How is a loan on 5+ units different from a 1-4 unit loan?
A loan on five or more units is a commercial loan: the lender underwrites the property's net operating income and your experience rather than a residential rent-to-payment ratio, typically at 20 to 25 percent down, with a five to ten year fixed period, a 25 to 30 year amortization, and often a balloon. Appraisals, reserves, and closing costs are all higher, and the lender pool is different.
What changes at five units
| Item | 1 to 4 units | 5+ units |
|---|---|---|
| Loan type | Residential investor loan (DSCR, conventional) | Commercial multifamily (bank, agency, debt fund) |
| Underwriting | Rent vs payment on a simple ratio | Net operating income after expenses, vacancy, and reserves; DSCR of 1.20 to 1.25 |
| Down payment | 20 to 25 percent | 20 to 25 percent; 25 to 30 for value-add |
| Term | 30 years fixed | 5 to 10 year fixed, 25 to 30 year amortization, often a balloon |
| Appraisal | Residential form, $500 to $1,200 | Commercial narrative, $2,500 to $6,000 |
| Closing time | 3 to 4 weeks | 45 to 90 days |
| Experience | Not required | Expected; first-time buyers need a manager or partner |
| Recourse | Personal guarantee | Full recourse at banks; non-recourse on agency loans above $1 million |
| Reserves | 3 to 6 months | 6 to 12 months of debt service plus replacement reserves |
Ranges vary by lender.
How income is underwritten
The lender starts with gross rent, subtracts vacancy (usually 5 to 10 percent even if the building is full), operating expenses (taxes, insurance, utilities, repairs, management at 4 to 8 percent whether you self-manage or not), and a replacement reserve of $250 to $350 per unit per year. What is left is net operating income. The loan is sized so that NOI covers the annual debt service by 1.20 to 1.25, and capped at 75 to 80 percent of value.
Who lends
- Local and regional banks. Relationship-driven, full recourse, competitive rates, 5 to 10 year fixed with a reset.
- Agency small balance (Fannie Mae, Freddie Mac). Usually $1 million and up, stabilized buildings, non-recourse, 5 to 30 year terms.
- Debt funds and bridge lenders. Value-add and lease-up, higher rates, 12 to 36 months.
- DSCR lenders. Some go to 8 or 10 units with residential-style underwriting, which can be simpler on small buildings.
What the file needs
Trailing twelve-month operating statement, current rent roll, leases, two to three years of tax returns on the property if available, your personal financial statement and schedule of real estate owned, and a management plan.
Where first-time buyers get stuck
Understating expenses, ignoring the management fee the lender will impute, thin reserves, and no experience on the team. A property manager with a track record solves the last one.
How CommFi handles it
Our lending desk underwrites the building the way the lender will and prices it across banks, agency, and DSCR options. It funds direct when it fits, and when a bank or agency lender is the better fit, the desk searches a database of 7,000+ lenders and the ones that lend on small multifamily in your market compete for it. Zero upfront fees.
Related reading
Related questions
- Why is a 5-unit building financed differently from a 4-unit?
- At five units the property is commercial. Lenders underwrite net operating income and your experience, use commercial appraisals, and offer shorter fixed periods with balloons.
- How much down payment do I need for a 5+ unit building?
- Typically 20 to 25 percent, and 25 to 30 percent for value-add or a first-time buyer.
- Are apartment loans 30-year fixed?
- Rarely. Most are 5 to 10 year fixed periods with a 25 to 30 year amortization and a balloon or reset.
- Do I need experience to buy an apartment building?
- Lenders expect it. A first-time buyer can qualify with an experienced property manager or a partner on the file.
- What DSCR do multifamily lenders require?
- Typically 1.20 to 1.25 on net operating income after vacancy, expenses, a management fee, and replacement reserves.
Property developer and licensed appraiser. 22+ years in real estate: TIC conversions, multi-unit redevelopments, mixed-use, fix and flips, commercial DSCR.