Investing in rental property can be an exciting opportunity, as it offers a potential income stream as well as potential long-term appreciation. However, purchasing rental property usually requires a substantial amount of capital. Investors seeking funding for their next real estate purchase can therefore benefit from business loans for rental property.
Can You Use Business Loans for Rental Property?
Yes, you can use certain types of business loans to finance real estate purchases, including rental properties. However, the type of loan that’s best for you will depend on factors such as the size of your business, your financial health, the type of property you're purchasing, and your long-term investment goals.
Most traditional business loans are designed for operational expenses, but some are tailored for real estate investments. These loans for real estate come in different forms, including term loans, commercial real estate loans, and even specific rental property loans. Each of these loan types has its own set of requirements and terms.
Do Commercial Real Estate Loans Work for Rental Property?
Commercial real estate loans are specifically designed for businesses looking to purchase property for business purposes, which can include rental properties. These loans are similar to personal real estate loans but often have different qualification requirements.
Eligibility for commercial real estate loans may depend on the borrower’s credit score, financial statements, business history, and the projected income from the rental property. Lenders may also consider the location and type of property.
Can You Get Term Business Loans for Rental Property?
A term loan is another financing option for business owners who wish to buy rental property. In a term loan agreement, a business receives a lump sum upfront, which it repays over a set period with interest.
Term loans are often more accessible to established businesses with a solid financial track record. Interest rates can vary depending on the lender, the term length, and the borrower’s creditworthiness.
Can You Use an SBA Loan to Buy Rental Property?
Small Business Administration (SBA) loans are a popular choice for business owners seeking flexible and affordable financing. Because SBA loans are backed by the government, they may come with lower interest rates and more favorable terms compared to other types of loans.
While SBA loans can be used for real estate purchases, they are generally intended for owner-occupied commercial properties. This means that the business itself must occupy most of the property. Therefore, investors may not qualify for SBA financing if they’re looking to purchase rental property and not have their business operate on that property.
SBA 504 Loan for Real Estate
The SBA 504 loan program is designed for small businesses looking to expand by purchasing real estate, equipment, or other fixed assets. If the rental property you’re looking to buy will serve as the primary operating space for your business, this type of loan may be an option.
The SBA 504 loan provides up to 90% financing, with the loan being split between the SBA, a third-party lender, and the borrower’s down payment. For rental property investments, borrowers must meet the owner-occupancy requirement.
SBA 7(a) Loan for Real Estate
The SBA 7(a) loan can be used for a wide variety of business purposes, including real estate purchases. Like the 504 loan, the SBA 7(a) loan also requires that the borrower’s business occupies at least 51% of the property. This makes it a suitable option for mixed-use properties, where part of the property may serve as rental units while another portion is used for business operations.
In general, the SBA 7(a) loan offers up to $5 million in funding, with terms of up to 25 years for real estate.
Can You Get Investment Property Loans for Rentals?
Investors looking to purchase property exclusively for rental investment purposes may consider investment property loans. Unlike many other types of business loans, these loans do not require the borrower’s business to occupy part of the property. Investment property loans may come with higher interest rates than loans for owner-occupied properties. Additionally, lenders may require a larger down payment for investment property loans.
Can You Use a Commercial Mortgage for Rental Property?
A commercial mortgage is another type of loan available for businesses looking to buy rental properties. This type of loan is similar to a traditional mortgage but is tailored for business purposes. Commercial mortgage repayment periods often range from 10 to 30 years, and their interest rates can be fixed or variable.
To qualify for a commercial mortgage, a business will need to demonstrate that it has the financial capability to manage the property and make timely loan payments. Lenders will also evaluate the expected rental income from the property and the borrower’s business financials. Some commercial mortgages require collateral.
Are There Risks With Hard Money Business Loans for Rentals?
For businesses that need quick financing or have difficulty qualifying for traditional loans, hard money loans may be an option. These are short-term, high-interest loans that are typically used by real estate investors who plan to purchase and renovate rental properties before refinancing with a conventional loan.
Hard money lenders usually base the loan on the value of the property being purchased, rather than the borrower’s creditworthiness. Because of their high interest rates and short repayment terms (often between 1 and 5 years), these loans are generally not recommended for long-term investments.
Should You Choose a Conventional Loan for Rental Property?
Conventional loans are another common choice for businesses looking to purchase rental property. While not specifically tailored to businesses, these loans can be used to finance investment properties under the right circumstances.
Conventional loans are typically offered by banks and credit unions and can be secured for both personal and business investment purposes. These loans may require a downpayment and they may offer competitive interest rates for borrowers who have strong credit. Businesses lacking established credit history may find it challenging to secure a conventional loan for rental property purchases.
Are Bridge Loans Feasible for Rental Property?
Bridge loans are another short-term financing option that can be used to finance rental property investments. These loans are designed to "bridge the gap" between the purchase of a property and the securing of long-term financing.
Bridge loans may come with higher interest rates and shorter repayment terms. Many business owners use bridge loans to secure a rental property quickly, then refinance with a longer-term loan once they’ve stabilized the property’s cash flow.
What Are the Risks of Using Business Loans for Rental Property?
While business loans can be a valuable tool for financing rental property purchases, they also come with risks. Before taking out a loan, you should evaluate the risks and your ability to manage the debt. Careful planning and thorough research are key to making sound decisions when it comes to financing your rental property business.
High Interest Rates for Investment Properties
One of the most significant risks is the possibility of higher interest rates. Because rental properties are seen as riskier investments than owner-occupied properties, lenders often charge higher interest rates to compensate for this risk. This can make the overall cost of financing significantly higher over time, especially for long-term loans.
Cash Flow Challenges
Rental properties depend on steady rental income to cover expenses, including loan payments. If the rental market takes a downturn or your property experiences extended vacancies, you could face cash flow challenges that make it difficult to repay your loan. It’s, therefore, beneficial to have a reserve fund to cover unexpected vacancies or maintenance costs.
Loan Qualification Requirements
Another challenge with using business loans for rental property is meeting the loan qualification requirements. Lenders will scrutinize your business financials, credit history, and the potential income from the rental property. Newer businesses or those with inconsistent cash flow may struggle to qualify for certain types of financing.
How Does Rental Property Financing Differ for Residential vs. Commercial Properties?
Financing rental properties can vary depending on whether you're purchasing residential or commercial real estate. Borrowers using a residential property loan to purchase residential property, such as a single-family home or a small multi-family home, might need to present their credit score, personal income, and debt-to-income ratio to their lender during the application process. Residential loans tend to have lower interest rates and longer terms.
In contrast, loans for commercial properties—such as office buildings or apartment complexes with five or more units—may place more emphasis on the business’s financial health. Lenders may evaluate business income, cash flow projections, and the potential rental income of the property. Commercial real estate loans typically come with higher interest rates, shorter repayment periods, and larger down payments.
Finding the Right Business Loans for Rental Property
Business loans for rental property can be an excellent tool for borrowers looking to venture into real estate investing. However, finding and qualifying for a loan that meets your needs can prove challenging if you don’t have access to the right information. That’s why we at BusinessLoans.com use our proprietary technology to review your business information and quickly match you with the right lending partners. Contact us today to get started.
