Can SBA Loans Be Used for Real Estate Investment?
SBA loans cannot be used for businesses in which the primary source of income is real estate investment. In fact, SBA loans can only fund real estate that is owner-occupied, and will be used primarily by the business that is taking out the loan. However, in most cases, a business only needs to oc
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SBA loans cannot be used for businesses in which the primary source of income is real estate investment. In fact, SBA loans can only fund real estate that is owner-occupied, and will be used primarily by the business that is taking out the loan. However, in most cases, a business only needs to occupy 51% of the property it has purchased. This means that they may be able to rent out the rest of the property to other tenants in order to supplement their income. Businesses that are getting financing to construct a new building for their business are often held to a higher standard; in most cases, at least 60% of the building must be occupied by the borrower, meaning that 40% or less of the property can be rented out to other tenants. These rules apply to both SBA 7(a) and SBA 504 loans.
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Related Questions
What are the requirements for an SBA loan for real estate investment?
To qualify for an SBA 504 loan for real estate investment, the business must be a for-profit small business with a net worth below $15 million. The loan must create or maintain jobs, and the property must be occupied by the business. Investors must also have good credit and a good financial history. Additionally, borrowers must not change or alter the ownership of their business without first seeking the approval of the SBA, and they must seek the permission of the Small Business Administration before attempting to take out any additional financing that uses their commercial property as collateral. The SBA also is very strict in ensuring that borrowers pay their federal taxes, as well as hazard insurance for their property.
For more information, please refer to the following sources:
What are the benefits of using an SBA loan for real estate investment?
The SBA 7(a) loan is a great option for entrepreneurs looking to invest in owner-occupied commercial real estate. Benefits of using an SBA loan for real estate investment include:
- Low down payment requirements - typically 10%
- Long loan terms - up to 25 years
- Versatile loan - funds can be requested for nearly any legitimate business purpose
- Quick closing - work with an SBA Preferred Lender like ReadyCap Lending to quickly close a deal
What types of real estate investments are eligible for an SBA loan?
SBA loans are typically used to finance the acquisition or refinance commercial properties like office buildings, warehouses, industrial structures, retail assets, and many other types of owner-occupied commercial real estate. However, they cannot be used for multifamily properties.
The SBA 7(a) loan program prohibits any funds from being used for an investment property like an apartment complex, single-family homes, or any kind of commercial real estate that is not owner occupied.
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What are the risks associated with using an SBA loan for real estate investment?
The Small Business Administration (SBA) offers a variety of loan products that can be used for real estate investment. However, there are certain risks associated with using an SBA loan for real estate investment. For instance, borrowers must not change or alter the ownership of their business without first seeking the approval of the SBA. Plus, borrowers need to seek the permission of the Small Business Administration before attempting to take out any additional financing that uses their commercial property as collateral. The SBA also is very strict in ensuring that borrowers pay their federal taxes, as well as hazard insurance for their property.
For more information, please refer to the SBA 504 Loans for Commercial Real Estate page.
How long does it take to get approved for an SBA loan for real estate investment?
The length of time required for an SBA 504 loan to be approved can vary drastically, but averages between 60 and 90 days. With that being said, it may take up to six months in some situations. There is no hard and fast rule here, and each situation will be unique. Factors that go into determining the length of time to loan approval include:
- Your ability to gather all required information
- Your ability to satisfy all lender requirements for information and proof of income
- SBA approval (up to 7 days)
- Due diligence (2 to 3 weeks)
- Closing (up to 14 days)
Most terms for SBA 7(a) loans limit repayment to 10 years, and working capital loans are usually restricted to seven years. But the maturity for real estate and construction loans runs up to 25 years.
So, it can take up to six months to get approved for an SBA loan for real estate investment, depending on the factors mentioned above.