DSCR Loans for 5+ Unit Apartment Buildings

Once you cross into 5+ unit territory, you leave residential real estate behind and enter commercial multifamily—a world with different rules, different lenders, and dramatically different scale. DSCR loans for apartment buildings offer experienced investors a path to acquire and refinance larger properties without the extensive financial documentation required by traditional commercial loans.

The 5-Unit Threshold: What Changes

Residential vs. Commercial Classification

The fundamental shift at five units affects everything about your financing:

Residential (2-4 Units):

• 30-year amortization standard
• Personal income verification often required (except DSCR)
• Simpler appraisals focused on comparable sales
• Owner-occupancy options available
• Fannie Mae/Freddie Mac guidelines apply

Commercial (5+ Units):

• 20-30 year amortization typical
• Property performance dominates underwriting
• Income approach appraisals (cap rate, NOI-based)
• Investment-only (no owner-occupancy programs)
• Commercial lending standards apply

DSCR loans for 5+ units operate in this commercial space but maintain some residential-style benefits: primarily, the ability to qualify without extensive personal financial documentation.

Why DSCR Loans Work for Apartment Buildings

Traditional commercial multifamily loans require:

• Three years of tax returns
• Detailed business financials if buying in entity
• Personal financial statements
• Credit reports and liabilities review
• Extensive debt-to-income calculations

DSCR loans streamline this to:

• Credit score verification
• Property appraisal and rent roll
• DSCR calculation
• Reserve confirmation

For investors with complex finances, multiple businesses, or significant write-offs, this simplified approach removes major qualification barriers.

DSCR Calculation for Commercial Multifamily

The DSCR formula remains the same, but the inputs become more sophisticated:

DSCR = Net Operating Income (NOI) / Annual Debt Service

Understanding Net Operating Income (NOI)

NOI represents the property's true earning power after operating expenses but before debt service:

NOI Formula: Gross Rental Income

• Vacancy Loss (typically 5-10%) = Effective Rental Income

• Other Income (laundry, parking, storage, pet fees) = Gross Operating Income

• Operating Expenses = Net Operating Income (NOI)

Operating Expenses for Apartment Buildings

Commercial properties carry expenses single-family investors rarely encounter:

Property-Specific:

• Property management (typically 8-10% of gross income)
• Repairs and maintenance
• Utilities (if owner-paid)
• Landscaping and snow removal
• Pest control
• Trash removal

Administrative:

• Property taxes
• Insurance (property, liability, flood if applicable)
• Legal and accounting
• Licenses and permits
• Marketing and advertising

Capital Reserves: Most underwriting includes 3-5% of gross income for capital reserves (roof, HVAC, parking lot, etc.)

Real-World Example: 12-Unit Apartment Building

Property Details:

• Purchase price: $1,800,000
• Down payment (30%): $540,000
• Loan amount: $1,260,000
• Interest rate: 8.25%
• Amortization: 25 years
• Annual debt service: $117,720 ($9,810/month)

Income Analysis:

• 12 units × $1,400 average rent = $16,800/month
• Gross annual rental income: $201,600
• Vacancy loss (7%): -$14,112
• Other income (laundry, storage): +$3,600
• Gross operating income: $191,088

Operating Expenses:

• Property management (9%): $17,198
• Repairs & maintenance: $12,000
• Utilities: $8,400
• Landscaping/snow: $4,800
• Property taxes: $18,000
• Insurance: $9,600
• Admin/legal/other: $6,000
• Capital reserves (4%): $7,643
• Total operating expenses: $83,641

NOI Calculation: $191,088 - $83,641 = $107,447 NOI

DSCR Calculation: $107,447 / $117,720 = 0.91 DSCR

This property operates at a slight loss relative to debt service. Most lenders want 1.20+ for strong terms, though some will finance properties with 1.0-1.10 DSCR at higher rates.

Qualification Requirements for 5+ Units

Credit and Experience Standards

Commercial multifamily lenders set higher bars than residential:

Credit Score Requirements:

• Minimum: 660-680 for most programs
• Preferred: 700+
• Best rates: 720-740+

Experience Requirements: Many lenders require:

• Previous multifamily ownership (even just a duplex counts)
• Property management experience or agreement with professional PM
• Demonstrated ability to operate rental properties

First-time commercial buyers can qualify but should expect:

• Higher rates (0.50-1.0% premium)
• More conservative LTV (65-70% vs. 75-80%)
• Larger reserve requirements
• Possible recourse vs. non-recourse terms

Down Payment and LTV

Expect larger down payments for commercial multifamily:

Standard Terms:

• 25-30% down payment typical
• 70-75% LTV (loan-to-value) maximum
• Higher DSCR properties (1.30+) may access 75-80% LTV
• Value-add properties requiring renovation: 30-35% down

Loan Amount Considerations: Most DSCR lenders set minimum loan amounts for commercial multifamily:

• Typical minimum: $150,000-$250,000
• Sweet spot: $500,000-$5,000,000
• Some lenders cap at $3-5 million
• Larger loans ($5M+) transition to agency or commercial bank products

Reserve Requirements

Commercial multifamily requires substantial reserves:

Minimum Standards:

• 6-12 months PITIA reserves for the subject property
• Some lenders require 6 months reserves per unit (e.g., 12-unit building = 72 months reserves)
• Reserves for all financed properties, not just new acquisition

Reserve Sources:

• Cash in bank accounts
• Stocks, bonds, mutual funds (70-80% of value typically counted)
• Retirement accounts (60-70% counted)
• Lines of credit (some lenders accept, others don't)

Example Reserve Calculation: 12-unit building with $9,810 monthly PITIA:

• 12 months reserves: $117,720
• If lender requires per-unit reserves: 12 units × 6 months × $1,400 rent = $100,800

Operating Statements and Rent Rolls

Unlike single-family or small multifamily, commercial properties require detailed documentation:

Rent Roll Requirements:

• Current tenant list with unit numbers, rent amounts, lease start/end dates
• Security deposit amounts
• Tenant payment history (who's current, who's behind)
• Market rent estimates for vacant units

Operating Statement Requirements:

• Trailing 12 months (T-12) profit and loss statement
• Year-to-date (YTD) income and expenses
• Previous 2-3 years annual statements (preferred but not always required for DSCR)
• Property tax bills
• Insurance declarations
• Utility bills if owner-paid

Pro Forma Analysis: For value-add properties or buildings with below-market rents, lenders will review your pro forma projections:

• Projected rents after renovation/repositioning
• Estimated renovation costs
• Timeline to stabilization
• Comparable rent justifications

Interest Rates and Terms

Commercial multifamily DSCR loans typically carry:

Interest Rates:

• Generally 1.5-3.0% above comparable residential rates
• As of 2026: expect 8.0-10.5% depending on profile
• Rate factors: credit, DSCR, LTV, property condition, location, loan size

Loan Terms:

• Amortization: 20-30 years (25 years most common)
• Maturity: Often shorter than amortization (5, 7, or 10-year balloons)
• Fixed vs. ARM: Fixed-rate most common; some lenders offer 5/1, 7/1, or 10/1 ARMs

Prepayment Penalties: Commercial loans often include prepayment penalties:

• Step-down penalties (5-4-3-2-1% over five years)
• Yield maintenance (complex calculation ensuring lender's yield)
• Defeasance (expensive, typically only large loans)
• Some lenders offer no prepayment penalty at slightly higher rates

Appraisal and Valuation

Income Approach Dominance

Unlike residential properties valued primarily through sales comparisons, commercial multifamily uses income approach:

Capitalization Rate (Cap Rate) Method:

Property Value = NOI / Cap Rate

Example:

• NOI: $107,447
• Market cap rate: 7.0%
• Estimated value: $107,447 / 0.07 = $1,534,957

Sales Comparison Support: Appraisals include recent sales of comparable apartment buildings but reconcile value primarily through income approach.

Critical Insight: Properties are worth what they produce. Improving NOI through rent increases or expense reductions directly increases property value.

Rent Comps and Market Analysis

The appraisal includes detailed market rent analysis:

• Comparable properties (3-5 similar buildings)
• Rent per square foot comparisons
• Unit mix analysis (studios, 1BR, 2BR, 3BR)
• Amenity adjustments (parking, laundry, storage, AC)
• Occupancy and absorption trends

Market Rent vs. Actual Rent: DSCR lenders typically underwrite to current rents (actual rent roll) rather than pro forma market rents, unless:

• You're executing a clear value-add strategy with renovation budget
• Leases are expiring within 90 days
• Recent comps strongly support higher rents

Value-Add Strategies for Improved DSCR

Rent Optimization

Unit Renovations: Strategic unit upgrades can justify 15-30% rent increases:

• Kitchen upgrades: $8-12K → $100-200/month increase
• Bathroom renovations: $5-8K → $50-100/month increase
• In-unit washer/dryer: $2,500 → $75-125/month increase
• Flooring, paint, fixtures: $3-5K → $50-75/month increase

Phased Approach:

• Renovate vacant units first
• Use increased rents to fund next renovations
• Raise rents at lease renewals for remaining units
• Timeline: 12-24 months to fully reposition

Amenity Additions:

• Package receiving/lockers
• Bike storage
• Dog wash stations
• Fitness center or upgrade existing
• Community spaces (grills, fire pits)
• Security systems/cameras
• Smart home features

Expense Reduction

Utility Management:

• Submetering (pass electric/gas to tenants)
• Water-saving fixtures (toilets, showerheads)
• LED lighting in common areas
• Programmable thermostats in units
• Solar panels (high upfront cost but long-term savings)

Property Tax Appeals: Challenge assessments, especially after:

• Purchasing below assessed value
• Market downturns
• Comparable sales showing lower values

Insurance Optimization:

• Shop carriers annually
• Bundle properties with same insurer
• Increase deductibles (if cash flow supports)
• Consider captive insurance for large portfolios

Management Efficiency:

• In-house management (if portfolio supports)
• Negotiate property management fees (8% vs. 10% saves $15K/year on $1.5M building)
• Preventive maintenance programs
• Tenant retention initiatives

Forced Appreciation Through NOI Growth

Every dollar of NOI increase creates $10-15 of value (depending on cap rates):

Example:

• Current NOI: $107,447
• Rent increases and expense reductions add: $15,000 NOI
• New NOI: $122,447
• At 7.0% cap rate: $122,447 / 0.07 = $1,749,243
• Value creation: $1,749,243 - $1,534,957 = $214,286

This forced appreciation is why savvy investors focus on value-add multifamily: you control value creation through operational improvements.

Comparing DSCR to Other Commercial Multifamily Loans

DSCR Loans

Pros:

• No tax returns or extensive financial documentation
• Faster closing (30-45 days)
• LLC ownership from day one
• Scalable (no property count limits)

Cons:

• Higher interest rates (1-2% above commercial)
• Shorter amortization sometimes (20-25 years vs. 30)
• Prepayment penalties common
• Lower LTV than some alternatives

Agency Loans (Fannie Mae/Freddie Mac)

Pros:

• Lowest rates (often 1-1.5% below DSCR)
• 30-year amortization
• Non-recourse
• High LTV options (up to 80%)

Cons:

• Extensive documentation (tax returns, financials)
• Minimum loan amounts ($1-2M+)
• Longer closing timelines (60-90 days)
• Net worth and liquidity requirements

Commercial Bank Loans

Pros:

• Competitive rates for strong borrowers
• Relationship-based lending
• Flexible terms possible

Cons:

• Extensive documentation
• Personal guarantees common
• Shorter terms (5-10 year balloons)
• Conservative LTV (65-75%)

HUD Multifamily Loans

Pros:

• Lowest rates available
• 35-40 year amortization
• Non-recourse
• High LTV (up to 87%)

Cons:

• Extensive documentation and approvals
• 6-12 month closing timelines
• High fees and costs
• Minimum loan amounts ($2-5M+)
• Property and borrower requirements strict

Tax Strategies for Commercial Multifamily

Accelerated Depreciation

Commercial multifamily properties depreciate over 27.5 years (same as residential), but the larger basis creates substantial deductions:

Example:

• Purchase price: $1,800,000
• Land value (20%): $360,000
• Depreciable basis: $1,440,000
• Annual depreciation: $52,364

Cost Segregation

Cost segregation studies identify property components that depreciate faster than 27.5 years:

• Appliances, carpeting, vinyl flooring: 5 years
• Landscaping, sidewalks, parking lots: 15 years
• Building systems can be partially reclassified

Impact: A $1.8M property might reclassify $400-600K to 5-15 year depreciation, creating significant first-year deductions.

Cost: $5,000-$15,000 for engineering study ROI: Often 10:1 or better in tax savings

1031 Exchange Strategy

Commercial multifamily properties serve as excellent 1031 exchange targets:

• Trade multiple single-families for one apartment building (simpler management)
• Trade smaller multifamily for larger (scale up)
• Trade up from 2-4 units to 5+ units (commercial scale)

Opportunity Zones

If the property is in a Qualified Opportunity Zone:

• Defer capital gains from other sales
• Reduce gains by 10-15% if held long enough
• Eliminate gains on appreciation if held 10+ years

Property Management Considerations

Professional Management Requirements

Most lenders prefer or require professional property management for 5+ units:

Why Lenders Care:

• Professional management maintains occupancy
• Reduces deferred maintenance
• Ensures compliance with housing laws
• Provides auditable financial records

Management Costs:

• 8-10% of gross collected income (industry standard)
• Leasing fees: 50-100% of first month's rent per new tenant
• Some managers charge flat per-unit fees ($50-100/unit/month)

Self-Management Considerations

Some investors self-manage to save costs, but should consider:

Time Commitment:

• Showing units and processing applications
• Rent collection and accounting
• Maintenance coordination
• Tenant communications
• Legal compliance and evictions

Expertise Required:

• Fair housing laws
• Lease agreements and state-specific requirements
• Maintenance vendor management
• Financial reporting
• Emergency response 24/7

When Self-Management Makes Sense:

• Property within 15 minutes of your home
• You have previous property management experience
• Building is small (5-12 units) and stable
• You value control over cost savings

Due Diligence Checklist for 5+ Unit Properties

Financial Review

• Trailing 12-month income and expense statement
• 2-3 years historical financials
• Current rent roll with lease dates
• Security deposit ledger
• Property tax bills (last 3 years)
• Insurance declarations and loss history
• Utility bills (12 months)
• Vendor contracts (management, landscaping, snow, etc.)
• Capital expenditure history

Physical Inspection

• Professional property inspection
• Roof inspection and estimated remaining life
• HVAC systems review (age, condition, service records)
• Plumbing and electrical inspection
• Foundation and structural review
• Environmental Phase I assessment
• Lead paint and asbestos (if pre-1978)
• Parking lot and common area condition

Legal and Compliance

• Title report and survey
• Zoning verification
• Certificate of occupancy
• Building permits for any renovations
• Violation search (code enforcement, housing)
• Tenant lease review
• HOA documents (if applicable)
• Property tax assessment and any pending appeals

Market Analysis

• Rent comps (3-5 comparable properties)
• Occupancy rates in submarket
• New supply pipeline (competing developments)
• Employment and population trends
• School quality and crime statistics
• Transportation and walkability scores

The Bottom Line

DSCR loans for 5+ unit apartment buildings provide experienced investors access to commercial multifamily without the extensive documentation burden of traditional commercial loans. Success requires understanding commercial underwriting, operating multifamily properties effectively, and executing value-add strategies that improve NOI and force appreciation.

The leap from residential to commercial multifamily represents a significant scale increase—more moving parts, more complexity, more opportunity. For investors ready to manage that complexity, commercial multifamily offers superior cash flow, economies of scale, and wealth-building potential that single-family and small multifamily can't match.

Focus on properties with solid fundamentals, clear value-add opportunities, and strong DSCR at stabilization. Master the operational side—leasing, maintenance, expense management—and you'll build a commercial multifamily portfolio that generates cash flow and equity growth for decades.