Can I use an SBA loan to buy an investment property?
Investors seeking to grow their portfolios look to various loan programs, such as hard money loans, a home equity line of credit, an investment line of credit, and more. Many also often wonder if they can use an SBA loan to buy an investment property. Well, can you? Today we’ll answer this question (and a few more) regarding SBA loans.
What is an SBA Loan?
An SBA loan is a business loan from the Small Business Administration. Since it’s a federally backed loan, it comes with more guarantees than private loans. SBA loans are meant to fund startup costs for businesses, real estate purchases, and other business expenses. Though the U.S. Treasury backs these loans, a bank or another financial institution lends the money.
Most Popular Types of SBA Loans
There are many types of SBA loans that help borrowers reach their business goals. Each type has specific loan terms and often has subcategories to fund different types of business operations.
- 7(a): The most popular SBA program with loan amounts of up to $5 million.
- SBA 504 loan program: This is a fixed-rate long-term loan that can pay for repairs, equipment, machinery, or other assets.
- Microloans: These are smaller loans that go up to $50,000 and can go toward startups, buying furniture, fixtures, supplies, materials, equipment, and/or for working capital.
For a full list of SBA loan types and the kinds of business expenses that they cover, go straight to the source at SBA.gov.
Can I use an SBA loan to buy real estate investments?
No, you can’t use an SBA loan to buy real estate investments like single-family or multifamily rentals. They can only fund owner-occupied real estate. Specifically, the business must occupy 51% of an existing property purchased with an SBA loan. If it’s new construction, the business must occupy 60% of it initially and then gradually expand to fully occupy it within a decade.
Since tenants occupy real estate investments like single-family rentals, and SBA loan cannot cover the acquisition of this type of property.
So, what can small business loans be used for?
SBA loans can be used for a variety of small business needs which include:
- Buying land for an eligible business project.
- Improvement to a business property.
- Purchasing an existing building or new construction that will be business-occupied.
- Converting, expanding, or renovating an existing building for business use.
- Acquiring and installing fixed assets.
- Refinancing qualifying business debts.
Speak with your lender to find out which SBA loan is the best for you. Whether you need to refinance or start up a new business, an SBA lender can advise you on the best option based on your net worth, credit history, and business plan.
Small business owners can get the best repayment terms and loan rates when they have good credit and financial standing. The application process is similar to any loan approval journey. Be prepared to provide tax returns, bank statements, and any other upfront information to the SBA lender to maximize your chances of qualifying. The better you stand financially, the lower interest rates you can get.
What SBA loans can be used for buying property?
Two SBA loans can go toward business property: The SBA 504 loan and SBA 7. Each loan has its specific terms, interest rates, and other lender terms. For each loan option, your lender will determine your eligibility. Starting the loan application early can ensure that you get the funds when you need them, so speak with an SBA lender soon if you want to get your next business project up and running.
What loans can real estate investors use to buy investments then?
Since investors won’t be running their business from a rental property, they cannot use any SBA loan program to fund its acquisition. However, they can use conventional loans, hard money loans, lines of credit, and private loans to acquire single-family rentals and beyond. For every business need, there is usually a loan product that can help borrowers get the money they need to reach the next level.
Alicia Persson is a Content Strategist SEO writer at Marketplace Homes, utilizing previous years of experience on real estate teams that specialized in investments and property management. Before she joined Marketplace Homes, she was also a freelance writer for 7 years, leading to a specialization in real estate and home living content for boutique digital marketing agencies. During her writing years, she learned the basics of SEO and gained experience writing for many different clients, making her versatile at creating diverse content.
She is a proud University of Virginia master’s graduate and enjoyed her undergraduate years at the University of Mary Washington. When Alicia is not writing, she plays keytar and sings in a local 90’s rock cover band, or she spends time with her amazing family.