SBA Loans for Real Estate Investment

If you have a small business and are seeking to invest in real estate, you have several financing options to choose from. One recommended strategy is to pursue a Small Business Administration (SBA) loan, which can enable you to borrow needed funds to purchase real estate, build new facilities, improve land, and remodel existing buildings. Two of the most popular SBA loan options are the SBA 504 loan and the SBA 7(a) loan.

Explore the differences between these two loans, what they can be used for, their terms, costs, and requirements, lenders offering 504 and SBA 7(a) loans, the pluses and minuses of each loan choice, and more.

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Types of SBA loans for real estate

SBA loans provide valuable financing options for small businesses, granting access to affordable funds via partial guarantees through the U.S. Small Business Administration. These financing vehicles help small companies receive capital for their operations, and they can be employed for several purposes—including buying or improving real estate and funding startup costs, ongoing operating costs, expansions, or capital investments.

“There are several compelling reasons to consider SBA loans for real estate investing,” says Mike Qiu, a licensed real estate agent. “First, these loans provide access to financing that may not be available through traditional lenders, especially for businesses with limited capital or shorter business histories. SBA loans also offer more favorable terms, including lower down payment requirements and longer repayment periods, enabling borrowers to preserve capital for other business needs. And the SBA guarantee reduces the risk for lenders—increasing the likelihood of loan approval for borrowers who may not qualify for conventional loans.”

Consider the following scenario. You are a small business owner seeking to expand your operations by purchasing an office building. Although you have limited capital and a relatively short business history, you learn more about SBA loans and recognize their potential for your prospective real estate investment.

“By leveraging the SBA guarantee, you can secure financing from a lender, benefiting from lower down payment requirements and favorable loan terms. Purchasing the office building not only facilitates the expansion of your business but also generates additional cash flow, which helps cover the loan repayment and contribute to overall business growth,” Qiu continues.

SBA 504 loans for real estate investing

They set the SBA 504 loan program up to help small businesses acquire commercial real estate. This loan can be used for a variety of purposes, including purchasing or constructing owner-occupied buildings (including mixed-use buildings), purchasing and renovating existing properties, buying or improving land, financing long-term projects such as equipment, machinery, and furniture, and refinancing existing debt.

SBA 504 loans come from three parts: a certified development company (CDC, 40% of the loan), a third-party lender such as a bank or credit union (50%), and the borrower (10%).

These loans are typically available in amounts up to $5 million (some projects can qualify for up to $5.5 million) for the CDC portion of the loan.

SBA 504 loan terms

According to real estate investor Sarah Momsen, CTO of Jit Home Buyers, SBA 504 loan terms will vary depending on the lender, but typically span 10 to 25 years, with a fixed interest rate and periodic payments due on the loan (monthly or quarterly).

SBA 504 loan costs

“The interest rates for SBA 504 loans differ depending on market conditions. But they are typically set at an annual rate of between 3.5% and 4%,” says Momsen. Often, interest rates on the CDC are linked to five-and 10-year US Treasury notes and commonly equate to around 3% of the funding amount.

The closing costs on SBA 504 loans will depend on the lender. But you can count on an application fee of between 1% and 3%, a loan origination fee of between 0.5% and 2%, and other administrative or closing costs, including appraisal fees, title search fees, etc. In addition to these expenses, there is also an upfront guarantee fee that you pay to the SBA.

SBA 504 loan requirements

To qualify for a 504 loan, you must be a small business, as defined by the SBA, your business must have been profitable for two of the last five years, you must demonstrate an ability to repay the loan, and you have to provide a business plan demonstrating how you will use the loan proceeds. You are required to make a down payment of 10% to 20% or more.

Additionally, if the real estate project is an existing building, it must be 51% owner-occupied at minimum. The building has to be 60% or greater owner-occupied if it’s a new real estate project. Also, your project must abide by job creation/retention goals, or one community development, public policy, or energy reduction goal as indicated by the SBA.

SBA 504 lenders

“SBA 504 loans are offered by most major banks and financial institutions as well as smaller local lenders who specialize in small business loans,” Momsen adds. “To find the best lender for your needs, it’s advisable to shop around and compare loan terms, interest rates, closing costs, and other fees associated with different lenders.”

Popular SBA 504 lenders today include JP Morgan Chase, Bank of America, Wells Fargo, US Bank, Capital One, Bank of the West, Life Oak Bank, and Fundera.

SBA 7(a) loans for real estate investing

The most in-demand SBA loan today is the 7(a) loan, which can be employed for an array of reasons, from purchasing and improving real estate to funding land purchases or leases, buying equipment, expanding inventory, making street, parking, or landscaping improvements, and refinancing debt. These loans are available from participating lenders – often credit unions and banks – and are partially guaranteed by the SBA. The SBA backs up to 85% for loans of $150,000 or less, and up to 75% for loans exceeding $150,000.

SBA 7(a) loan terms

In general, SBA 7(a) loans have repayment periods of between 10 and 25 years. The loan term length is determined by the type of collateral used, the amount of money borrowed, and other factors. Loans are available up to $5 million.

SBA 7(a) loan costs

Interest rates for this loan are based on different factors, such as the size of the loan, the purpose of the funds, and your creditworthiness. The interest rate can either be fixed or variable, ranging from 6% to 13% usually, but may be higher or lower per your situation. These interest rates often depend on the prime rate, plus a spread that is agreed to between you and your lender.

Expect closing costs to range from 1% to 6% of your total loan amount. You may be on the hook for expenses like origination fees, appraisal fees, application fees, and more.

SBA 7(a) loan requirements

As with 504 loans, with a 7(a) loan the building has to be at least 51% owner-occupied if it is an existing real estate project. If it’s a new project, the building is required to be at least 60% owner-occupied.

You must put down at least 10% for this loan.

SBA 7(a) lenders

SBA 7(a) loans are issued by many different kinds of lenders, such as banks, online lenders, and credit unions.

“It’s important to shop around and compare interest rates, fees, and other terms. Additionally, it’s recommended that you work with a knowledgeable loan broker or lender who has experience with SBA 7(a) loans,” advises Momsen.

Common SBA 7(a) lenders nowadays include Bank of America, Huntington National Bank, Wells Fargo, Byline Bank, NewTek, and Celtic Bank Corp.

SBA 504 versus SBA 7(a) for real estate investing

SBA 504 loans and SBA 7(a) loans work similarly. To be eligible for either, you must be a for-profit small business that is physically located and conducting business within the United States, possess good credit (a personal credit score of 690 or greater is recommended), have been in business at least two years, and can demonstrate robust finances.

An SBA 504 loan might be better for you if you merely want to fund a real estate project, desire a lower interest rate and a bigger loan amount, and can meet public policy or job creation objectives. Or, a 7(a) loan could be ideal if you seek to use the funds for other goals in addition to real estate, you prefer a simplified loan structure, and don’t meet public policy or job creation objectives.

Pros and cons of SBA loans for real estate investing

The SBA 504 and 7(a) loans offer valuable and flexible opportunities for small business owners to invest in real estate. Often, the interest rates and costs for these loans can be less than those offered through conventional lenders.

“But while SBA loans offer significant advantages, it’s essential to consider the drawbacks,” Qiu notes. “First, the application process for SBA loans can be lengthy and involve extensive documentation. Also, strict eligibility criteria, including creditworthiness, collateral, and business history, must be met. Borrowers are often required to provide personal guarantees, making them personally liable if the business defaults. And SBA loans have restrictions on fund usage and may require regular reporting to the SBA.”

The bottom line

Before committing to any SBA loan, read and understand the terms and conditions carefully. Make sure you are aware of all the fees associated with the loan as well as any other requirements or restrictions that may be imposed on you by the lender.

“Know exactly what type of real estate investment you are looking to pursue. Different types of investments have different risk levels and returns, so carefully understand the risks associated with your chosen investment,” suggests Momsen. “It’s also crucial to consider the length of time it will take for the loan to be fully repaid. Long-term loans may require more money and interest payments than short-term loans.”

Lastly, remember that SBA loans are not fully guaranteed. If your business fails or if you are unable to make the required payments, you could be left with an unpaid debt and a damaged credit score. That’s why it’s essential to do your homework.