Small Business Loans for Rental Property

By Susan Guillory · May 22, 2024 · 5 minute read

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 Small Business Loans for Rental Property

If you own a rental, you might be considering buying more properties. But if you don’t have a lot of cash to make that purchase, should you pursue business financing?

Getting a small business loan to buy rental property can help you grow your business while conserving the cash available in your bank account for renovations, repairs, and business operations.

There are disadvantages to be aware of too.

Lender Options for Rental Property Business Loans

If you’re looking for a loan for a new rental property, where do you begin? First, familiarize yourself with the most common small business loan terms and requirements. There are many lenders to choose from, each offering their own financial products.

Recommended: Small Business Loans for Business Expansion

Loan Types for a Rental Property Business

There are several types of small business loans you may want to consider as you begin shopping for financing for rental property.

Term Business Loan

Banks and real estate lenders offer a variety of options. Some loans are specifically for rental properties, while others are aimed at fix-and-flip investors.

These financing options can include:

•  Short-term business loans to cover day-to-day expenses

•  Long-term business loans for building renovations and real estate purchases

•  Bridge loans to address immediate business needs

Business Line of Credit

A home equity line of credit (HELOC) may be useful if you need capital for renovations now, and more down the road. With a HELOC, you can take out cash up to a maximum draw. Once you repay it, the money is available to borrow again.

Alternative Loans

If you don’t qualify for the above options, you may be glad to know that there are alternatives that can get you access to cash.

Alternative loans can include the following lending products:

•  Merchant cash advances

•  Equipment financing

•  Small business auto loans

Wondering why a Small Business Administration (SBA) loan for rental property isn’t on this list? The SBA specifically prohibits the use of SBA loans for investment properties.

Recommended: Business Consolidation Loans

Interest Rates for Rental Property Loans

So what’s the going interest rate on a small business loan for rental property? They can vary widely, depending on the lender and your qualifications.

It’s a good idea to shop around with multiple lenders and compare rates to ensure you get the best deal.

The Differences Between Rental Property Loans and Conventional Home Loans

You might be wondering how a business loan to buy rental property compares to a personal home mortgage.

How High Interest Rates Are

Lenders specializing in business loans for rental property may be happy to lend to investors like you. But they may also charge you a higher interest rate than they would for a home mortgage.

In fact, interest rates for commercial real estate loans can be one-half to three-quarters of a percentage point higher than your home mortgage. That may not sound like much, but over time, it can really add up.

The reason for the higher rates is that lending to a real estate investor, who may have multiple mortgages at once, is generally riskier than lending to someone who wants to live in his or her home and has only one mortgage.

Recommended: Peer to Peer Business Loans

How Hard They Are to Obtain

For that same reason — the inherent risk that real estate investment involves — rental property lenders may be pickier in offering commercial real estate loans than with personal mortgages. During the application process, you may be asked to provide your credit report, personal income verification, bank statements, and tax returns to show lenders that you’re financially capable of paying the mortgage each month.

You may also be required to offer a larger down payment on the property or to demonstrate greater cash reserves and income to show that you can afford to pay the loan.

Finally, lenders may not be as lenient if you fall behind on payments as they might if you lived in the home carrying a loan.

Recommended: First Time Business Loans

Requirements and Eligibility for Rental Property Loans

There are often more stringent requirements to qualify for a small business loan for rental property. During the application process, you will typically be asked for business entity documents (if your real estate investment company is an LLC or corporation), a voided check, and a scope of work.

Credit Scores

Just as with any business loan (or personal loan, for that matter), your credit score will help determine your eligibility for a rental property loan, as well as what rate you pay. The higher your score, the lower the rate you may be offered.

Some lenders require scores of 620 or higher. Lenders may look at your business score, your personal score, or both. Borrowers who meet a lender’s minimum credit scores for business loans may get approved for financing.

Debt-to-Income Ratio

Another important factor in applying for a rental property loan is your debt-to-income ratio, also known as your DTI. This is the ratio of how much debt you have against your total income. The higher the ratio, the more risk you present to lenders. Most want to see a DTI ratio of 36% or less.

Your Down Payment

Most lenders will require you to make a business loan down payment with your purchase. Some lenders will let you borrow with little to no money down (expect those to charge higher interest rates).

You may be required to put down 20% — at minimum — of the purchase price.

Recommended: Typical Small Business Loan Fees

The Takeaway

Business loans for rental property can be helpful when purchasing your next apartment building investment, but they’re not without drawbacks.

If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.

Get personalized small business financing quotes with SoFi's marketplace.

FAQ

Can you get a small business loan for a rental property?

Yes. There are specific loans designed for real estate investors with rental properties.

What type of loan do I need for a rental property?

There are several different loans available to you for rental property, from standard term loans to lines of credit. After reviewing these options, you can choose one that’s right for you.

Can an LLC get a mortgage?

Yes, a real estate investment company operating as an LLC (or a corporation) may be eligible for a commercial property mortgage.


SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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