Residential versus commercial treatment
Lenders generally treat one-to-four-unit properties as residential and five or more units as commercial real estate. That difference changes how a loan is underwritten. A residential lender focuses on the borrower’s income and credit. A commercial multifamily lender focuses on the property: its rent roll, expenses and net operating income (NOI). If you are buying two to four units, see our DSCR loan page and the beginner’s guide to multifamily financing.
The numbers lenders use
Net operating income (NOI) is rental income minus operating expenses such as taxes, insurance, maintenance, management and a vacancy allowance. It excludes mortgage payments.
Debt service coverage ratio (DSCR) is NOI divided by annual loan payments. Many commercial lenders look for a minimum somewhere around 1.20 to 1.25, though it varies by lender and loan type.
Loan-to-value (LTV) caps are commonly in the range of 65% to 80%, depending on the program.
An illustration with made-up figures: a building with $180,000 of annual NOI and $144,000 of annual loan payments has a DSCR of 1.25 ($180,000 ÷ $144,000).
Main financing sources
- Agency loans (Fannie Mae and Freddie Mac). Often among the most competitive for stabilized apartment buildings, with long terms and amortization. Small-balance programs exist for smaller properties.
- FHA / HUD multifamily programs. Government-insured loans with long terms, typically used for larger or newer projects and involving a longer process.
- Bank and credit union loans. Local lenders may offer flexible terms and often prefer borrowers who keep deposits with them. Terms are commonly shorter, with a balloon payment.
- Private and bridge lenders. Useful when a property needs repositioning or when speed matters. See bridge loans.
- Seller financing. Occasionally available and negotiated directly with the seller.
Terms to compare
- Recourse: a recourse loan makes you personally liable. Many commercial loans are non-recourse except for specific carve-outs, such as fraud.
- Amortization and term: 25 to 30 years of amortization with a shorter term (for example 5, 7 or 10 years) is common, which means a balloon payment or refinance at maturity.
- Prepayment penalties: yield maintenance, defeasance or step-down fees can be large. Ask for the exact formula.
- Reserves and escrows: lenders often require replacement reserves and tax and insurance escrows.
What lenders ask you to provide
- Current rent roll and 12 months of operating statements (often called a T-12).
- Purchase contract or current mortgage statement.
- A personal financial statement and a schedule of real estate owned.
- Entity documents and ownership information.
- Lender-ordered appraisal, property condition report and environmental review.
Is multifamily right for you?
Multifamily can offer steadier cash flow because income comes from several tenants, and value is tied to income rather than only to comparable sales. It also brings more management work, larger capital needs and more complex financing. Many investors start with two to four units and move up.