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Qualifying for Real Estate Loan with Business Expenses, Not Just Income

Updated: May 1

We've seen a significant increase in the number of requests from business owners looking to purchase commercial real estate. With rents skyrocketing and most commercial loans having 5-year terms, many real estate investors are choosing to sell rather than refinance at much higher interest rates. This environment makes it more appealing for business owners to explore purchasing their operating property or relocating their business.

As a business owner, showing a high net income on your tax returns doesn't always accurately represent your true ability to afford a commercial real estate purchase. The reason? Legitimate expenses like rent, depreciation, depletion, and amortization can significantly reduce your taxable income despite not actually impacting your cash flow.

However, these same deductible expenses can actually help you qualify for a commercial property loan - potentially with as little as 10% down. Here's how it works:

Most lenders primarily look at your business tax returns to assess your ability to take on a new mortgage payment. But they also analyze addbacks - those deductible expenses and non-cash charges that lowered your taxable income without reducing the cash flowing into your business.

By adding back costs like rent, depreciation, depletion, amortization, and other write-offs, the lender can calculate a more realistic picture of your business's cash flow available to service debt. This addback method essentially recasts your income higher than the stated net income on your tax returns.

Using addbacks allows you to qualify based on your true cash flow resources instead of just the bottom-line taxable income figure. And when combined with an SBA loan program, the benefits are amplified even further.

SBA loans facilitate commercial property purchases with down payments as low as 10% because the SBA guarantees a portion of the loan. This 90% loan-to-value financing makes properties much more accessible for owners looking to purchase real estate or relocate their business.

The key advantages of using addbacks and SBA loans include:

1. Ability to qualify with little to no stated net business income on tax returns

2. Getting maximum leverage from your business cash flow  

3. Acquiring the property with only 10% down

4. Avoiding tying up a significant amount of capital

5. Avoiding potential issues with stated income/no-doc loans

6. Building equity in a real estate asset instead of paying rent

7. Hedging against future rent increases or landlord decisions

8. Potential tax benefits of writing off mortgage interest

9. There is portion of SBA loan can be fix rate loan for 25 year

While substantial addbacks help qualify with a lower net income, lenders still want to see around 1-2 years of consistent revenue along with recurring expenses and non-cash deductions. But for entrepreneurs with significant operating cash flow, combining addbacks with an SBA loan can facilitate a commercial real estate purchase or business relocation that may have seemed out of reach.

If you've questions in obtaining commercial property financing due to your income appearing too low, Essencap Funding encourages business owners to seek our help. We offer both SBA and non-SBA loan options and have extensive experience with addback analysis. With the right loan program and documentation of your cash flow streams, your high business expenses could paradoxically help you acquire up to 90% financing to become a property owner, relocate your business, and hedge against rising rents.

Our prior blog provide more reference.

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