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How to Use Business Credit to Buy Real Estate: The Essential Guide

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Many property investors lack the cash to purchase real estate outright and use financing options. While using personal credit for property investment loans is common, establishing a separate business entity and building business credit could lead to higher borrowing amounts and diverse financing products to accelerate your portfolio.

This guide covers what you should know about using business credit to purchase real estate, including the advantages, disadvantages, and how to apply. Specifically, we’ll answer these questions and more:

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    What is Business Credit for Property Investors?

    Business credit refers to a company’s financial history and ability to borrow money, reflected on the business credit report. The major business credit bureaus produce business credit scores to help creditors determine an enterprise’s creditworthiness.

    Property investors often use this credit to purchase real estate or finance other activities like renovations, marketing, etc. Unlike personal credit, business credit is tied to the company, not the individual.

    Establishing strong business credit typically allows investors to access higher credit limits and better payment terms. While many property investors rely on personal credit for real estate investments, business credit can provide more favorable borrowing conditions.

    This can open up opportunities for investors to grow their ventures and take on larger projects. It also provides a layer of protection for personal assets and separates business finances from personal funds.

    How can Property Investors Establish and Build Business Credit?

    Real estate investors should follow various steps for establishing and building business credit. Many of these activities will also lend legitimacy to your real estate investing business.

    Form a Business Entity: The first step to begin building business credit is to create a formal business entity, which could be an LLC, S-corporation, or C-corporation. As the business owner, you can also operate as a sole proprietor or partnership, but in most cases, you would need to request the creation of a business credit profile. You’ll typically file the paperwork to form your business entity with The Office of the Secretary of State or a similar government office in your state.

    When establishing your business entity, it’s also a good idea to create these information points, as the credit bureaus typically look for them:

    • Business Name (usually required for formation as well).
    • Business address.
    • Business phone number.
    • Business email.
    • Website & social media profiles.

    Establishing these identifiers also lends credibility to your business when working with lenders, property management companies, developers and contractors, banks, vendors, and other investors or investment groups.

    Get an EIN: An Employer Identification Number (EIN) helps further establish your business. Most business credit bureaus use your EIN to track your business’s credit activity. An EIN can also help with other business activities, such as opening a business bank account, obtaining business credit cards, and opening trade credit accounts. You can get an EIN if you don’t have employees or opt for a Federal Tax ID Number instead.

    Open a Business Bank Account: Establishing a checking account in your business’s name isn’t strictly required for business credit, but it can help significantly. A business bank account keeps your personal and business finances separate. This enables you to track and report business income and expenses more efficiently and allows the business credit bureaus to track credit activity more efficiently.

    Open & Use Business Credit Cards: One of the benefits of establishing a separate business entity for your property investment activity is access to business credit cards. Many cards have higher credit limits and more perks and rewards than personal credit cards. Using and paying off your business credit card establishes and builds credit history.

    Open Business Tradelines: Opening a business trade line or trade credit can further build your credit history. However, it’s essential to work with vendors that report to the major business credit bureaus (Dun & Bradstreet, Experian, and Equifax). Some popular vendors include:

    • Quill.
    • Grainger.
    • Uline.
    • Summa Office Supplies.
    • Crown Office supplies.

    Get a DUNS Number: A DUNS number is a unique nine-digit identifier for businesses, essential for establishing business credit and credibility with lenders and suppliers. Property investors can apply for one through Dun & Bradstreet’s website.

    Use Credit Responsibly: Many of the activities to build good personal credit also apply to building good business credit. The two most important actions are always making payments on time and keeping your credit card balances low. It’s also a good idea to maintain a diverse credit mix and keep accounts open and in good standing so that they age, or “season,” which further builds credit history.

    Monitor Your Business Credit: Finally, regularly review on your business credit reports to ensure everything is accurate. Look for and remove any false or incorrect information, and ensure your credit account holders report your activity.

    What types of Real Estate can you Buy with Business Credit?

    Property investors can use business credit to purchase various residential properties that offer steady rental income and potential appreciation over time. Examples include:

    • Single-family homes
    • Multi-family homes.
    • Fix-and-flip properties.
    • Vacation rentals.
    • Land for development.
    • Condos.
    • Apartments and other rental properties.

    Commercial Real Estate

    Property investors can also use business credit to purchase commercial real estate, such as office buildings, retail spaces, and warehouses. These properties often generate higher rental yields compared to residential properties. Using business credit to buy commercial real estate allows investors to tap into a broader range of investment opportunities and potentially higher returns than residential properties.

    What Business Loans allow you to Buy Real Estate?

    Establishing business credit provides access to various commercial loan options. Here are a few types of business financing that can help investors build their business portfolios.

    Hard Money Business Loans: Hard money business loans are a type of financing often used by real estate investors for property investments. These loans are typically secured by the value of the purchased property rather than the borrower’s creditworthiness. Hard money loans are known for their quick approval process and flexibility, making them popular among investors looking to acquire real estate quickly.

    Business Line of Credit: Business lines of credit are a flexible financing option for real estate investments. They allow borrowers to access funds as needed up to a predetermined limit. This type of financing can be used for various real estate transactions, such as purchasing properties, renovating them, or covering unexpected expenses. With a business line of credit, investors can take advantage of opportunities quickly and efficiently in the real estate market.

    Business Credit Cards: Business credit cards can be a convenient way to finance real estate investments, providing quick access to funds for property purchases or renovations. Many business credit cards also offer rewards or cashback on purchases, allowing investors to earn additional benefits while growing their real estate portfolio. However, it’s essential to carefully manage credit card debt and interest rates to maximize the benefits of using business credit cards for real estate investments.

    SBA Loans: Property investors often turn to SBA loans to finance commercial real estate acquisitions, as these loans are not typically used to purchase residential properties. SBA loans can provide property investors with the necessary funding to expand their commercial real estate portfolio and grow their business. By leveraging an SBA loan, investors can take advantage of favorable terms and rates to maximize their return on investment in the commercial real estate market.

    Commercial Real Estate Loans: Commercial real estate (CRE) loans are a popular choice for investors looking to finance the purchase of real estate properties. These loans are specifically designed for investors who want to acquire income-generating properties such as office buildings, retail spaces, or apartment complexes. CRE loans typically offer competitive interest rates and terms tailored to the needs of real estate investors.

    What are the benefits of Buying Real Estate with Business Credit?

    Using business credit to purchase real estate offers several advantages. Firstly, it allows businesses to separate personal and business finances, enhancing financial organization. This separation is crucial for maintaining clear records and simplifying tax filings.

    Moreover, leveraging business credit for real estate acquisitions can significantly boost a company’s purchasing power. By accessing additional funds through credit lines or loans, businesses can rapidly expand their property portfolios and diversify their investments.

    Another key benefit is the ability to mitigate risks associated with real estate investments. Property investment companies can use business credit to protect personal assets in case of loan defaults or unforeseen circumstances, safeguarding the owner’s financial stability.

    Utilizing business credit for real estate transactions enables companies to establish a strong credit history. This can lead to improved credit scores, lower interest rates on future loans, and better terms from lenders, creating opportunities for achieving long-term financial goals.

    What are the drawbacks of Buying Real Estate with Business Credit?

    One key risk is the possibility of high interest rates associated with business loans, leading to increased costs over time. These rates can significantly impact the overall profitability of real estate investments.

    Another pitfall is the potential for accumulating substantial debt when relying on business credit for real estate transactions. This debt burden can strain a company’s financial health and limit its ability to pursue other investment opportunities or cover operational expenses.

    Moreover, defaulting on business credit obligations related to real estate investments can have severe consequences. Defaulting may damage a company’s credit score, making it harder to secure future financing at favorable terms. It can also lead to legal actions such as foreclosure, putting the invested real estate assets at risk.

    Buying Real Estate with Business Credit Pros & Cons

    Pros:

    • Ability to leverage business credit for real estate investments.
    • Separation of personal and business finances.
    • Potential tax benefits for business-owned properties.

    Cons:

    • Higher interest rates and fees associated with business credit.
    • Limited availability of business credit compared to personal credit.
    • Risk of damaging business credit if real estate investment fails.

    How do Property Investors apply for a Business Loan to Purchase Real Estate?

    Follow these steps to apply for a business loan to purchase an investment property.

    Step 1 – Determine the Type of Loan Needed: Property investors should first assess their financial needs and the type of loan that best suits their real estate purchase. Options could include traditional mortgages, commercial loans, or hard money loans.

    Step 2 – Prepare Financial Documentation: Gather all necessary financial documents, including tax returns, bank statements, proof of income, and information on existing assets and debts. Lenders will require this information to evaluate the investor’s financial situation and creditworthiness.

    Step 3 – Research Lenders: Shop around and compare loan terms, interest rates, and fees from different lenders. Consider both traditional banks and alternative lenders to find the best financing option for the real estate investment.

    Step 4 – Submit Loan Application: Complete the loan application with the chosen lender. Be prepared to provide detailed information about the property being purchased, the investor’s financial history, and the intended use of the loan.

    Step 5 – Undergo Loan Approval Process: After applying, the lender will review the investor’s financial information and conduct a credit check. They may also require a property appraisal to determine its value. The investor will then receive approval or denial for the loan.

    Step 6 – Close the Loan: If approved, the investor will need to review and sign the loan documents. They will also need to pay any closing costs and fees associated with the loan. Once everything is finalized, the funds will be disbursed for the real estate purchase.

    Frequently Asked Questions

    Here are the most common questions about how to use business credit to buy real estate.

    Can I purchase my own residence using Business Credit?

    Typically, business credit is not intended for personal expenses like purchasing your primary residence. It is primarily used for investment properties or real estate transactions related to your business activities.

    While technically possible, mixing personal and business finances for residential property purchases can blur the lines between them, leading to complications in accounting and financial management. Mixing personal and business finances can also have legal and tax implications.

    How much do Business Loans for Property Investment Cost?

    When considering business loans for property investments, it’s essential to understand the associated costs. These costs can vary depending on factors such as the loan amount, interest rate, loan term, and the lender’s fees. Typically, interest rates for business loans for property investments can range from 4% to 15%, depending on the lender and the borrower’s creditworthiness.

    Additionally, lenders may charge origination fees, closing costs, and other fees that can add to the overall cost of the loan. Borrowers should carefully review all costs associated with the loan before committing to ensure they understand the total financial commitment involved in financing their property investment.

    Is it better to use Business or Personal Credit for Real Estate Investments?

    When considering real estate investments, using business credit offers distinct advantages. With business credit, your personal credit score remains unaffected, and you typically have some limited liability protections that keep your personal assets safe. Business credit also allows investors to access higher borrowing amounts.

    On the other hand, it may be more challenging to obtain commercial financing for investment properties. Many business loan lenders don’t issue funds for property investment. For example, you can’t purchase residential properties with SBA loans, and most banks or alternative lenders don’t issue business-term loans for this purpose either. Even with an established business credit history, most property investment lenders rely on your personal credit for approval.

    How to Use Business Credit to Buy Real Estate – Final Thoughts

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    Leveraging business credit to invest in real estate can be a powerful strategy for growing wealth and expanding your business portfolio. By utilizing this financial tool wisely, you can take advantage of opportunities that may otherwise be out of reach. Remember to conduct thorough research, seek professional advice, and have a solid plan before making any investment decisions.

    Contact us if you have more questions or to apply for a small business loan. Our alternative funding experts can help you find the best financing options for commercial property purchases or other business needs.

    We will help you grow your small business.

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