DSCR Loans for 5+ Unit Multifamily Properties: Commercial Apartment Financing

The jump from 1-4 unit residential properties to 5+ unit multifamily is one of the most significant transitions in real estate investing. Everything changes: the lending category shifts from residential to commercial, appraisals use the income approach exclusively, and the property is valued based on its NOI and cap rate rather than comparable sales alone.

DSCR loans are particularly well-suited for 5+ unit multifamily because the DSCR concept is the foundation of commercial real estate lending. Unlike residential DSCR loans that adapted a commercial concept for residential properties, multifamily DSCR loans operate in their native environment. The property's income is—and always has been—the primary qualification factor.

Residential vs. Commercial DSCR: Key Differences

1-4 Units (Residential DSCR)

Appraised using comparable sales and rent surveys
DSCR based on appraiser's market rent estimate
Loan terms similar to residential mortgages
Single lease or up to 4 leases
Many lender options with standardized products

5+ Units (Commercial DSCR)

Appraised using income approach (NOI ÷ cap rate = value)
DSCR based on actual income and verified expenses
Commercial loan terms (shorter balloon periods, different amortization)
Multiple leases and complex income analysis
Fewer but more specialized lenders
More detailed underwriting process

Why 5 Units Is the Dividing Line

The 5-unit threshold isn't arbitrary—it's based on federal lending guidelines. Fannie Mae and Freddie Mac classify 1-4 units as residential and 5+ as commercial. This classification affects everything from appraisal methodology to loan terms and regulatory requirements.

How 5+ Unit DSCR Loans Work

Income Calculation

For multifamily DSCR loans, lenders evaluate actual property income rather than appraiser-estimated market rent:

Gross Potential Rent (GPR): Total rent if all units were occupied at market rates

Effective Gross Income (EGI): GPR minus vacancy allowance plus other income (laundry, parking, pet fees, storage)

Net Operating Income (NOI): EGI minus all operating expenses

DSCR: NOI ÷ Annual Debt Service

Expense Categories

Lenders will scrutinize your operating expenses:

Property management: 5-10% of EGI
Maintenance and repairs: 5-10% of EGI
Property taxes: Actual or projected
Insurance: Actual or quoted
Utilities: Owner-paid utilities (common area, water/sewer if not tenant-paid)
Administrative: Legal, accounting, advertising
Payroll: On-site staff for larger properties
Reserves/replacement: 3-5% of EGI or per-unit allowance
Turnover costs: Painting, cleaning, minor repairs between tenants

The Expense Ratio

A key metric lenders evaluate is your expense ratio (total expenses ÷ EGI):

Efficient operation: 35-45% expense ratio
Average: 45-55%
Concerning: 55%+ (suggests operational problems or deferred maintenance)

Qualification Requirements

Property Requirements

Minimum 5 units (some lenders start at 6 or 8 units)
Occupancy: 85%+ current occupancy (some lenders accept 75%+ with explanation)
Property condition: Habitable and code-compliant
Financial documentation: 12-24 months of operating statements (T-12 or T-24)
Rent roll: Current rent roll showing all units, rents, lease terms, and tenant status
Location: In established rental markets with adequate comparable properties

Borrower Requirements

Credit score: 660+ (better terms at 700+)
Net worth: Some lenders require net worth equal to the loan amount
Liquidity: 6-12 months of debt service in liquid reserves post-closing
Experience: Many lenders prefer borrowers with multifamily experience (though some will finance first-time multifamily buyers with strong credit and reserves)
Entity ownership: LLC, LP, or corporation required

DSCR Requirements

Minimum DSCR: 1.20-1.30 (stricter than residential DSCR)
Stress test: Some lenders test DSCR at a higher interest rate
Break-even occupancy: Lenders want to see the property covers expenses at 75-85% occupancy

Loan Parameters

Loan amounts: $500,000 to $25,000,000+
LTV: 70-80%
Interest rates: Vary by market conditions, property quality, and borrower strength
Amortization: 25-30 years
Term: 5, 7, or 10-year balloon (some offer longer terms)
Prepayment: Yield maintenance, defeasance, or declining prepayment penalties
Recourse: Some loans are non-recourse above certain thresholds (typically $2M+)

Property Types Within 5+ Multifamily

5-20 Units (Small Multifamily)

The entry point for commercial multifamily:

Often owner-managed
Simpler operations
More DSCR lender options
Purchase price: $500,000-$3,000,000
Can often be financed with residential-style DSCR products adapted for 5+ units

20-50 Units (Mid-Size Multifamily)

The transition to professional management:

On-site or dedicated property management needed
More complex operations and accounting
Better economies of scale
Purchase price: $2,000,000-$10,000,000
Attracts commercial DSCR and bridge lenders

50-100+ Units (Large Multifamily)

Institutional-quality assets:

Professional management required
On-site staff
Amenity packages
Purchase price: $5,000,000-$50,000,000+
Agency financing (Fannie/Freddie), CMBS, and large commercial lenders

Analyzing 5+ Unit Multifamily Deals

Step 1: Review the Rent Roll

The rent roll is the most important document. Evaluate:

Current rents vs. market rents: Is there upside potential?
Lease terms: Month-to-month vs. annual leases
Vacancy: How many units are vacant and why?
Delinquency: Are tenants current on rent?
Unit mix: Bedroom count distribution and rent variation
Tenant quality: Length of tenancy, payment history

Step 2: Analyze the T-12

The trailing 12-month operating statement reveals the property's financial reality:

Income trends: Is income growing, stable, or declining?
Expense trends: Are expenses reasonable and consistent?
NOI trajectory: Is the property improving or deteriorating?
One-time items: Identify non-recurring income or expenses
Owner add-backs: Some expenses may be personal to the current owner

Step 3: Calculate Key Metrics

Cap Rate = NOI ÷ Purchase Price

Tells you the unlevered return on the asset
Compare to market cap rates for similar properties

DSCR = NOI ÷ Annual Debt Service

Must meet lender minimums (1.20-1.30)
Higher is better for loan terms and cash flow

Cash-on-Cash Return = Annual Cash Flow ÷ Total Cash Invested

Your actual return on invested capital
Target: 8-12%+ for value-add; 6-8% for stabilized

Break-Even Occupancy = (Debt Service + Operating Expenses) ÷ Gross Potential Rent

The occupancy level needed to cover all costs
Lower is safer; target below 85%

Step 4: Identify Value-Add Opportunities

Value-add strategies that boost NOI (and therefore property value):

Rent increases to market levels
Utility bill-back (submetering water, charging for utilities)
Adding income (laundry, parking, storage, pet fees)
Reducing expenses (renegotiating contracts, energy efficiency)
Unit renovations commanding premium rents
Reducing vacancy through better marketing and management
Adding units (converting common areas, building ADUs)

The 5+ Unit DSCR Loan Process

Timeline: 30-60 Days

Week 1-2: Application and Preliminary Review

Submit application with property financials
Lender reviews rent roll, T-12, and preliminary DSCR
Term sheet issued with proposed loan terms

Week 2-4: Due Diligence

Appraisal ordered (income approach + comparable sales)
Phase I environmental assessment (often required for 5+ units)
Property condition report
Title and survey review
Borrower financial review

Week 4-6: Underwriting and Approval

Full underwriting with all due diligence reports
Loan committee approval
Commitment letter issued

Week 5-8: Closing

Legal document preparation
Final conditions clearing
Funding and closing

Pros and Cons of 5+ Unit DSCR Investing

Advantages

Economies of scale: Lower per-unit management and maintenance costs
Income diversification: Multiple tenants reduce single-vacancy risk
Income-based valuation: You directly control property value through NOI
Non-recourse options: Available for larger loans
Professional management: Scale justifies dedicated management
Value-add potential: Operational improvements directly increase property value
Portfolio acceleration: Acquire many units in a single transaction

Disadvantages

Higher capital requirements: Larger down payments and reserves
Operational complexity: More tenants, more management, more systems
Commercial loan terms: Balloon payments create refinance risk
Longer closing times: More due diligence and underwriting
Experience expectations: Lenders prefer experienced multifamily borrowers
Property management necessity: Self-management becomes impractical at scale
Market sensitivity: Larger properties are more sensitive to local economic conditions

Scaling from Residential to Commercial Multifamily

The Progression Path

Many successful multifamily investors follow this path:

1-4 units: Learn the basics with residential DSCR loans
5-10 units: First commercial property, often a converted house or small apartment
10-25 units: Develop management systems and lender relationships
25-50 units: Professional management, more sophisticated financing
50+ units: Institutional-quality operations and agency financing

Bridging the Gap

If you have residential DSCR experience but want to move to 5+ units:

Partner with an experienced multifamily investor for your first deal
Start with a 5-8 unit property that's operationally similar to a fourplex
Take a multifamily investing course or join a mentorship program
Underwrite 50+ deals before buying one—develop your analytical skills
Build relationships with commercial DSCR lenders before you need them

Getting Started

Master DSCR fundamentals: Start with our DSCR loan guide if you're new to DSCR
Learn commercial analysis: Understand NOI, cap rates, and income-based valuation
Build your team: Commercial broker, property manager, lender, attorney, and CPA
Analyze deals: Practice underwriting 5+ unit properties (even if you're not ready to buy)
Network: Connect with multifamily investors and operators in your target market
Start looking: Work with a commercial broker to identify opportunities
Make offers: Submit LOIs on properties that meet your criteria and DSCR requirements

The jump from residential to commercial multifamily is where real estate investors build significant wealth. DSCR-based financing—the foundation of commercial real estate lending—makes this transition accessible to investors who understand the fundamentals and are ready to scale.

Dscr Loan For Multifamily 5 Plus

Key Takeaways