It is common knowledge that a home loan is the financing used to purchase a house, and a business loan is the financing utilized to fund a business. But let us say you are in the endeavor of buying real estate properties: is it possible to get a business loan for a home purchase?
Yes, it is possible only if you have moved your rental property business to an LLC. When this happens, you can access financing in the type of a business loan. Some business loans can be compared with or have a slight edge over other financing options for buying rental properties.
Learn more about a business loan and how to qualify for one. We will also discuss the types of business loans you can get if you want to purchase rental properties.
What is a Business Loan?
A business that needs financing for an inventory increase, infrastructure/equipment investment, or expansion can get a business loan. Major lenders like credit unions and banks offer such financing to help companies fund their business operations.
It is understandable why a grocery store gets a business loan to cover renovation expenses or a computer shop takes out such financing to build new facilities. Such investments generate revenue for the business, and it is also why real estate investors get a loan to purchase real estate properties.
For you to buy properties, you can qualify for an investment loan if you are a rental property business owner or a so-called real estate investor.
Criteria to Qualify for a Business Loan
You cannot simply create a business entity and visit a bank to apply for a considerable loan amount. Any lender imposes some requirements on loan applicants to ensure the latter can pay the loan. The borrower should meet the qualifications or requirements to borrow money from the lender.
A business that wants to take out a business loan with the best interest rate should have a low debt-to-income ratio. Documents to submit showing proof of debt-to-income ratio include bank statements, tax returns, and profit and loss statements. The lender will ask for these documents during the application process for the financial assessment of the applicant.
Your personal credit score and your business credit rating will also be assessed by the lender when you are applying for a business loan. Your business credit history will prove that your business is generating positive cash flow and consistent in paying bills. This assessment will also ensure the lender that you have a reliable business.
Personal Guarantee or Collateral
It is typical for a business loan to require applicants to offer collateral. Such security against the loan can be an ownership claim to the business assets. The lender may also require you to put your personal assets if your business assets are not enough as collateral for the loan. The collateral can come into the possession of the lender if you default on the loan.
Types of Business Loans for Buying Properties
If you want to invest in real estate, there are types of business loans that are fit for it, and each has its pros and cons.
Commercial Property Loans
You can use a commercial real estate loan to buy an apartment complex or any property that generates income. This loan option is perfect for a large purchase, providing a longer repayment term and a competitive interest rate.
Portfolio lenders are free to set their own qualification criteria. In determining the capacity of the property to generate positive cash flow, they utilize the debt service coverage ratio instead of the personal income of the loan applicant. The only caveat is that portfolio loans come with higher interest rates.
Business Lines of Credit
The flexibility of a business line of credit makes it a suitable form of financing to buy investment properties. It allows you to draw on your line of credit when you need money and pay back what you owe at your convenience. You can use the money to make a down payment or cover renovation expenses.
Private Money Loans
A private money loan is another flexible type of financing for investment properties. You can use such a loan if you are into BRRRR real estate investment strategy. The catch is that this loan option is difficult to find as it is not always advertised.
A real estate investor must know about the different types of business loans for purchasing investment properties. If you want to expand your portfolio as an investor, take advantage of business loans to purchase not just a single property but multiple rental properties. Be sure to find lenders that offer financing that suits your business's financial situation and achieve target goals.