If you’re looking to purchase real estate as an investment, business loans for real estate can help cover the cost. Financing can provide you with the cash you need to purchase, build, or renovate property.
Here’s what you need to know about business loans for real estate purchases.
How Commercial Real Estate Loans Work
Taking out a loan for real estate works similarly to taking out any other kind of business loan. Funds can be used to purchase commercial property, multifamily apartments, office buildings, warehouses, and more. Business loans for real estate can also be used to cover renovations, expansion, and construction.
You may be required to make a down payment of 15% to 35% of the purchase price.
When you get a commercial real estate loan, the property you’re purchasing is typically used as collateral. That means that if you’re unable to repay your loan, you could lose the property. The lender could take steps to sell it to recover the money you owe.
Just like other types of business loans, you’ll make monthly payments that include principal plus interest and fees for an agreed-upon period of time until the loan is paid off.
Types of Business Loans for Real Estate
There are several types of business loans for real estate transactions for you to consider.
Traditional Bank Loans
Banks and credit unions may offer commercial real estate loans to purchase or refinance commercial property. They may also offer construction loans if you’re building from scratch.
In August 2024, rates for traditional commercial real estate loans ranged from 5.03% to 15%, depending on the loan type and the type of property you want to purchase.
SBA Loans
The Small Business Association offers loans that can be used to purchase or renovate real estate, including 504 and 7(a) loans. To qualify for an SBA loan, you must have exhausted other avenues for financing and meet other SBA requirements.
Rates vary depending on the lender but in 2024 fall between 6% and 11%.
Hard Money Loans
When a traditional loan isn’t an option, you could consider a hard money loan. These are loans offered by individuals or companies, not banks. The value of the property, rather than criteria like your credit score and financials, is the main consideration.
Interest rates for hard money loans tend to be higher, ranging from 10% to 18%.
Bridge Loans
Bridge loans—short-term loans that typically need to be repaid within 12 to 36 months—provide temporary financing. The idea is to get long-term financing relatively quickly and use it to pay off the bridge loan. Interest rates are often higher compared to traditional and SBA business loans for real estate, and in 2024 ranged from 6.35% to 15.35%.
Alternative Financing Options
Here are a few other options to explore if the above business loans for real estate don’t look like a good fit.
Owner Financing
With owner financing, the seller finances the purchase. The buyer makes monthly payments directly to the seller (or the seller’s designated loan processor) until the total amount is paid off. You would have to find a seller willing to offer owner financing.
Crowdfunding
Crowdfunding platforms like GoFundMe and Crowdfunder allow large groups of people interested in your project to invest small amounts of money. These options could help you raise funds quickly. Your success will depend on your ability to promote your project online to attract the maximum number of investors.
How to Qualify for Business Loans for Real Estate
If you’re seeking a traditional or SBA business loan to purchase real estate, here are some of the things that lenders look at when considering your application.
- Credit score: The higher your business and personal credit scores, the better rates and terms you may qualify for.
- Down payment: The more you’re able to put down for the real estate purchase, the more likely lenders will be to approve your application for the rest.
- Debt-to-Income Ratio: Lenders typically want a debt-to-income ratio of 1:1 or higher. That means that for every dollar of debt, you have at least one dollar of income. Anything lower signifies negative cash flow, which is a red flag to lenders.
- Collateral: For real estate loans, the property will guarantee the loan. The lender is likely to require a property appraisal to determine the current market value.
How to Choose the Right Lender
Before you start shopping for types of business loans for real estate and specific lenders, first understand your qualifications. If you know your personal and business credit scores, you can narrow down the list to just those with requirements you can meet.
Explore the different types of financing we’ve discussed, starting with traditional loans, since they offer the most competitive rates. Once you’ve found a few companies you’re interested in, read customer reviews online. Pay attention to any negative reviews, especially those that mention bait-and-switch or hidden fees.
Once you’ve narrowed down your list further, get preapproved. Many lenders let you apply online without affecting your credit, so you can see what rates and terms you qualify for. Now it’s just a matter of choosing the lender and loan you like best!
Preparing Your Financial Documents
Once you find the right kind of business loan to purchase real estate, prepare your documents for your application.
Personal and Business Tax Returns
You may be required to provide tax returns for the past several years. If your business is established as a corporation or an LLC, you may only need to provide business tax returns. If you run your business as a sole proprietor or partnership, you may also need to provide personal tax returns.
Financial Statements
The lender may ask for balance sheets, income statements, and cash flow statements for the past three to five years.
Collateral Information
Lenders will also want details on the property you’re purchasing, including its value and features. You’ll need a third-party appraisal of the property. The lender may insist on using its own appraiser, and you might have to pay for it.
Business Plan
While not every lender will ask for it, some will want to see a business plan to understand what you intend to do with the investment property, especially if you’re new to real estate investing.
Once you’ve been approved for the real estate loan, put it to good use. Keep a budget to ensure you don’t overspend on the purchase and renovation, and be sure to budget in your monthly loan payments. Down the road, if your financial situation improves, you may consider refinancing the balance to a new loan with a lower rate.
