Can You Get a Small Business Loan for Rental Property?

A small business loan for rental property is possible, but not through the SBA if your plan is simply to collect rent. The SBA’s 7(a) and 504 programs, capped at $5 million and $5.5 million respectively, prohibit financing for speculative or investment rental real estate.¹ Investors who want to buy property purely to lease it out generally turn to commercial products like DSCR loans, blanket mortgages, or traditional commercial mortgages instead.

Why the SBA Won’t Finance a Pure Rental

The SBA’s two real estate programs share one hard limit. The 7(a) program lets small businesses acquire, refinance, or improve real estate and buildings, and the 504 program provides long-term, fixed-rate financing for major assets like land and buildings.² Neither will back a loan where the property’s main purpose is generating rental income for a passive owner.

Federal regulations exclude passive businesses owned by developers and landlords that do not actively use or occupy the property bought with loan proceeds.³ A residential home bought solely for a tenant to live in falls squarely into that prohibited category, and so does an office or retail building you intend to lease out entirely.

When an SBA Loan Can Still Work

Two situations get you back in the running.

You Occupy Most of the Building Yourself

If your business operates out of the property, you can lease the rest. For an existing building, your business must permanently occupy at least 51 percent of the rentable space, leaving up to 49 percent for other tenants.⁴ That rental income can offset your mortgage while you keep the SBA-backed rate.

New construction is tighter. Your business must occupy at least 60 percent of the building immediately, plan to take additional unleased space within three years, and occupy all remaining space within ten.⁴ Falling below those thresholds puts you in default territory, which can trigger acceleration of the full balance.

The Eligible Passive Company Structure

There is one narrow path for a holding company to receive SBA financing on a property it won’t operate out of. An “Eligible Passive Company” can own the real estate and lease it entirely to a separate operating company that runs an eligible small business on the premises. The operating company must meet SBA size standards, guarantee or co-borrow on the loan, and actually use the property.⁵

Several conditions come with it. The lease between the two entities must be in writing and subordinate to the SBA’s lien. Rent cannot exceed the amount needed to cover the loan payment plus direct holding costs like insurance, maintenance, and property taxes. Every person holding at least 20 percent of either entity must personally guarantee the loan.⁵ The structure is designed for legitimate operating businesses that hold their real estate in a separate entity, not as a workaround for pure investors.

Loans Built for Rental Property Investors

When the SBA is off the table, three commercial products do the job.

DSCR Loans

A Debt Service Coverage Ratio loan qualifies you on the property’s rental income rather than your personal earnings. The lender divides net operating income by total debt obligations. A DSCR of 1.0 means the property’s income exactly covers the mortgage; most lenders want at least 1.1 to 1.2, meaning 10 to 20 percent more income than needed for debt payments.

Down payments usually run 20 to 30 percent, though some lenders offer as little as 15 percent for properties under $1 million. Interest rates sit higher than conventional home loans because lenders treat these as higher-risk commercial assets. The tradeoff is flexibility: no W-2s, no personal tax returns required.

Blanket Mortgages

Buying several properties at once? A blanket mortgage finances them all under a single loan. Instead of separate closings, rates, and monthly payments for each property, you consolidate into one package and avoid paying separate fees for each acquisition. Developers, investors building portfolios, and businesses expanding across multiple locations use them routinely.

Traditional Commercial Mortgages

Standard commercial mortgages from banks and credit unions typically run five to twenty years with various amortization schedules. These are portfolio loans the lender holds on its own books rather than selling to a government agency. Because the lender weighs the property’s income-generating potential alongside your financials, underwriting criteria vary a lot from one institution to the next.

What You’ll Put Down and Sign For

Whichever loan you pick, expect significant cash up front and personal assets on the line.

SBA 504 loans require a minimum 10 percent equity injection from the borrower, with a Certified Development Company providing up to 40 percent and a private lender covering up to 50 percent.
SBA 7(a) down payments vary by lender but commonly run 10 to 20 percent for real estate.
DSCR loans typically require 20 to 30 percent down, with some programs allowing 15 percent on smaller properties.
Commercial mortgages generally require 20 to 30 percent down, depending on the lender and property type.

On SBA loans, any owner with at least 20 percent of the company must sign an unlimited personal guarantee. If the business defaults, the lender can pursue your personal assets, including savings, other property, and investments, to recover the full balance plus interest and legal fees.⁵ Commercial lenders may demand secondary collateral too: equipment, business accounts, receivables, or other real estate you own.

Credit requirements differ by product. SBA 7(a) uses the FICO Small Business Scoring Service, which combines personal credit, business credit, and application data; the current minimum SBSS score for 7(a) Small loans is 155 out of 300, adjusted periodically.⁶ Commercial and DSCR lenders set their own floors, generally somewhere between 620 and 700.

Tax Advantages Once You Own It

Holding rental property through a business entity opens several federal tax breaks.

Depreciation

The IRS lets you deduct the cost of a rental building over its useful life under the Modified Accelerated Cost Recovery System. Residential rental property, such as an apartment building, depreciates over 27.5 years under the General Depreciation System.⁷ Nonresidential real property, like office or retail space, depreciates over 39 years.⁸ These deductions reduce your taxable rental income each year even though no extra cash leaves your account.

Mortgage Interest

Mortgage interest paid on rental property is deductible as a rental expense. If the lender receives $600 or more in interest payments on the property during the year, it should send you Form 1098 documenting the amount.⁷ Points paid to obtain the mortgage count as prepaid interest and must be deducted over the life of the loan rather than all at once. If you refinance for more than the previous balance, interest on the excess generally cannot be deducted as a rental expense unless the extra proceeds go back into the rental activity.

Qualified Business Income Deduction

Owners operating as pass-through entities (sole proprietorships, partnerships, S corporations, or LLCs taxed as such) may qualify for the Section 199A deduction, which allows up to 20 percent of qualified business income to be deducted. The One Big Beautiful Bill Act made this deduction permanent and widened the income phase-in range for joint filers from $100,000 to $150,000. For 2025, the full deduction phases out above $197,300 for single filers and $394,600 for joint filers in taxable income, with inflation adjustments starting after 2026. The IRS has published a safe harbor election that lets rental real estate enterprises qualify if they meet certain record-keeping and hour requirements.

1
U.S. Small Business Administration. 504 Loans
2
U.S. Small Business Administration. 7(a) Loans
3
eCFR. 13 CFR 120.110 – What Businesses Are Ineligible for SBA Business Loans?
4
GovInfo. 13 CFR 120.131 – Leasing Part of New Construction or Existing Building to Another Business
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eCFR. 13 CFR 120.111 – What Conditions Must an Eligible Passive Company Meet?
6
U.S. Small Business Administration. 7(a) Loan Program – Lender Information
7
Internal Revenue Service. Publication 527 – Residential Rental Property
8
Internal Revenue Service. Publication 946 – How to Depreciate Property