Five Units and Up: How Commercial Multifamily Loans Differ
At five units, a residential rental becomes a commercial property in a lender's eyes. Here's what changes and how to prepare.
Short answer
Five units and up are financed as commercial real estate. Lenders underwrite the property's net operating income rather than just gross rent, set the loan size by debt service coverage and loan-to-value, and often offer shorter terms or balloon structures. Expect to provide a rent roll, trailing operating statements and a business plan.
Key points
- Underwritten on net operating income.
- Loan size set by DSCR and loan-to-value.
- Terms and structures differ from residential loans.
What changes at five units
| 1 to 4 units | 5+ units | |
|---|---|---|
| Loan type | Residential, such as DSCR | Commercial |
| Income measure | Gross market rent | Net operating income |
| Valuation | Comparable sales | Income approach and cap rates |
| Key documents | Leases and rent schedule | Rent roll, trailing 12 months, budget |
| Typical terms | Long amortizing terms | Shorter terms, sometimes a balloon |
Net operating income takes center stage
Commercial lenders look at income after operating expenses, not just rent; see NOI, cap rate and DSCR. Vacancy, management, repairs, taxes and insurance all come off the top before debt service.
Looking at a 5+ unit or mixed-use deal? Send the rent roll and operating statements and we'll take a look. Review my deal
What to prepare
- A current rent roll and copies of the leases
- Trailing 12-month operating statements, or the seller's books
- Your budget and business plan, especially for value-add; see value-add multifamily
- A summary of your experience managing rentals
Stepping up from a fourplex? See duplexes to fourplexes for how the smaller end works.
Frequently asked questions
Is a 5-unit building residential or commercial?
Commercial. Properties with five or more units are generally financed with commercial loans.
How do lenders underwrite apartment buildings?
On net operating income: rent minus vacancy and operating expenses. The loan size is then set by debt service coverage and loan-to-value.
What documents do I need for a multifamily loan?
Typically a rent roll, leases, trailing 12-month operating statements, a budget or business plan and details of your experience.
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