The Short Answer
For businesses that are buying investment properties, there are business loans for rental property that can be a useful financial solution for these real estate purchases. Purchasing rental properties is a sound investing strategy, and business loans for rental property are available through a range of lenders, from traditional lenders like a bank or credit union, to private lenders and blanket mortgage lenders.
Qualifying for a business loan for rental property requires supplying a business plan, financial statements to illustrate the business’ cash flow, profits and other important information, credit history and scores, as well as information on the property.
Key Points
What Are Rental Property Business Loans?
Purchasing an investment property is a sound real estate investment strategy for those who want to generate a passive income from the rental income they receive. There are various ways to go about securing the funds for both the rental property and any renovations it might need. Those who wish to use business loans for rental property can purchase single and multi-family properties, and fund any property upgrades that are necessary.
Business loans are a good alternative for people who don’t want to use loans where they are required to provide a personal guarantee. This allows borrowers to lend under a business capacity, with no personal liability and therefore less focus placed on personal financial details.
There are various business loans that can be used for the purpose of real estate investment property purchases, and these will typically use business assets as collateral, if the loan repayments cannot be met. From traditional bank loans to private money lenders, there are a variety of business loan options for real estate investment, particularly rental property purposes.
The Difference Between Rental Property Loans and Normal Home Loans
The main differences between rental property loans and conventional home mortgage loans lie in the loan requirements and interest rates.
Interest rates
Rental property loans and mortgages being used for a primary residence may have a difference of 0.5% to 0.75% when it comes to interest rates. Often, the rates on a rental property loan will be higher than a traditional home loan because rental properties are being bought by real estate investors who are seen as riskier borrowers.
Real estate investors may have a few loans at once, as they purchase multiple properties, and lenders are therefore more careful with real estate investors, as opposed to people who are buying a house to live in. To mitigate the risk, lenders will often charge a higher interest rate, which can add up over time.
Loan requirements
Applying for a business loan has different requirements from a typical home loan. Lenders who provide loans for rental properties and other real estate investments may have more stringent lending criteria than traditional lenders. This is due to the fact that real estate investors are a riskier bet for lenders, so they need to make sure that they can pay back the loan.
A larger down payment is often required, to ensure that the business has a larger amount of real estate equity and safeguard lenders against any risk. A down payment of 20% or more is quite a common requirement for rental property loans for an investment property.
The credit requirements between traditional home loans and rental property loans are slightly different. Credit scores are applicable for both rental property loans and home mortgages, however when it comes to rental property loans, personal credit scores and the credit history of the business will be used. Personal credit scores typically need to be higher for rental property loans than home loans.
With regards to financials, the business will need to produce various statements as part of the application process, such as cash flow statement, profit and loss statement, and so on. Whereas a regular home loan would not require this paperwork.
Different qualifying property types
An investment property usually needs to be a condominium, house, single-family unit or multi-family unit. A rental property loan will usually be granted for 1-4 unit investment properties. Whereas a conventional home loan is usually used for single-family real estate that will be occupied by the owner and are not considered investment property.
Advantages of Using Business Loans For Rental Property
- Less personal risk: One of the biggest benefits to purchasing a rental property with a business loan, is that it significantly lowers the personal risk. Business assets will be used as collateral for the loan which means that personal assets will not be at risk, should the business become unable to pay the loan back.
- Easier to invest with partners: Using a business loan for a rental property purchase makes it significantly easier for people to partner on an investment. For administrative purposes, a business loan can make it easier to purchase a rental property with a partner.
- Tax advantages: Buying a rental property through a business loan can allow for some significant tax benefits that wouldn’t be offered on regular home loans. The rental income can also pass through the business which means that the individual’s income tax return can be reduced using the tax benefits.
- Privacy: When using a business loan to purchase a rental property, the deed of the property can have the business’s name on it, instead of an individual. This is very useful for dealing with tenants, who will therefore not have access to an individual outside of the property manager, and all personal information is protected.
Disadvantages of Using Business Loans For Rental Property
- Higher interest rates: Using a business loan to purchase a rental property may result in higher interest rates, as rental property is used for investing purposes and not for residence. Real estate investors are seen as a higher risk borrower, so these interest rates will be higher than a conventional loan.
- Stricter lending criteria: Business loans can have stricter lending criteria that require in-depth business financial statements, cash reserves, high personal credit scores and more.
- Harder to find financing: Finding a business loan for a rental property purchase can be more difficult than finding a loan for an individual. So, finding the right lender and loan type will require research, and these loans may not be as favorable as the loans available to individuals.
Business Loan Options For Rental Property Investment
We’ve put together a list of some of the most popular business loans for rental property investing. Each has its own benefits and drawbacks, but it’s good to get to grips with every option, in order to make the most informed decision.
Traditional Bank Loans
A bank or credit union will provide traditional real estate loans for businesses to invest in rental properties, as well as commercial real estate loans. The application works in a similar way to a personal loan application, and some personal information may also be required even though the business is applying for the loan.
Lenders may require credit reports, business tax returns, the business plan and financials, statements showing the business cash flow, profits and losses, along with other important information. Traditional lenders may also require the borrower to pay for private mortgage insurance (PMI) when taking out a loan. Private mortgage insurance is to protect the lender in the event of the borrower defaulting on the loan.
Private Lenders
A good alternative to traditional lenders is private lenders. Private lenders can provide faster funding, however they usually have higher interest rates and fees than other business loans. Private money lenders can easily be found online, or via other real estate professionals who may have used reliable private lenders for real estate before.
Private lenders can offer greater flexibility as they aren’t bound by the same regulations as traditional loans. Which means that these lenders can offer businesses loan terms that are more in line with their requirements, and find a middle ground between lender and borrower.
Portfolio Lenders
A portfolio lender will hold the loan themselves, instead of selling it on a secondary market. Portfolio loan rates and terms are flexible and can be structured according to the borrower’s needs. Portfolio loans can be approved faster than traditional loans, and funding is issued faster.
Portfolio loans often come with fixed and adjustable rate options for financing, business lines of credit and short-term bridge loans. There are typically no limits to the number of loans that can be funded with a portfolio lender, which is useful for businesses who are investing in multiple rental properties or real estate opportunities.
Business Term Loans
Business term loans are provided by banks, credit unions and private lenders. Business term loans provide funds for businesses to purchase real estate, renovate office space, purchase equipment and more. These usually come with a fixed interest rate, and funds are paid in a lump sum.
There are short-term, medium-term and long-term options available for businesses. Each with its own benefits, and it’s up to the business to choose the terms that will suit the real estate deal the best.
Business Lines of Credit
Much like a home equity line of credit (HELOC), a business line of credit also provides access to funds as they are needed. The business will make interest-only payments on the amounts that they have borrowed initially. Loan repayments are then made monthly, and once the loan for rental property has been settled, the business can continue to borrow.
The interest rates on a business line of credit are not as high as other loan options, and business assets are usually used as collateral. Which means that if the loan cannot be repaid, then the lender can seize the assets that have been used as collateral.
Invoice financing and factoring
Invoice financing and invoice factoring are two alternative options that businesses can use to get a loan for rental property. Invoice financing is when a business acquires a loan to the value of any outstanding customer invoices. With this loan, the business repays the loan as the invoices get paid and the lender charges a fee which is a percentage of each invoice.
Invoice factoring is quite similar to invoice financing, however instead of the business collecting the outstanding invoices, they’re sold to the lender for a percentage of the total invoice amount. Which means that the lender will need to collect the outstanding amounts from the customers and the business will receive the amount once the lender has deducted their fee.
Blanket Mortgage
A blanket mortgage is useful for businesses who are purchasing multiple rental investment properties, as they can get these all financed under a single loan. The real estate itself will serve as the collateral for these loans, so these are a popular option for businesses. These business loans for rental property come with less admin, as there is only 1 payment to process each month for the loan, however loan rates and fees may be higher than conventional loans.
How To Qualify For Rental Property Business Loans
Qualifying for business loans for rental property can be a little more challenging than qualifying for a regular mortgage. However, there are a few common criteria that your business should meet, to have the best chance of qualifying for business loans for rental property purchases.
- Provide a business plan: The more information a lender can see about your business, the better. So, providing a business plan for a rental property loan will help them understand where and how the loan funds will be used, and how this will contribute to the overall goals of the business.
- Provide financial statements: The business’s financial statements are a key part of the real estate loan application as these will show that the business is financially capable of paying back the loan. Any lender’s primary concern is that a borrower can repay a loan, so this is crucial to the success of the loan application.
- Show your credit score: The credit history of the business, as well as the credit score of the individuals are both important parts of the real estate loan application. Loans are granted on the basis that the business has the ability to pay it back, and credit history is a great way of showing that the business has previously settled debt.
- Give the property information: Information about the investment property is a vital element of qualifying for a loan for rental property, as this shows the potential rental income that can be received and indicates whether it’s a good deal or not. The investment property location, size, operating costs and potential rental income are important pieces of information to include.
To note, Small Business Administration (SBA) loans cannot be used for rental investment property purchases. While the 504 small business administration loans are applicable for real estate purchases, they cannot be used to get a loan for rental property purchases and need to be used for creating jobs and promoting business growth.
Rental property business loans can be a good financing solution for those who want to purchase real estate investment properties while retaining their privacy, purchase rental property with their business partners, and purchase an investment property for business purposes.
There are a variety of rental property loan options to choose from, for the purchase of an investment property, each with their own advantages and drawbacks. Consider each loan for rental property carefully before making a decision on how to fund the investment property purchase, to ensure that you make the right choice for the business’s real estate investing goals.