The Best Business Loans for Rental Property

So you’re hunting for a loan for rental property? Finding the right financing can make or break your real estate investment. For many, business loans for rental properties open doors to new opportunities, like buying new assets, sprucing up old ones, or just keeping the cash flowing. But simply getting a loan for rental property comes with its own unique challenges.

Taking out a business loan for your rental venture is a big move, so it’s understandable that you’d want to weigh your options against your financial reality and the long-term impact of debt.

The key is knowing what your options are and what they mean, from traditional term loans and small business administration offerings to flexible credit lines and beyond. This is what’s going to ensure that your choice fits your investment plans, to quote Ace Ventura here, “like a glove“.

In this article, we’ll dive into why these loans might be the right move for you, sift through the financing options on the table, and touch on special considerations for those running Airbnb or other short-term rentals.

Why Business Loans for Rental Property?

Understanding business loans for rental property is like knowing the rules of the game before you play. They’re designed specifically for real estate investors like you.

These kinds of loans is that they can give you a big chunk of cash upfront, which makes buying property much more of a breeze. They’re made for investors, so they often have better terms than personal loans, which could translate as more money to borrow or lower interest rates. Plus, keeping your personal and investment money separate protects your personal finances if things get tough.

Knowing how a loan for rental property works lets you make smarter choices. Having all the info at hand makes it easier to pick the best loan for your situation, which can save you money and help you grow your investments faster. Choosing the wrong financing option could cost you more money or even risk your personal assets in the long run.

So, in short, understanding what each of these loans entails helps you: 

• make the most of your investments, 
• save money, 
• and protect yourself from unnecessary risks.

Let’s Break Down the Benefits

Opting for a business loan is a smart move for a couple of reasons:

Investment Growth

Do you want to buy an investment property? A business loan from a traditional bank, an SBA (small business administration) loan, or maybe something from a credit union, can give you the cash injection you need to do that.

Improvements & Upgrades

You’ve got the property but now you need to make it special. Want to make it stand out and catch the attention of those high-paying tenants? Upgrades are the way to go, but they can hit your wallet hard. That’s where a business or SBA loan comes in handy. Having that little bit of extra financial muscle lets you spruce up your properties, and ultimately boost their value and your income.

Cash Flow Management

This one kind of goes without saying but it’s super important to keep your rental finances in check, especially when unexpected costs pop up. A business loan, like a line of credit or SBA loans, can be a lifesaver, giving you a financial cushion to smooth out those cash flow bumps. It’s about having the funds at your fingertips when you need them.

Types of Loans and Financing Options

1. Term Business Loans offer a lump sum with fixed monthly payments, suitable for long-term investments​​.
2. SBA Loans, like the SBA 7(a) and Express loans, provide favorable terms for real estate investments, though they’re not directly available for speculative real estate​​.
3. Business Lines of Credit allow flexibility, letting you draw funds as needed, ideal for ongoing expenses or incremental rental property improvements​​.
4. Alternative Loans and Private Lenders can offer more flexible or faster funding solutions, albeit sometimes at higher costs​​.
5. Specialized Programs for short-term rentals, like those from Kram Capital, cater specifically to Airbnb and VRBO investors, offering terms that recognize the unique dynamics of short-term rentals​​.

STR-Specific Financing

Now let’s talk about the what, where, and how. The financing landscape for short-term rental properties calls for a tailored approach, which you’ll find is distinctly different from a traditional real estate investment.

With platforms like Airbnb and VRBO, investors are looking for loans that accommodate the unique dynamics of short-term rentals. These properties often generate higher rental income but come with their own set of challenges and financial considerations.

Specialized Loan Programs

There are specialized loan programs for investing in Airbnb or short-term rental properties. Companies like Genesis Capital and Kiavi offer financing options specifically designed for real estate investors who want to focus on short-term rentals.

These lenders understand the market’s nuances, so they provide products like bridge loans and rental loans with competitive rates, starting at 5.75% as noted by Kiavi.

Here are 5 of the best business loans for rental property:

1. KRAM Capital

• • Offers financing for short-term rentals to real estate investors with a dedicated short-term rental financing program.
  • Offers a sizable loan range of $200,000 to $300,000.

2. Tidal Loans

• • Offers hard money loans and investment property loans for short-term rental investors.
  • Interest rates start at 3.5%.
  • Loans range from $75,000 to $2,000,000 for up to four units.

3. Intrust Funding

• • Provides hard money lending for non-owner-occupied properties.
  • Offers loans for 100% short-term rental properties.

4. Easy Street Capital

• • Offers short-term rental loans with flexible underwriting and quick 30-day closes.
  • Rates start at 5.99%.

5. Visio Lending

• • Offers DSCR loans for long-term rentals that can also be used for Airbnb or vacation rentals.
  • Loan-to-value (LTV) up to 80%.

SBA Loans and Traditional Financing

While SBA loans are a popular choice for many small business owners, it’s important to remember that they’re not generally available for investment properties focused on rental income.

However, a traditional term business loan from a bank or credit union can still act as a solid foundation for buying and improving rental properties. These business loans offer a lump sum with repayment terms and interest rates dependent on factors like credit scores and annual revenue.

Alternative Financing Options

If you don’t qualify for traditional loans because of credit scores or other criteria, alternative loans could be an option. These loans, offered by online lenders and other financial institutions, are more accessible to anyone with less-than-perfect credit or newer businesses. They may come with higher interest rates and shorter repayment terms, but they provide the capital you’d need to get started or even expand.

Be Prepared

Regardless of the financing route you choose to pursue, there are some basic things you need to do to make sure you’re financially prepared. Lenders will evaluate your financial health, including credit scores, debt-to-income ratio, and the income-generating potential of the investment rental property.

For commercial loans, a down payment of 15% to 35% of the rental property’s value is typical, and lenders will scrutinize your ability to repay the loan, considering both personal and business finances.

Choosing the right loan and preparing your finances accordingly will help you better navigate the STR market and grow your investment portfolio.

Eligibility and Requirements

Get your notebooks ready. We’re going to start ticking off a list of lender must-haves.

These benchmarks are there to size up your financial stability, and the investment’s promise, and to ensure you’re a safe bet for the loan.

Your Financial Snapshot

A big piece of the puzzle is your credit score—it’s how lenders get a read on your financial habits. You’ll usually need a score of 620 or more to get in the door. The better your score, the sweeter the deal you’re likely to get on your loan.

But it’s not just about that magic number; lenders are also diving into your debt-to-income ratio (DTI). They prefer a DTI of 36% or lower, showing you’ve got room in your budget to handle this new debt without breaking a sweat.

Upfront Investment and Ownership Stake

Then there’s the matter of the down payment. Expect to front 15% to 35% of the rental property’s price, proving you’re serious and reducing the lender’s risk right from the start. This initial equity plays a big part in shaping your loan’s terms and the interest you’ll pay.

The Paper Trail

Be ready to hand over a stack of paperwork—tax returns, bank statements, income proof, and for those investing through a business entity like an LLC, your business docs. These papers lay bare your financial situation, giving lenders a clear view of your ability to pay back the loan.

Will It Pay Off?

For Airbnb and short-term rentals, the rental property’s ability to pull in rental income is under the microscope. Lenders will want to see your business plan, how much cash you expect to make, and how often you’ll have guests. They’re trying to make sure the rental property won’t just cover its own costs but will also pad your wallet.

In Summary…

Here’s the checklist you’ll be working through:

1. Credit Score: Aim for a credit score of 620 or higher.
2. Debt-to-Income Ratio (DTI): Keep your DTI ratio at 36% or below.
3. Down Payment: Be ready to put down 15% to 35% of the rental property’s purchase price.
4. Financial Documentation: Gather your financial docs, including personal and business tax returns, bank statements, and proof of income. If your investment is through an LLC or corporation, you’ll need your business entity documents too.
5. Property’s Income Potential: Lenders will want to see your business plan and projections for rental income and occupancy rates.

Showing off your financial health, commitment to the investment, and a solid plan to actually make money from your rental property will put you in a better position to get your loan approved.

Application Process

Here’s a breakdown of what to expect and how to prepare:

1. Define Your Investment Goals: Clearly outline your investment strategy for the rental property. Identify the type of rental property you’re interested in, the location, and how it fits into your overall real estate portfolio. Your real estate investment goals will guide the type of loan you apply for.
2. Prepare Your Financials: Get your finances in order. Organizing your bank statements, tax returns (both personal and business), and any other documents that demonstrate your income and debt levels. Your credit score and debt-to-income ratio are key factors here, so ensure they’re in the best shape possible before applying.
3. Research Lenders: Research and compare lenders, including traditional banks, credit unions, and online lenders, to find the best fit for your investment needs.
4. Gather Required Documentation: Organize your proof of income, business entity documents if you’re operating through an LLC or corporation, a detailed scope of work for any property improvements, and a solid business plan that outlines the property’s income-generating potential. Look at your lender of choice’s requirements.
5. Submit Your Application: Once you’ve chosen a lender and prepared your documentation, it’s time to submit your application.
6. Undergo Property and Financial Evaluation: The lender will conduct a thorough evaluation of both the property and your financial situation, which may include a property appraisal, a review of your financial documents, and an assessment of the rental property’s market potential.
7. Close the Loan: If your application is approved, the final step is closing the loan. This involves reviewing and signing the loan agreement, paying any closing costs, and meeting any other lender-specific requirements.

By following these steps and preparing thoroughly, you can navigate the application process for a rental property loan with confidence. The key to a successful application lies in demonstrating your financial stability, the viability of your investment property, and your ability to manage the property effectively for income generation.

Final Thoughts

Finding the right kind of business loan for rental property, especially those on Airbnb and short-term platforms, might feel overwhelming at first glance. But, there’s a financial fit for every investor.

Snagging the right financing is just the beginning. The real magic in maximizing your investment lies in savvy property management. That’s where iGMS comes in.

Tailor-made for the unique demands of Airbnb and short-term rentals, iGMS simplifies your operations, automates the mundane, and ensures your rental ventures run like a well-oiled machine, pushing occupancy rates up and optimizing your earnings.

So, with the right financial strategy in your arsenal and iGMS by your side, success in the rental market of your choosing is well within reach.