Nic

    Real estate investing with little to no money has never been easier, thanks to the financing options available to us. Nowadays, there’s a loan for just about every type of property investment you want to make.

    Want to buy a house? Get a traditional bank loan. Planning to flip a property? A private money lender might be your best bet.

    But for those businesses looking to invest in rental properties, what financing options are on the table? You might first think of rental loans, or maybe getting a loan from a bank or credit union. But, if you’re operating through an LLC or a corporation, you’ve got another option: business loans.

    These loans can offer better rates and terms than the usual routes when funding your real estate investment. That said, you still have to come prepared before getting approved. The criteria are more demanding, and you’ll need your LLC paperwork in tight order.

    Let’s take a closer look at how a business loan for rental properties works, why it might be a smart choice, and what you need to get your application across the finish line.

    TL;DR

    • Business loans can provide real estate investors operating under an LLC with competitive rates, larger loan amounts, and better terms than personal mortgages.

    • Business loan options for rental properties include traditional bank loans, business lines of credit, SBA loans, private money lenders, portfolio loans, and blanket mortgages, each offering unique benefits.

    • Options like SBA 7(a) and 504 loans offer government backing and affordable down payments but have strict eligibility rules requiring owner-occupancy.

    • Securing a business loan requires thorough preparation, including solid business and personal credit scores, detailed financial documentation, and a comprehensive business plan to meet stricter lending criteria.

    What Are Business Loans?

    What Are Business Loans?

    Business loans are financial aid for businesses of all sizes, from new startups and small companies to large corporations. And real estate investors are no exception. Those with real estate investment under a formal business structure like a Limited Liability Company (LLC) can use their corporate status to secure these loans for purchasing, renovating, or refinancing investment properties.

    Financial institutions such as banks, credit unions, online platforms, and other financial entities offer business loans. Getting one depends on how long you’ve been in business, how much money you’re making, your credit score, and what you can offer as collateral.

    Types of Rental Property Business Loans

    Types of Rental Property Business Loans

    When it comes to financing rental properties through a business loan, investors have several options. The most common types of business loans used for rental real estate include:

    Traditional Bank Loans

    Traditional Bank Loans

    Banks and credit unions provide traditional loans for businesses looking to invest in rental properties and commercial real estate. Applying for these loans is a lot like applying for a personal loan, and you might need to share some personal details even though it’s the business that wants the loan.

    Prepare for a waiting period of at least a month to close the deal. You’ll also have to meet strict requirements for your credit score and business cash flow, and you usually need to put down at least a 20% down payment.

    Business Term Loans

    Business Term Loans

    If you need a straightforward lump sum of money with fixed repayment terms, consider this option. You can choose from short-term, medium-term, or long-term business loans, each offering different advantages. It’s up to the business owner to pick the loan term that best fits their real estate purchases.

    Business Line of Credit

    A business line of credit works like a credit card for your property investments, similar to a home equity line of credit (HELOC). It’s flexible—you only pay interest on the amount you actually use. This is perfect for funding continuous repairs or when you’re unsure about the total funds your business will need. You make monthly repayments, and once you’ve paid off the loan, you can borrow again.

    Small Business Administration (SBA) Loans

    While not available for businesses that primarily earn from rental income, the U.S. Small Business Administration (SBA) offers loan programs for small business owners who want to buy or finance properties they’ll use for their own operations. Basically, if you’re getting one of these loans, your business has to run its operation out of the property you’re buying.

    The SBA 7(a) and SBA 504 loan programs are the most popular SBA real estate loan options. To qualify, your business must occupy more than half (51%) of the property, but you can rent out the rest—up to 49%—to bring in some extra cash.

    • SBA 7(a) loan: With an SBA 7(a) loan, you can buy commercial real estate, pay for renovations, or refinance business debt. You’ll get nice long repayment terms of up to 25 years, significantly longer than other types of investment property financing. And the down payment is pretty affordable at 10% in most cases.

    • SBA 504 loan: You can use an SBA 504 loan to get long-term, fixed-rate financing of up to $5.5 million. It helps small businesses buy major fixed assets like real estate or equipment, which either promote business growth or job creation.

    The best thing is that these SBA real estate loans are very safe as the federal government backs them. The catch? They come with extensive paperwork and a long, detailed approval process that could stretch over several months. And if you’re looking at a 504 loan, watch out for prepayment penalties that can make it costly to pay off the loan early.

    Private Money Lenders

    Private Money Lenders

    When speed is of the essence, and you’re okay with higher interest rates for quicker access to funds, private lenders can be a good option. This method might work well for investors with less-than-perfect credit or those needing flexible terms.

    Getting a business loan from a private lender can also be quicker than other business loan options, though it often has higher interest rates and fees. But, because of their flexibility, a private lender might set up the loan for rental property in a way that works better for both you and them.

    Finding a private lender can be a bit tricky since they don’t usually put out ads like banks do. But you can often find a reliable one by networking with other real estate investors or asking your contacts.

    Portfolio Loans

    Portfolio lenders keep the loans they give out instead of selling them off. This setup allows them to offer a mix of loan options, including those with fixed or adjustable rates, bridge loans, and lines of credit, often with more flexible terms.

    They might not even need personal guarantees from you. Rather than focusing solely on your income, many portfolio lenders look at the property’s debt service coverage ratio (DSCR) to figure out if it’s likely to rake in enough cash to be a good investment.

    DSCR Formula

    The good part about portfolio lenders is they don’t usually limit how many loans you can take out. This is a big win for businesses aiming to expand their real estate portfolio, whether through multiple rental property investments or various real estate projects.

    Blanket Mortgages

    With a blanket mortgage, you can bundle multiple properties into one loan. It’s pretty handy because it lets you sell off properties one by one without having to redo the whole loan.

    Getting one of these loans can make life easier for businesses. It speeds up the loan process and reduces paperwork since you’re only dealing with one monthly payment. But there’s a catch: if you fall behind on payments, all your properties could be on the line. Plus, the costs and interest rates might be a bit steeper than regular mortgages. 

    Advantages of Getting a Business Loan for Rental Real Estate

    Advantages of Getting a Business Loan for Rental Real Estate

    Getting a business loan instead of a regular rental loan when you’re looking to buy or fix up rental properties can be a smart move, especially if you’re running your show through an LLC or a corporation.

    Access to Larger Amounts of Capital

    Business loans, especially those backed by SBA or issued by commercial banks, often let you borrow more cash than typical rental loans. This can be a game-changer if you’re eyeing a pricey property or planning some major upgrades.

    Potentially Lower Interest Rates

    Due to the structured and often more secure nature of business loans, lenders may offer lower interest rates. This is particularly true for loans with SBA backing, which aim to encourage business growth and investment.

    Building Business Credit

    Building Business Credit

    Taking out a business loan and consistently making timely payments can help build your business’s credit profile. A strong business credit report can open doors to more favorable financing options in the future, lower insurance premiums, and better terms with suppliers.

    Tax Benefits

    Interest paid on business loans is often tax-deductible, which can reduce your overall tax burden. Plus, using a business loan for property investment can offer other tax advantages, such as depreciation and deductions for operating expenses.

    How To Qualify for a Business Loan

    How To Qualify for a Business Loan

    Qualifying for a business loan involves meeting certain criteria set by the lender, which can vary depending on the type of loan and the financial institution. Here are some common steps and requirements that businesses typically need to fulfill to qualify for a business loan:

    Credit Score

    Your credit scores, both personal and business, are like the financial version of making a good first impression. A high score can open doors to better loan terms. If your score needs a bit of a boost, start sprucing it up by paying off debts and always paying your bills on time.

    Financial Statements

    Financial statements provide a snapshot of your business’s financial health, including revenue, expenses, and profitability. Lenders review these statements to assess your ability to make regular loan payments. Plus, many lenders require that a business has been operating for a certain period, often at least two years.

    Collateral

    Some loans require collateral, which can be business or an ownership claim to the property. If there’s not enough collateral, you might have to sign a personal guarantee, meaning you’ll personally pay back the loan if your business can’t.

    Down Payment

    For most business loans, you’ll need to pay a down payment. A few lenders might let you get by with little or no down payment, but those deals usually come with higher interest rates.

    Usually, you should expect to make a down payment of approximately 20% of the total purchase price. The more you’re able to put down initially, the higher your chances of securing a lower interest rate.

    Legal and Financial Documents

    Legal and Financial Documents

    You need to get your documents ready. This usually includes your business plan, business and personal financial statements, tax returns, bank statements, legal documents (like articles of incorporation), and any licenses or permits.

    Business Plan and Experience

    As I’ve mentioned, lenders usually want to see a detailed business plan that outlines the purpose of the loan, the business model, market analysis, management team, and financial projections. Some lenders may require that the borrower has experience in the industry related to their business.

    Startups can have a harder time securing loans due to a lack of history. If you’re new to the game, focusing on other areas, like your business plan and credit score, can help.

    Conclusion

    Getting a business loan for rental property investing is a solid choice for real estate investors who run their business as an LLC or corporation.

    Sure, the hoops you have to jump through are a bit tougher than with a personal mortgage, but if you’ve got a solid business and credit background, some assets to back up the loan, and a clear plan for your business, you could land yourself a deal with better rates and terms than you’d find elsewhere.

    Business Loan for Rental Properties: FAQs

    What type of business is best for rental properties?

    For rental property owners, setting up an LLC is typically the best choice. An LLC protects personal assets from business debts and lawsuits, offers pass-through taxation to avoid double taxation, and allows for flexible management and ownership structures. It also boosts credibility with lenders and partners and simplifies the process of transferring ownership or adding new investors.

    What’s a Good DSCR?

    A good DSCR is typically 1.25 or higher. This number shows lenders that your business earns enough income to cover your loan payments comfortably by a margin. In simple terms, for every dollar of debt you have, you’re making at least $1.25 in income to cover that debt and then some. This extra cushion reassures lenders that your business can handle the loan, even if you hit a rough patch financially.

    Can I use an SBA loan to pay off my house?

    No, you cannot use an SBA loan to pay off your house. SBA loans are for business purposes only, such as starting or expanding a business, purchasing equipment, or financing operational expenses. Borrowers must show how they will use SBA loan funds to directly support business operations and growth, ensuring the loan serves eligible business purposes.