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Small Business Loans for Rental Property

Small Business Loans for Rental Property; Getting a small business loan for an investment property can be a headache. Learn about the ins and outs of getting a loan for a rental property.
Susan Guillory
Susan GuilloryUpdated March 2, 2023
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If you own a rental, you might be considering buying more properties. But what if you don't have a lot of cash on hand to make that purchase? Should you pay out of pocket if you qualify for 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. But there are some pitfalls to be aware of too. Read on to learn more.

Lender Options for Rental Property Business Loans 

If you’re looking for a loan for your rental property, where do you begin? First off, familiarize yourself with the most common small business loan terms and requirements. There are many lenders out there, each offering their own financial products. Here are a few representative examples from the top results of a Google search to begin your research.

Genesis Capital

Genesis Capital provides financing for a variety of real estate investment situations, from fix-and-flips to new constructions and multifamily units. Its staff claims deep knowledge of real estate development.

Kiavi

Another rental property lender, Kiavi (formerly LendingHome), offers bridge loans and rental loans at rates starting at 5.75%.

AimLoan

AimLoan is a direct lender that has won the Better Business Bureau Torch Award for Ethics, which speaks to its reputation as a company. It offers conforming fixed rate and jumbo fixed rate commercial mortgages, as well as private mortgage insurance for real estate investors.

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 your small business loan for rental property, each with its own benefits and drawbacks.

Term Business Loan

Banks and real estate lenders offer a variety of business loans that fall under this category. Some are loans specifically for rental properties, while others are aimed at fix-and-flip investors. These financing options can include: 

Business Line of Credit

A home equity line of credit (HELOC) may be a useful option if you need some capital now for renovations, for instance, 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 business loan alternatives that can also 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.

Interest Rates for Rental Property Loans

So what’s the going interest rate on a small business loan for rental property? It can vary wildly, depending on the lender and your qualifications.Interest rates on a 30-year Fannie Mae multifamily loan ranged from 5.01% to 5.46% as of May 2022, according to the Commercial Real Estate Finance Company of America. That’s not to say that’s what you will pay on your loan. If your credit score is less than 600, your interest rate could be higher.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 different a business loan to buy rental property is from your personal home mortgage. They’re quite different in several ways, it turns out.

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 charge you a higher interest rate than they would for your 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 riskier than lending to someone who wants to live in his or her home and only has one mortgage.

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 they are with personal mortgages. In 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 have 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 lenient if you fall behind on your payments as they might if you lived in the home you had a loan on.

Requirements and Eligibility for Rental Property Loans

There are often more stringent requirements to qualify for a small business loan for rental property. In 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, such as AimLoan, 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, you guessed it, 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. There are some lenders who will let you borrow with little to no money down (expect those to charge higher interest rates).At a typical minimum, you may be required to put down 20% of the purchase price. However, the more you put down, the lower your interest rate may be.

The Takeaway

Business loans for rental property can be helpful when purchasing your next apartment building investment, but they’re not without drawbacks. It can be a good idea to make sure you qualify for financing before you apply to ensure the likelihood of getting approved.Lantern by SoFi can help you find fast funding for your business with loans up to $2 million. You can see small business loan offers in Lantern’s network.Check your rate today and see if you prequalify.

Frequently Asked Questions

Can you get a small business loan for a rental property?
What type of loan do I need for a rental property?
Can an LLC get a mortgage?
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About the Author

Susan Guillory

Susan Guillory

Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.
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