Can You Use a Business Loan to Buy Rental Properties?

When you need financing to buy a home, you look for a home loan. When you need financing for a small business, you might look for a business loan. 

But what if you’re in the business of buying rental property—like, say, a real estate investor?

Of course you can finance your property with a hard money loan or investment property loan. You can use a conventional mortgage loan as well, at least for your first few investment properties. 

But if you, like many real estate investors, have transferred your rental property to an LLC or other legal entity, your business may also have access to an additional slate of business loans too. Some of these compare quite favorably against other lending options for purchasing rental properties. 

Let’s briefly define business loans and review how you qualify for them before we dive into the specific types of business loans for rental properties.

What Are Business Loans?

Sometimes businesses need funding for big plans, expansion, or infrastructure.

Banks and credit unions make commercial financing available to businesses to help them fund operations, purchase equipment—or, yes, buy real estate. We intuitively understand the model of big manufacturers getting commercial loans to build new facilities, or a restaurant taking out a small business loan to pay for a renovation. The same logic holds true for businesses that generate rental income from real estate properties.

If you own a business as a real estate investor, your business may qualify for investment property loans to help you make real estate purchases too.

How To Qualify for a Business Loan

As you might imagine, not just anybody can form a business entity and stroll into a bank asking for an enormous loan. (I mean, you can always ask…) Just like with personal loans, the lender must make sure the business it’s lending money to has an ability to repay—and protect themselves in case it doesn’t. 

To qualify for a business loan, you’ll need to meet several criteria and prepare some documentation.

Credit Score: Commercial lenders often look at both your personal credit history and your business credit score (if you have one). Business credit scores work much like personal credit scores. Most lenders expect to review the credit history of your business to ensure it’s been producing positive cash flow for a period of time, paying its bills, and isn’t some fly-by-night operation. The credit score requirement varies depending on the type of loan. 

Financial Statement: Your business needs a low debt-to-income ratio to qualify for some types of loans and the best rates, just as an individual borrower would. You may be required to present your business tax returns, bank statements, and/or profit-and-loss statements during the approval process to help lending institutions assess your financial status.

Collateral or Personal Guarantee: Business lenders typically require business assets and/or an ownership claim to the property being financed as collateral to guard against default. If these aren’t sufficient, you may be required to provide a personal guarantee, staking your personal assets in the event you default on your debt obligations.

Types of Business Loans for Investment Properties

Several types of business loans work great for real estate investments. Each comes with its own advantages and considerations, so choose the type of loan that fits your situation and investment strategy. 

These are the major types of loans real estate investors can explore, starting with secured real estate loans and then getting into unsecured business loans.

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Conventional Mortgage Loans

A traditional bank loan remains an option for your business, especially if you’re buying single-family homes or other residential properties with four or fewer units. You can get conventional loans from any major bank or credit union you already work with.

These are often the cheapest loans you can find but have a host of drawbacks for real estate investors. They usually take at least 30 days to close, carry strict credit and income requirements to qualify, and typically require a down payment of 20% or more. Plus there’s a cap on the number of traditional mortgages you can carry on your credit report at a time, which becomes a deal-breaker as a real estate investor grows their portfolio.

Portfolio Loans

Portfolio lenders hold the loans they issue as part of their investment portfolio, hoping to make a return on investment from the interest repaid rather than reselling the mortgages on the secondary market. That fact frees each lender to set its own qualification guidelines. Many portfolio lenders use a formula called debt service coverage ratio (DSCR) rather than your personal income to determine whether the property should produce positive cash flow, thus making it a safer investment.

These loans might offer more lenient qualification criteria, but tend to carry slightly higher interest rates to compensate lenders for their increased risk.

Private Money Loans

Private lenders such as hard money lenders can provide customized financing for real estate investing. They don’t always advertise themselves, but check out our investment property loans page to compare reputable lenders.

These loans might come with more flexible terms but can also carry higher interest rates and/or stricter qualification conditions. Hard money loans are inherently short-term loans designed to help you buy and renovate properties. After the renovations are complete, you either sell as a flip or refinance to keep the property as a rental (the BRRRR strategy).

Private money extends beyond just hard money loans however. It could include any financing not provided by a bank or conventional mortgage lender. Technically, private loans you borrow from family and friends also fall into this category, but of course not everyone has a Rich Uncle Pennybags to turn to for a friendly real estate loan.

Commercial Property Loans

Also called commercial real estate loans, these loans are specifically designed for helping to purchase income-generating properties. They apply to a wide range of property types, from apartment complexes to office buildings to retail spaces.

Commercial real estate loans typically offer competitive interest rates and longer repayment terms, making them suitable for long-term rental property investments. They’re designed for very large purchases, often with minimum loan amounts of $1 million and no upper limit. Great if you’re developing a regional shopping mall, but not really the solution for buying a residential duplex.

Want to compare investment property loans?

What do lenders charge for a rental property mortgage? What credit scores and down payments do they require?

How about fix-and-flip loans?

We compare the best purchase-rehab lenders and long-term landlord loans on LTV, interest rates, closing costs, income requirements and more.

Business Lines of Credit

A business line of credit gives you an incredibly flexible financing option. Think of it like a building-sized credit card, where you’re borrowing against the value of the property. You can draw on your line of credit as needed and repay it at your own pace, paying interest only on your outstanding balance in a given month. Use the money you draw for whatever you want—to make a down payment or purchase a new rental property, to renovate, or to hire a property manager.

Of course, if you fail to repay, the lender can take the property and any collateral. But not all business lines of credit require collateral.

Unsecured Business Credit

Ready for a “secret” that most real estate investors don’t know?

As a real estate investor, you can qualify for unsecured business lines of credit and business credit cards. You don’t need to put up any collateral, which means saving thousands of dollars on title company fees, settlement fees, and lender fees. Plus, the lender can’t foreclose on your properties if you default.

Business credit cards prove more useful for real estate investing than you realize. You can dodge cash advance fees and limits by using a service like Plastiq. You can pay for materials directly with your card. All the while, you rack up credit card reward points.

I’ve gone so far as to buy and renovate a property almost entirely using credit card funds.

Check out business credit concierge Fund&Grow, which lets real estate investors open business credit lines and cards between $50,000–$250,000. They even scrub your credit report in between each round of fundraising.

Small Business Administration (SBA) Loans

SBA loans are government-backed loans designed to assist small businesses. They’re not really intended for real estate investors and restrict using them to purchase rental properties or other properties used as investments. But your business may be able to use one nonetheless.

You can use an SBA 7(a) loan, for instance, for commercial real estate purchases, renovations, or refinancing existing business debt. Or you can use an SBA 504 loan to get long-term, fixed-rate financing up to $5.5 million to buy assets that promote business growth and job creation, including building purchases, new construction, and land improvement projects.

SBA loans often come with lower down payment requirements and favorable interest rates, but are notorious for having long approval times and an application process mired in red tape. Expect to spend a couple months jumping through hoops. But these loans can reward you with some of the best terms around—if you’re patient.

Final Thoughts

Business loans offer plenty of options for rental property investments and allowing real estate investors to grow their portfolios. Understanding the types of business loans helps you select an option that aligns with your current situation and your financial goals.

Shop around to compare rates and terms, especially in real estate financing where the numbers can become astronomical. And don’t forget to shop around! There’s no harm in asking what your preferred lending institutions can offer to you in your situation, and let them compete for your business.♦

Have you ever used a business loan to buy rental properties? What types of business loans have you used for real estate investing?

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About the Author

Jim Cirigliano has more than 15 years of experience writing original content for consumer and business publications in industries including personal finance, construction and manufacturing, nature and outdoors, and science and biotechnology. He operates Spot Check Editorial, which produces world-class content that engages readers and customers.