Can You Buy a House with a Business Loan?

One of the first steps to invest in real estate is securing financing. Once you have a clear understanding of your loan source and repayment terms, you can set a budget for renovations and rental fees.

One common question that investors ask is whether they can work with the Small Business Administration (SBA) to secure an investment property loan. In most cases, you cannot get an SBA loan to buy a house, but there might be some instances where these loans still help your new real estate business. 

Use this guide to answer, “Can you buy a house with a business loan?” and learn about the process of doing so. If you do not qualify for an SBA loan, learn about other financing options that can help you secure the necessary capital to start investing in real estate.

Can You Get a Business Loan for Residential Purchases?

The goal of the Small Business Administration is to provide financing for local businesses that support their communities. The SBA specifically wants to fund projects that will contribute to job growth in the area and build up communities as a whole.

This is why it is hard to secure an SBA loan for residential real estate. If you want to buy a house for your family where you also operate your solo proprietorship, the SBA might not approve the loan.   

Small business loans to renovate or flip houses also don’t create jobs in the long run. While you will hire short-term contractors, boosting their revenue, you aren’t creating permanent positions. Investors often argue that improving abandoned or decrepit houses improves the local economy by increasing home values and boosting the housing supply, but that still doesn’t mean the SBA will approve a loan.

SBA guidelines state the business must occupy 51% of an existing property or 60% of a new build with the goal of expanding your business into the rest of the house. Buying an investment property that you rent to tenants doesn’t count because your business operations aren’t based at the residential location.  

SBA 504 Loans

While you cannot buy residential properties with SBA loans, you can still use financing from this organization to purchase and improve real estate. An SBA 504 loan is also known as a CDC/504 loan because it is funded by Certified Development Companies along with third-party lenders that are backed by the SBA. 

SBA 504 loans can be used for land or real estate purchases, land or real estate improvements, equipment investments, and (in some cases) debt refinancing. These loans cannot be used for real estate investments. 

With these loans, the borrower (your business) puts 10% down, the CDC puts 40% down, and the third-party lender you work with provides the remaining 60% in loan form. As the borrower, you will pay back both the CDC and third-party lenders.

New businesses (companies that have operated for less than two years) might need to put more money down because they are still establishing themselves. Lending to newer businesses comes with a higher perceived risk. 

Special-purpose real estate also requires larger down payments. These are properties that can have unique designs that can only be used for one thing. A bowling alley has a pretty obvious construction and layout, while a generic office space could be used by companies across dozens of industries.    

Exploring SBA 7(a) Loans

Another option you can consider for purchasing real estate is the SBA 7(a) loan. These SBA loans are issued by private lenders instead of going through the CDC. This is the most common type of loan the SBA issues, with the Small Business Administration issuing more than 57,000 in 2023.  

The maximum SBA loan amount for this option is $5 million and the SBA will guarantee a portion of the loan, which means they will take responsibility for it in case you cannot pay it back. This guarantee makes lenders more likely to work with small business owners because the loans are now less risky. The SBA guarantees 85% of loans that are less than $150,000 and 75% of loans that are more than $150,000. 

You can use these SBA loans to purchase or lease real estate, make street or landscaping improvements, build, renovate, or expand on real estate, purchase equipment or inventory, or use the money as working capital for your day-to-day operations. 

These loans are known for having favorable rates and fair terms for business owners, which is why they are so desirable. While you can buy real estate with this SBA loan option, you cannot purchase residential homes that can then be turned into rental properties.

Qualifying for an SBA Loan for Real Estate

While you cannot use SBA loans to purchase homes, even if you plan to turn them into investment properties as part of your business, you might be able to use these loans for other parts of your operations. 

For example, you could apply for an SBA loan to receive an influx of working capital to cover the repairs and renovations of an investment property you recently acquired. You might decide to purchase the property in cash and then use SBA loan financing to make the house desirable to live in.

This could be a good business model if you are interested in buying foreclosed houses or distressed homes that are usually more affordable than comparable properties in the area. 

SBA loans are popular because they are known for offering competitive interest rates compared to other lenders. You can secure small business loans to cover a variety of needs if you meet the right criteria. Here are a few things you need to qualify for an SBA loan: 

• Your business must be located in the United States or its territories. 
• You must have a business credit score in the 600s (at a minimum) for most loans. 
• You need a clean criminal record and cannot owe money to the federal government. 
• In some cases, you might need to provide collateral on the loan. 
• You must operate a for-profit business. 

Additionally, you must not be able to get financing from other lenders. You might need to start your financing process by applying for other small business loans to show that you cannot secure them and need assistance from the SBA. 

SBA Loan Interest Rates

One of the main reasons to consider applying for an SBA loan is the competitive interest rates that come with it. Even if you can’t use these loans to purchase residential real estate, you might be able to use the financing for other aspects of your business.

The SBA 7(a) loans, interest rates start at 11.5% and reach 16.5%, with rates depending on the size of the loan and whether you are applying for fixed-rate or adjustable-rate terms. The larger your loan, the lower your interest rate will typically be.

For example, a fixed-rate loan that is less than $25,000 will have an interest rate of 16.5%. A fixed-rate loan that is greater than $250,000 will have rates around 13.5%. These rates are based on 2024 data and can fluctuate from one year to the next. 

Because SBA loans are used by business owners who cannot secure funding in other ways, these rates are usually favorable compared to their other options. While small business bank loans can be as low as 7.71% in 2024, some lenders will charge up to 75% APR to help entrepreneurs secure funding.

Bad credit business loans, which are used if the personal credit score of the owner or the business credit score is low, can have an APR greater than 99%. These loans are hard to pay off because most companies spend all of their money paying off interest and aren’t able to pay off the principal easily. This creates a cycle of debt that is hard to break.

Alternative Financing Options

If an SBA loan isn’t ideal for your real estate goals, there are multiple options to consider as you grow your business. Here are a few other real estate loans to look into and financing channels to explore. 

Know that your business is still in a growth phase. If you can’t secure the capital you want now, reset your goals and create a plan for the future. You can continue growing for a few years to improve your financial situation and business credit.

This will make your business more attractive to lenders and can help you receive better interest rates and loan terms.

Conventional Loans

One of the most common ways to invest in real estate is to work with conventional lenders. You might have a higher interest rate on these loans because you are purchasing investment properties, but this is usually the best option for real estate loans. 

You can still get competitive rates by providing a high personal credit score and using a larger down payment to buy the house. This can make repaying the loan easier so you can turn a profit on your business faster. Smaller monthly payments can also free up capital for repairs and upgrades, allowing you to make your investment more desirable to renters or buyers.

You cannot buy houses with SBA financing. Start by meeting with conventional lenders to discuss real estate loans and then learn how the SBA can support you with working capital and other resources.

Home Equity Loan

One way to secure real estate capital is to tap into your existing equity. Evaluate how much you owe on your home compared to how much it is worth. You might be able to refinance your mortgage and pull equity from your house.

A home equity loan or home equity line of credit (HELOC) would allow you to self-finance your real estate purchase. You wouldn’t have to pay back a bank or credit union and instead would pay yourself back over time. 

Many small businesses are funded by their founders, as opposed to investor funding or through real estate loans. A HELOC might give you the cash flow you need to purchase real estate and renovate it until you can start collecting rental income from tenants. 

Business Line of Credit 

Instead of real estate loans, look into a line of credit that would allow you to build your business credit score and grow your company over time. A business line of credit could be a good option if you have enough for a down payment on a house but need operating capital for renovations.

First, you secure a conventional loan for the property. Then use can your line of credit to cover repairs and improvements. 

Lines of credit are also useful for new businesses or potentially risky endeavors. Your credit provider can set a low limit when you are just starting and expand your spending power as your business grows. Maintaining good credit can help you receive better loan terms and qualify for other programs in the future. 

Turn Your Primary Residence Into an Investment Property

Real estate lenders typically have different rates for primary residences compared to investment properties. One option is to move out of your primary residence and turn it into your rental property while securing a home loan for your next house.

This could be a viable option if you live in a desirable area. You can either use the space as a long-term rental or a short-term vacation home. You also need to be emotionally ready to move and purchase another home in a different area. 

Check the IRS guidelines for primary residences. You will need to occupy the property for at least two years. You will also need to prove that you actually lived there. Changing your driver’s license, voter ID, or passport to your new address is one example of this.

Talk to Your Realtor About Investment Financing and SBA Loans

While an SBA real estate loan cannot be used for residential purchases or investment properties, you could still benefit from securing financing in this manner. You could use the money to purchase equipment for your business or cover the operating costs of your new investment firm. 

To discuss your options, meet with a representative at your local bank or credit union and talk with a real estate agent who specializes in investment purchases. Both parties can break down complicated financial concepts and provide different options for financing. Whether you are struggling to get enough money for a down payment or need operating capital, they can help you reach your real estate investment goals. 

To find a real estate agent that works with investors, check out FastExpert. You can find agents in your area and learn about their specialties. The right Realtor can help you secure real estate loans whether you are buying a single property or looking to purchase multifamily units.