Getting rental property financing can seem like a tough barrier to cross for a rookie real estate investor. Even if you manage your first purchase with personal funds, you will eventually think about financing to scale up your property business and boost your profitability.
If you’re looking into business loans for rental properties, this article will give you insight into available options. We will discuss:
- Top business loans for real estate investors
- Viability of each option
- Availability of Small Business Administration (SBA) loans for rental property investors
Best Business Loans for a Rental Property—Practical Options
A real estate investor typically earns by flipping or renting out properties, and the latter also includes capital appreciation due to the time value of money. Like with any business, you have to find a financing stream that aligns with the cash inflow pattern of your operations.
In the case of fix-and-flip dealings, you get the cash inflow within 12–15 months, leaving you with enough proceeds to work on your next project. The cyclical investment strategy does not work for rental property businesses because your income is passive. Your goal is to find a lender that understands your business and keeps your monthly payments affordable. The following loan types are the best options for your situation:
- Conventional bank loans
- Secured business lines of credit
- Blanket mortgages
- Portfolio loans
- Hard money loans
Conventional Bank Loan
If you’ve already financed your primary residence with a local bank, you may want to approach your current lender for a one-to-four unit residential investment property mortgage. It is conventional financing offered according to the guidelines of Fannie Mae and Freddie Mac. You can go for the purchase, refinance, and cash-out refinance programs, provided you meet the special underwriting requirements, which include:
- Minimum credit score of 620
- Maximum debt-to-income (DTI) ratio of 45% (your future rental income is excluded from the calculation)
- Adequate cash reserves
A bank-financed investment property loan is the cheapest option on our list as you only pay 1–2 points above the prime lending rates. The loan-to-value (LTV) ratio is 70%–80%, so you pay the balance as a down payment. For refinance cases, you need to have at least 20% equity.
The product is not exactly a business or commercial loan—you typically get a 30-year mortgage with amortized monthly payments, which can be burdensome if your cash inflow is not consistent. The paperwork and processing time (2–6 months) also make bank financing inconvenient.
Source: Kelly Sikkema
Secured Business Line of Credit
Moving towards more business-friendly loans, you may want to get a credit line for your rental property holdings. A business line of credit (LOC) is a ready source of funds that can be used to cover all types of operational expenses. In the case of a rental property business, you can use it to:
- Rehab an existing property from your portfolio
- Clear off property taxes
- Buy or construct a new property
- Pay off a more expensive debt on an encumbered asset
Check out the typical terms of investment property LOCs:
|• Minimum credit score of 700
• Maximum DTI ratio of 45%
• Relevant business experience
|Up to 60%
|2%–5% above prime rates
|Up to 10 years
LOCs are offered by both banks and private commercial lenders, and the credit limit is secured by one or more assets in your portfolio (it’s similar to HELOCs). A downside of the option is the recurring annual expenses for a host of lender charges.
A blanket mortgage allows you to finance several real estate properties with a single, bulk-size loan. It was originally used by property developers who purchased extensive vacant land to build different pockets of structures. Each time a pocket is sold, the blanket loan can be reduced with a corresponding partial payment.
Blanket loans work well for rental property holdings because the borrower is free to dispose of loss-making properties without any hassle. Compared to acquiring and keeping track of multiple investment property loans, you deal with documentation requirements and monthly payments in a streamlined manner.
Keep in mind that blanket loans are not widely available to rental property investors. Besides having a solid credit standing, you need to present a track record of successfully managed properties to qualify. Another drawback is that the lender can sell off all assets in your portfolio if you default on a single payment.
A portfolio loan is another attractive financing option for rental property businesses. In simple terms, a portfolio loan is a product that the lender keeps on the company’s balance sheet—i.e., it won’t be sold off to Freddie Mac, Fannie Mae, or another lender. Since the deal is created between you and your direct lender, they can ignore conventional qualification guidelines to service rental loans. The LTV offered is low, typically under 50%.
A portfolio loan is often confused with a blanket loan because of the name, but the “portfolio” here refers to the lender’s portfolio of investments—not the borrower’s rental property portfolio. That being said, the risk of losing ownership of your rental assets upon default is the same for both products.
Portfolio loans are generally offered by private lenders and can be pretty flexible in terms of the addition and deletion of properties. You need to have an excellent investment profile to qualify for these loans.
Source: Avi Waxman
Hard Money Loan
A hard money loan is ideal for financing a rental property business as it is accessible with minimal eligibility requirements. Hard money lenders are individuals, groups, or companies facilitating real estate investments based on the assets involved and the profitability of the deal. Even if your credit score, DTI ratio, and past experience are not perfect, you can qualify for a loan because the lender would want in on a promising deal.
These products are short-term, interest-only loans. You can acquire them within days, making them the fastest-delivered product on our list. The interest rates are usually 1–8 points above prime, depending on the pricing prevalent on a particular market.
It’s a common misconception that hard money lenders only serve property flippers and rehabbers who have immediate cash inflows. In reality, these lenders follow a highly flexible lending setup, allowing you to acquire rental property loans on terms and tenures suitable to you. You can finance:
- Any number of properties (even your entire portfolio)
- Residential and commercial structures
- Owner-occupied and non-owner-occupied units
A potential challenge with using hard money financing is the lender search. While you can find several hard money lenders around you, it’s necessary to evaluate them on facets like market standing, customer support, pricing transparency, and lending ethics.
Get a Tailored Business Loan for Real Estate Investment—Talk to Hard Money Loan Solutions
If you’re looking for a tailor-made borrowing option for your rental or investment property business, Hard Money Loan Solutions (HMLS) can help. HMLS is a Florida-based financing group specializing in hard money loans for investors and businesses. HMLS is funded by a team of esteemed real estate entrepreneurs who can service deals of $50+ million, provided the profitability makes sense. You can qualify for a loan regardless of your:
- Rental business experience
- Credit score and debt status
- Nationality status
- Portfolio type (residential or commercial)
- Past financial history
Get a free consultancy with HMLS to discuss a flexible financing setup for your business. The group designs rental loans on a case-by-case basis. For example, you can:
- Get your properties financed or refinanced in bulk for a streamlined experience—the lender will help you modify the loan every time you add or sell units
- Choose on-the-go financing for new purchases
- Secure cash-out refinances or equity loans
HMLS funds most deals within 3–14 days.
All HMLS loans are structured according to local and state lending guidelines, with interest rates 2–5 points above prime. The following table captures the basic lending parameters:
|Up to 70%
|2 points or 2%
|3 days to 2 weeks
|No—your monthly cost commitment is low because of interest-only payments
• LLC or corporation
How To Get a Business Loan for a Rental Property With HMLS
The HMLS team can review your situation and approve funding within a day. Here are the steps to proceed:
- Access the HMLS loan application form online
- Submit basic details about your business and the property
- Add a customized message if required
- Submit the form
- Provide the lender with more details when contacted
HMLS has ethical lending practices—the team designs feasible loan packages only after appraising the property/properties in question. The eligible structures include (but are not limited to):
- Single- and multi-unit homes (self-occupied or not)
- Commercial buildings
- Special- or mixed-use properties
HMLS loans require light documentation related to your property and business. The team doesn’t ask for bank documents, tax returns, and personal asset schedules as they don’t affect the lending decision.
Benefits of Doing Business With HMLS
HMLS is a 5-star rated group with values rooted in helping new businesses and investors grow regardless of their current situation. The HMLS team follows a let’s-make-it-happen approach when it comes to complicated deals, finding innovative methods to fund borrowers—even the ones turned down by other lenders.
Source: Google Reviews
HMLS also enjoys a good reputation in the market because of its:
- Transparent terms and policies
- No-frill pricing—the group saves you around $8,000 by not charging extra for hidden expenses like:
- Rate locking
- Digital retention
- Fund disbursal
- Easy loan modification options
- Responsive and friendly team
- Honorable funding guarantee
- Free-of-cost real estate financing advice
Get in touch with HMLS to forge a reliable and supportive long-term business relationship. The group also caters to other real estate scenarios, such as:
- Bridge funding
- Fix and flip
- Foreclosure prevention
- Short sale
- Mezzanine financing
- Rehab and renovation
Can You Get a Small Business Administration (SBA) Loan for a Rental Property?
If you’ve registered a small rental property business, you may want to consider SBA loans—unfortunately, acquiring them might be tricky. Currently, SBA only offers SBA 504 and SBA 7(a) programs for real estate purchase, and in both cases, the property must be self-occupied for business. In case of purchases, at least 51% of the property must be applied towards business, while the minimum is 60% in case of new construction. The self-occupation guidelines aren’t exactly flattering for a rental property owner.
The crux of the matter is that the structure of SBA loans is more or less unsuitable for a rental business. Even if you apply, it’s likely your request will be rejected on grounds like lack of job creation or no contribution towards public policy goals.
Featured image source: Pavel Danilyuk