The Ultimate Guide to SBA Loans for Rental Real Estate

Last Updated: December 2023

SBA Loan for Rental Property

Small Business Administration (SBA) loans can be a good financing option for businesses looking to acquire real estate for their operations. The SBA doesn’t lend money directly, but instead guarantees a portion of the loan provided by a bank or other qualified lender, reducing the lender’s risk and often allowing for more favorable terms. The two primary SBA loan programs that are commonly used for real estate purchases are the SBA 7(a) and 504 loans, which enable businesses to purchase commercial real estate, construct new buildings, or renovate existing properties, often with long repayment terms and lower down payments than conventional loans.

What is an SBA Loan?

An SBA loan is a commercial loan offered through banks and direct lenders, guaranteed by the U.S Small Business Administration, and used to finance real estate purchases and renovations. They offer favorable terms, including longer amortization periods and lower down payments, making them a popular choice for small businesses looking to acquire, build, or upgrade their commercial premises.

Important SBA Loan Terms

Guaranty Fee – A guaranty fee is a fee that the loan borrower pays, which helps cover the U.S. Small Business Administration’s costs if a borrower defaults on a loan. They can range from .25% to 3.75% of the loan amount.

Owner Occupied – Owner occupied refers to a property in which the property owner occupies (for dwelling or business purpose) the whole or partial property, while the remaining units or space can be rented out to tenants.

Can an SBA Loan Be Used to Purchase a Rental Property?

SBA loans cannot be used for businesses whose primary source of income comes from rental real estate investments. This means that you cannot use SBA loans to execute real estate strategies such as fix and flip or BRRRR (Buy, Rehab, Rent, Refinance, Repeat). Similar to VA loans and FHA loans, SBA loans can only be used for real estate that is occupied and primarily used by the business (i.e. owner-occupied). However, SBA 7(a) and SBA 504 loans require the business only needs to occupy 51% of the property. This means that a business could potentially rent out the rest of the property to other tenants in order to supplement their income (similar to a house hacking investment strategy). For businesses using SBA loans to construct a new building, the minimum occupancy threshold is usually at least 60% of the building must be occupied by the borrower, meaning that only 40% or less of the property can be rented out to other tenants.

Types of SBA Loans

The Small Business Association (SBA) offers many different types of property loans to small businesses that can be used for many things such as working capital, equipment, and even natural disaster recovery. Below we will take a look at the 2 most common types of SBA loans used for real estate purchases:

SBA 7(a)

An SBA 7(a) Loan is a type of loan provided by the Federal Government’s Small Business Association, or SBA. This is their primary program for providing financial assistance to small businesses. The 7(a) loan program covers a wide range of financing needs, including working capital, inventory or equipment, business acquisition – as well as commercial real estate. Interest rates on 7(a) loans are generally lower than rates on traditional bank loans, and the terms can be up to 25 years. The maximum loan amount for a 7(a) loan is $5 million. SBA 7(a) loans are available through participating SBA-approved lenders, such as banks, credit unions, and non-bank lenders. For businesses seeking financing for commercial real estate, the SBA 7(a) loan program offers several options. 7(a) loans for the purchase of an existing property can be used for owner-occupied real estate, like office buildings, retail space, or industrial facilities.

SBA 504

The SBA 504 loan program provides financing for major fixed assets, such as real estate or equipment, through the sale of bonds. The loan program is designed to promote economic development and job creation/retention by providing long-term, fixed-rate financing for eligible small businesses. 504 loans are available through Certified Development Companies (CDCs), federally certified and regulated non-profit organizations. The maximum loan amount under the 504 program is $5 million, with a maximum debenture (bond) amount of $5.5 million. The Small Business Administration (SBA) guarantees 100% of the loan, making it easier for small businesses to obtain financing. Interest rates on 504 loans are typically lower than rates on other types of commercial financing, making the 504 program an attractive option for small businesses. 504 loans can be used to finance the purchase of land, buildings, and equipment and for renovations and improvements. The program can also be used to finance the construction of new facilities and the purchase of existing buildings. They are available for for-profit businesses of all sizes, including rental real estate firms.

Pros & Cons of SBA Loans for Rental Properties

SBA Loan Pros

  1. Favorable Terms: SBA loans often come with lower down payments and longer repayment terms compared to traditional loans. This makes them more affordable and can improve cash flow for business owners.
  2. Access to Capital: SBA loans can be easier to qualify for compared to other commercial loans. This can help businesses that might struggle to secure funding from other sources.
  3. Multipurpose: The proceeds from SBA loans can be used for various purposes such as purchasing land or buildings, constructing new property, or renovating existing property. This gives business owners flexibility in how they use the funds.

SBA Loan Cons

  1. Process and Paperwork: Obtaining an SBA loan can be a long process with a significant amount of paperwork. The complexity and time involved can be a deterrent for some borrowers.
  2. Fees: SBA loans often come with additional fees compared to traditional loans. There are guarantee fees, which are a percentage of the guaranteed portion of the loan, plus other possible fees such as packaging or referral fees.
  3. Collateral: SBA loans typically require collateral, which can be the property being purchased, and possibly additional business or personal assets. This can increase the risk for borrowers if their business struggles.

Rental Property SBA Loan FAQ

Can I Use an SBA Loan to Purchase Rental Properties?

Generally, SBA loans are designed for owner-operated businesses and not for passive real estate investments like rental properties. However, if the property has a business component, such as a mixed-use property where the owner operates a business on one part and rents out another, it might qualify for SBA financing. Consider contacting a local licensed loan broker who has a thorough understanding of rental property finance and experience with SBA loans to see if your situation qualifies.

Which SBA Loan Programs are Most Suitable for Real Estate Purchases?

The SBA 504 loan program is designed for the acquisition of fixed assets, including real estate. This program is ideal for purchasing commercial properties, expanding existing premises, or even refinancing existing real estate debts under certain conditions.

Are There any Occupancy Requirements for Properties Purchased With SBA Loans?

Yes, for properties financed with an SBA 504 loan, the borrower’s business must occupy at least 51% of the rentable property space. The remaining space can be leased out or used for future business expansion.

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