCR) becomes the driving factor.

Most commercial lenders require a DSCR between 1.20 and 1.25, meaning the property’s net operating income (NOI) must exceed its annual debt payments by 20% to 25%.

When commercial interest rates were hovering around 4%, those underwriting standards still allowed many buyers to obtain financing near 80% of the purchase price. As interest rates climbed, however, the mortgage payment increased substantially—even if the property’s income didn’t.

The result? Loan proceeds began shrinking.

A real-world example

Let’s look at a simplified example.

Assume an investor is purchasing a $2,000,000 apartment community producing $160,000 in annual net operating income. A lender requiring a 1.25 DSCR would generally limit annual debt service to approximately $128,000.

Just a few years ago, with commercial interest rates around 4.25%, that property could likely support financing close to $1.6 million. The buyer would bring approximately $400,000 (20%) to closing.

Now assume absolutely nothing about the property changes.

• The purchase price remains $2 million.
• Net operating income remains $160,000.
• Occupancy remains stable.
• Expenses remain the same.

Only one thing changes. The interest rate.

With commercial financing closer to 7%, that same property’s income may now only support financing somewhere between $1.4 million and $1.5 million while still satisfying the lender’s DSCR requirement.

Instead of bringing $400,000 to closing, the buyer now needs approximately $500,000 to $600,000. That’s as much as 50% more equity for the exact same investment.

The property’s value didn’t change. The buyer didn’t change. The lender’s underwriting standards didn’t even change.

Only the cost of borrowing changed. Yet that single variable completely reshapes the capital stack.

Why buyers need to underwrite debt before returns

One mistake I continue to see is investors analyzing projected returns before understanding how much financing the property will actually support. Today’s underwriting process should begin with financing—not end with it.

Before calculating cash-on-cash returns, investors should answer five questions:

1. What DSCR will my lender require?
2. What interest rate should I realistically underwrite?
3. How much loan proceeds does that actually produce?
4. How much equity will I need?
5. Do the projected returns still justify the investment?

Answering these questions at the beginning of the process—not after negotiating a purchase agreement—can prevent weeks of wasted due diligence and avoid disappointing financing surprises.

Sellers need to understand this too

This changing lending environment doesn’t only affect buyers. It directly affects sellers.

Many owners continue pricing properties based on comparable sales that occurred during one of the lowest interest-rate environments in modern history. The challenge is that today’s buyers aren’t financing acquisitions with yesterday’s debt. Every additional dollar of required equity generally reduces the buyer’s cash-on-cash return.

Eventually, many buyers simply can’t justify paying yesterday’s prices—not because the property lacks quality, but because today’s financing changes the investment’s economics.

I’m seeing more transactions stall for this exact reason. The buyer isn’t walking away because they dislike the asset. They’re walking away because the financing no longer supports the pricing. Sellers who recognize this reality early tend to negotiate more effectively and ultimately close more transactions.

The new rule of thumb

Every property is unique. Every lender has different underwriting standards. Every market has its own dynamics. But one trend has become increasingly difficult to ignore.

The old assumption of a 20% down payment should no longer be the starting point for underwriting commercial acquisitions.

Instead, investors should begin every analysis expecting they may need 25% to 30% equity, unless the property’s income clearly supports additional leverage. That subtle shift in expectations can dramatically improve underwriting accuracy and prevent costly surprises later in the transaction.

Final thoughts

Commercial real estate has always been a numbers business. Today’s numbers simply tell a different story.

The investors who understand how higher interest rates affect debt service coverage will identify opportunities faster, negotiate with greater confidence and avoid financing surprises.

The sellers who appreciate how debt influences buyer returns will have more realistic pricing expectations and a greater likelihood of getting transactions to the closing table.

Commercial real estate has always rewarded those who understand the numbers better than everyone else.

Today’s most important number may no longer be loan-to-value. It’s debt service coverage.

The investors who continue underwriting deals like it’s 2021 will keep wondering why transactions fall apart. The investors who understand today’s lending environment will be the ones buying tomorrow’s best opportunities.

Jesse Brewer is a local county commissioner in Boone County, Kentucky, real estate broker, investor, property manager and private money lender. 
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners. To contact the editor responsible for this piece: zeb@hwmedia.com.