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Ultimate Guide to SBA Loans for Rental Properties

Saad Dar

Writer and Editor at Baselane 16 February 2022 8 Min Read
Ultimate Guide to SBA Loans for Rental Properties

If you’re a small business owner, you may need a loan for the various needs that come with running a business from working capital to money for fixed assets like machinery, furniture and more. You may even look at revolving lines of credit for ongoing needs.

Though SBA loans cannot be given to businesses where real estate investment is the primary source of income, you can rent out the rest of the building minus the business with the help of an SBA Loan.

An SBA Loan can be a valuable route to owning a rental property in addition to your business, which is why we’ll take you through everything you need to know if you’re thinking about applying for this very specific type of U.S. Government-backed loan.

1. What is an SBA Loan?

An SBA Loan is a loan backed by the U.S. Small Business Administration (SBA) and issued by banks, community development organizations or microgrant lending institutions to help fund small businesses through funds for operating capital or fixed assets like furniture, machinery, equipment, remodeling or real estate.

The U.S. SBA only lends out money directly for disaster recovery and doesn’t lend a small business money directly unless it’s in a declared disaster area. The one exception is during its COVID-19 Pandemic Relief Programs for small businesses through the end of 2021.

Instead, it guarantees the loans it backs by reimbursing the lender a high percentage of the loan if you (the borrower) happen to default, which lessens the risk for the lender. The percentage the SBA will reimburse the lender depends on the SBA Loan product in question and qualifications for the loan do not depend on the SBA itself, but the partner lenders it is working with.

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2. Can I Get an SBA Loan to Buy a Rental Property?

The SBA does not offer loan assistance to businesses where the primary income source is investing in real estate. It only will back loans for real estate which is owner-occupied and that owner owns the business taking out the loan.

But there’s a potential loophole in that most SBA loan lenders only require the business to occupy 51% of the property funded by the loan. This means business owners can rent out the rest of the property as a means of supplementing their income. In other words, you may use an SBA loan to buy a building with a storefront on the ground level and a rental unit above.

In cases where the SBA is backing a loan that will go towards the construction of a new building for a business, 60% of it needs to be occupied by the business in question, but that still leaves 40% of the building that can be rented.

These rules apply to the SBA 7(a) Loan and SBA 504 Loans which are two of the most popular SBA Loan products.

3. What Types of SBA Loans are Available?

There are various types of loans backed by the SBA. They come in several varieties, but the most ideal for small business owners looking to rent out extra space in their commercial property and primary place of business is the 7(a) Standard Loan.

Check out the details below:

7(a) Standard loans

  • Loans can be utilized to acquire commercial property, expand commercial property or ground-up construction
  • Loans can be approved in a minimum of 5 to 10 days
  • Some approved lenders can approve your loan without SBA review
  • Maximum loan amount: $5 million
  • SBA Guarantee: Up to 85% for loans less than $150,000 and up to 75% for loans greater than $150,000.
  • Maximum interest rate for loans less than 7 years:
    • Up to $25,000 = Prime + 4.25%
    • $25,001 to $50,000 = Prime + 3.25%
    • Over $50,000 = Prime + 2.25%.
  • Maximum interest rate for loans over 7 years:
    • Up to $25,000 = Prime + 4.75%
    • $25,001 to $50,000 = Prime + 3.75%
    • Over $50,000 = Prime + 2.75%
  • For loans less than $25,000, no collateral required
  • Loans over $350,000 are required to be collateralized to the fullest extent (up to the amount of the loan itself)
  • If the fixed assets of a business don’t cover the loan, trading assets can be brought in by the lender. (up to 10% of the business’s book value) The lender must also take equity from the personal and investment residential real estate owned by the principal owners of the business as collateral

What makes the SBA 7(a) attractive to real estate investors?

Number one is the low down payment requirement between 10% and 15%. Secondly, it’s a long-term loan of up to 25 years, which means as a real estate investor you don’t have to sell off or refinance a short-term balloon loan, as is often customary for commercial real estate. It can be utilized to acquire commercial property, expand commercial property or ground-up construction.

The SBA 7(a) Loan also comes in a few other forms:

7(a) Small Loan

  • Available for smaller loans up to $350,000
  • SBA Guarantee: Up to 85% for loans less than $150,000 and up to 75% for loans greater than $150,000
  • Terms can be negotiated between lenders and borrowers, but must not exceed the maximum interest rates for 7(a) Standard Loans
  • Collateral rules work the same way as they do for Standard 7(a) Loans with loans less than $25,000 not requiring collateral and loans over $350,000 required to be collateralized up to the full extent (up to the loan amount)

7(a) Express Loan

  • Also available for loans up to $350,000 but approval is within 36 hours
  • SBA Guarantee: Up to 50%
  • Revolving line of credit for up to 7 years
  • A maturity extension is allowed at the time of application

Finally, there are other types of SBA Loans for various other business purposes:

SBA 504 Loan

  • Used for economic development
  • It can’t be used for working capital or inventory
  • Offers a lower interest rate, lower fees and a lower down payment depending on the size of the development project
  • Maximum amount: $5 million to $5.5 million, depending on the project
  • Loan Term: 20 years for land and buildings 10 years for heavy equipment
  • Maximum interest rates: Certified Development Corporation (CDC) portion is between 2.08% and 2.18% above the U.S. Treasury Index
  • Maximum Guarantee: Up to 50% of the CDC portion and 40% of the lender portion
  • Takes 65 to 75 days for approval
  • Requires minimum 10% down payment
  • Credit approval is set by individual lenders, but usually requires 680 and up

SBA CAPLines Loan

Lines of credit for a business’s cyclical, short-term financial needs. They come in four distinct varieties on their own:

Seasonal CAPLines Loan – This loan can only be used for seasonal increases of accounts receivable and inventory

Contract CAPLines Loan – For fulfilling assignable contracts and the direct labor and materials associated with that

Builder’s CAPLines Loan – For the building costs and material, as well as direct labor for any contractor or builder of commercial or residential buildings with the actual building serving as collateral

Working Capital CAPLines Loan – a revolving line of credit based on assets for businesses who can’t meet typical credit standards for long-term credit. Repayment is made by turning short-term assets into cash that’s then handed over to the lender

  • Maximum: $5 million
  • Maturity: Up to 10 years, except Builder’s CAPLines, which is five
  • Everything else is the same as SBA 7(a) Loans

SBA Export Working Capital

  • For businesses that export sales and need additional capital to complete those sales.
  • The request is submitted to the closest U.S. Export Assistance Center to where the borrower lives
  • Lender approves applications
  • Maximum loan: $5 million
  • Maximum Guarantee: 90% up to $4.5 million
  • Maturity: One year, but can go up to three
  • No maximum interest rate but SBA monitors for irresponsible rates

Export Express Loans

  • Maximum Loan: $500,000
  • Approval or denial within 24 hours of receiving your application
  • Each lender has its own documentation and credit decision process
  • Maximum Guarantee: 90% of loans $350,000 or less and 75% guarantee of over $350,000
  • Maturity: Line of credit, revolving, and matures after 7 years
  • Maximum interest rate: Same as SBA Express

SBA Veterans Advantage

  • Business must be 51% owned by an honorably discharged veteran, Active Duty Military service members, Active Reservists, and/or National Guard members
  • The loan also extends to the spouses or widowed spouses of the above
  • Loan includes lower fees and loose borrowing terms
  • Functions similarly to an SBA Express loan

4. Who is Eligible for an SBA Loan?

There are various different requirements for SBA loan assistance depending on which one you are applying for. As you can see, there are SBA Loans available for specific types of businesses, like contractors and specific groups of people, like veterans.

But most people are applying for the most popular SBA Loan – the 7(a) Standard Loan – and it has its own eligibility requirements, which are as follows:

  1. You must have a registered for-profit business that’s operating legally
  2. You musn’t be on parole as a business owner

  3. Your business must have less than 500 employees and less than an average of $7.5 million in revenue each year over the past three years

  4. The business must be located in the U.S. and controlled by a U.S. citizen or someone living in the U.S. who is a legal permanent resident
  5. The business must be in an eligible industry. Businesses that aren’t eligible are businesses engaged in illegal activity, multi-sales distribution, (multi-level marketing) speculation, gambling, loan packaging, and investment or lending
  6. Eligible expenditures for an SBA Loan include renovations or conversions of existing commercial structures or buildings, repairs that are incidental to the renovation or conversion of a commercial building and construction and the costs and fees associated with building a new property

5. How to Apply for an SBA Loan

Applying for an SBA loan may seem like an overwhelming and daunting task, but all you have to do to make it simpler is break it down into these digestible steps:.

  • Choose the kind of SBA Loan You’re looking to apply for

Whether you’re looking for the most popular 7(a) Standard Loan, which is a catch-all for most business needs, you need a 504 Loan, which can finance fixed assets meant for expansion or modernization through a certified development company (CDC), or you’re looking for an SBA Microgrant up to $50,000 for smaller financial needs, you’ll need to choose the SBA Loan right for you.

  • Find a Lender

You can only get an SBA loan through an SBA partnered lender, but your bank or credit union might be one, so ask them. If that doesn’t work, the SBA does have a Lender Match tool on its site, which can help you find an SBA partnered lender in your area. You can also connect with your local SBA District Office and they can point you in the direction of your nearest lender that they work with. Lastly, some online lenders offer SBA guaranteed loans. Do your research to make sure these sites are legit. But, if you like what you see, get your SBA Loan without going anywhere.

  • Gather the Relevant Documentation

Your lender will help you out when it comes to telling you what documents you need to apply for an SBA loan or you can read our extensive list of required documents in the section below. Either way, the amount of documents needed for an SBA loan is extensive and can take a few weeks to pull together.

  • Apply for the Loan

You will then have to submit your application to your lender who will review your documents and possibly ask you for more information or more documents. After that, if they decide to process your application, after about a week you will receive a “Letter of Intent,” which will outline the loan terms and any fees or deposits you must pay, along with closing details.

If you’re good with the terms proposed by the Letter of Intent, the lender will begin a more formal underwriting process. The lender and the SBA will then thoroughly look over your application, the submitted documents and your credit history.

If the SBA and the lender approve your application, they will send you a commitment letter, which you will need to sign if you want to move forward. You’ll then get the closing documents that your lender will coach you through. Once you sign the closing documents, the money will be disbursed and the loan will be closed.

At the end of the day, the whole application process can take two to three months all told. However, some lenders say they can get you the money from the SBA in your hand in 45 days or less.

6. SBA Loan Document Checklist

The documents needed for the 7(a) Standard SBA Loan are as follows:

  • SBA Loan Application Form (Form 1919)
  • A personal financial statement and a personal background statement
  • Financial statements from your business outlining profit and loss and one year of financial projections
  • A list of business ownerships and affiliations
  • Your business license or certificate
  • Your loan application history
  • Tax returns from the last three years from your business and personal life
  • Resumes for each principal of the business
  • A business history and overview
  • A copy of your business lease
Why might my SBA loan get rejected?

Your SBA Loan might get rejected for a variety of reasons, including bad credit, you don’t have the assets you need, you don’t have a strong cash flow, you’re in the wrong industry, you have assets but won’t use them or you previously defaulted on other government-backed loans.

What is a commitment letter for a loan?

A commitment letter is a letter from your lender and the SBA saying that they approve your loan and would like to offer it to you. If you sign it, they will send you the closing documents, close the loan and send you the money you requested.

Is there SBA COVID assistance, and where can I apply?

Yes. The SBA did have a COVID assistance program for grants and loans, but they are no longer accepting applications as of the publication of this blog post. They are still offering their Paycheck Protection Program and COVID-19 EIDL, which is a loan for businesses experiencing revenue loss due to the pandemic.

Saad Dar

Writer and Editor at Baselane

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