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When it comes to purchasing mixed-use properties, there's often a blend of excitement and uncertainty. You envision a thriving coffee shop on the ground floor and two residential apartments above, but how can you make the most of this investment? Can you use rental income from the apartments to secure an SBA 7a loan? In this blog post, we'll explore the answers to these questions and guide you on navigating this deal effectively.
The Mixed-Use Property Dilemma
Jesse, a prospective property buyer, had a vision. He wanted to purchase a mixed-use property comprising a coffee shop and two residential apartments. He hoped to increase revenue by expanding the coffee shop's offerings. However, he was concerned about potential cash flow issues and wondered if the rental income from the apartments could be factored into the Debt Service Coverage Ratio (DSCR) calculation, a critical component of SBA 7a loan eligibility.
The 51 Percent Rule
Beau, a seasoned expert in financing mixed-use properties, provided a clear response. He explained that for a mixed-use property to be eligible for SBA financing, the coffee shop must occupy at least 51 percent of the total square footage. In Jesse's case, as long as the coffee shop met this requirement, it could be considered for SBA financing.
Rental Income and DSCR
However, when it came to the two residential apartments, Beau delivered a crucial piece of information—rental income from long-term rentals could not be used in the DSCR qualifications. This meant that Jesse's coffee shop business would need to demonstrate its ability to service the existing loan independently of the rental income.
Exploring Options
Despite this limitation, Beau hinted at the possibility of exploring alternative approaches. While rental income couldn't be used for DSCR calculations, it could contribute to the property's global cash flow, potentially strengthening the overall financial picture.
The Big Picture
In summary, while rental income from residential apartments might not directly impact DSCR calculations, it can play a role in assessing the property's global cash flow. This nuanced approach allows for a more comprehensive evaluation of the investment.
Book a Consultation
For those in Jesse's shoes—contemplating the purchase of mixed-use properties or seeking SBA financing—Beau extended an invitation to schedule a consultation. Whether you're starting a business, acquiring an existing one, investing in a franchise, building an office space, or expanding your current venture, there are multiple SBA financing solutions available. Beau can walk you through the intricacies of SBA 7a and 504 loans, providing guidance tailored to your specific situation.
Conclusion
Navigating the world of mixed-use property purchases and SBA financing can be complex, but understanding the rules and nuances is crucial. Remember the 51 percent rule for coffee shop eligibility, the limitations on rental income for DSCR calculations, and the potential impact on global cash flow. If you're uncertain about your next steps, reach out to experts like Beau, who can provide valuable insights and help you make informed decisions.
Investing in mixed-use properties can be a lucrative venture, and with the right knowledge and guidance, you can maximize your chances of securing the financing you need to turn your vision into reality.