DSCR Loans for 2-4 Unit Multifamily Properties

Small multifamily properties—duplexes, triplexes, and fourplexes—represent the sweet spot for real estate investors. They offer multiple income streams, economies of scale, and lower per-unit acquisition costs, all while remaining eligible for residential financing. DSCR loans amplify these advantages by qualifying you based on the property's combined rental income rather than your personal finances.

Why 2-4 Unit Properties Excel with DSCR Loans

Income Diversification Advantages

The fundamental appeal of small multifamily is income diversification. With four units, a single vacancy costs you 25% of rental income rather than 100%. This built-in cushion makes hitting DSCR targets easier and provides lenders with greater confidence in the property's cash flow stability.

Example Scenario:

• Single-family rental: $2,000/month (one vacancy = $0)
• Fourplex: 4 units × $1,500 = $6,000/month (one vacancy = $4,500)

The fourplex continues generating 75% of rental income during a vacancy, maintaining positive cash flow and protecting your DSCR.

Superior Cash Flow Metrics

Small multifamily properties typically achieve higher DSCR ratios than equivalent single-family investments because:

1. Lower per-unit acquisition costs: A fourplex rarely costs 4× a single-family home price
2. Shared systems: One roof, one foundation, often shared utilities
3. Management efficiency: Collect four rents with one property visit
4. Economies of scale: Repairs and improvements cost less per unit

Residential Financing Advantages

Properties with 2-4 units remain classified as residential real estate, meaning:

• 30-year amortization available
• Lower interest rates than commercial multifamily (5+ units)
• Simpler appraisal process
• More lender options
• Less stringent underwriting

DSCR Calculation for Multifamily Properties

Calculating DSCR for multifamily properties follows the same formula but with multiple income sources:

DSCR = Total Rental Income / Total Monthly Debt Service

Real-World Example: Triplex Analysis

Property Details:

• Purchase price: $525,000
• Down payment (25%): $131,250
• Loan amount: $393,750
• Interest rate: 7.75%
• Monthly P&I: $2,814
• Property taxes: $450/month
• Insurance: $225/month
• Total monthly debt service: $3,489

Rental Income:

• Unit 1 (2BR/1BA): $1,600/month
• Unit 2 (2BR/1BA): $1,550/month
• Unit 3 (1BR/1BA): $1,200/month
• Total rental income: $4,350/month

DSCR Calculation: DSCR = $4,350 / $3,489 = 1.25

This triplex achieves a healthy 1.25 DSCR, qualifying for competitive rates from most lenders.

Handling Mixed Occupancy

What if some units are vacant at purchase? Most DSCR lenders use market rent estimates from the appraisal rather than actual rent rolls. This works in your favor when buying a property with vacancies or below-market tenants.

Critical Point: The appraisal will include a rent schedule showing market rates for each unit based on comparable rentals. This becomes your official income documentation.

Qualification Requirements

Credit Score Standards

DSCR lenders typically require:

• Minimum: 640-660 for most programs
• Better pricing: 680+
• Best rates: 720-740+

Small multifamily properties sometimes face slightly stricter credit requirements than single-family (10-20 points higher minimum scores) because they're viewed as more management-intensive.

Down Payment Expectations

Expect to put down 20-25% for 2-4 unit properties. The exact requirement depends on:

• Property condition: Turnkey properties may qualify for 20% down; properties needing work require 25%
• DSCR strength: Exceptional DSCR (1.35+) may access lower down payment options
• Credit profile: 760+ credit scores with strong reserves sometimes qualify for 20% down
• Lender appetite: Some lenders specialize in small multifamily and offer more flexible terms

Reserve Requirements

DSCR lenders require cash reserves equal to 6-12 months of PITIA (principal, interest, taxes, insurance, association fees). For a triplex with $3,500 monthly debt service, expect to show $21,000-$42,000 in liquid reserves after closing.

Reserve Calculation Tip: Lenders calculate reserves based on all financed properties, not just the new acquisition. If you have three existing mortgages, you'll need reserves covering all four properties.

Experience Requirements

Most lenders prefer (but don't always require) previous landlord experience for multifamily properties. First-time investors can still qualify but should expect:

• Higher interest rates (0.25-0.50% premium)
• Larger reserve requirements
• More conservative underwriting

If you're new to multifamily, consider partnering with an experienced investor or purchasing a property with existing tenants and a track record of stable occupancy.

Property Types and Configurations

Duplexes (2 Units)

Ideal For: First-time multifamily investors stepping up from single-family Typical DSCR: 1.15-1.30 Management Complexity: Low to moderate Financing: Most accessible, widest lender selection

Duplexes offer the simplest transition to multifamily investing. Side-by-side configurations are easier to manage than up/down configurations but may have higher construction costs affecting purchase price.

Triplexes (3 Units)

Ideal For: Experienced investors seeking improved cash flow Typical DSCR: 1.20-1.35 Management Complexity: Moderate Financing: Good lender availability, slightly stricter than duplexes

Triplexes hit a sweet spot for cash flow efficiency. Three income streams provide excellent diversification while maintaining manageable oversight.

Fourplexes (4 Units)

Ideal For: Serious investors building multifamily portfolios Typical DSCR: 1.25-1.40 Management Complexity: Moderate to high Financing: Strong lender interest, approaching commercial underwriting rigor

Fourplexes maximize the benefits of residential financing before stepping into commercial territory (5+ units). They often deliver the best DSCR ratios in the 2-4 unit category.

Appraisal Considerations

Valuation Methodology

2-4 unit properties use a hybrid appraisal approach:

Primary Method: Sales comparison (comps) using recent sales of similar multifamily properties

Secondary Method: Income approach validation using gross rent multipliers (GRM) and cap rates

The appraisal must support both the purchase price and the projected rental income. Weak comps or below-market rents can kill deals.

Rent Schedule Requirements

The appraisal includes a rent schedule analyzing:

• Current rents (if occupied)
• Market rent estimates for each unit
• Comparable rental properties (3-5 comps)
• Rent trends in the submarket

This rent schedule becomes the foundation of your DSCR calculation. Conservative estimates help your case by building in safety margins.

Common Appraisal Issues

Insufficient Comps: Small multifamily sales can be sparse in some markets. Appraisers may need to expand search radius or use older comps.

Mixed Property Types: A triplex compared to duplexes and fourplexes requires adjustment factors that introduce subjectivity.

Deferred Maintenance: Properties with obvious repair needs will be flagged, potentially requiring escrow holdbacks or reduced valuations.

Functional Obsolescence: Outdated floor plans, shared laundry in basements, or single-bathroom units may appraise below purchase price.

Strategies to Maximize DSCR

Rent Optimization

Pre-Purchase Analysis: Before making an offer, research market rents thoroughly:

• Pull listings from Zillow, Apartments.com, and Craigslist
• Call property management companies for professional rent estimates
• Drive the neighborhood noting "For Rent" signs and advertised rates
• Check tenant mix (students, families, professionals) to gauge demand

Post-Purchase Improvements: Small upgrades can justify significant rent increases:

• Unit renovations ($10-15K investment → $100-200/month rent increase)
• In-unit laundry ($2,500/unit → $50-75/month rent increase)
• Updated kitchens and bathrooms (highest ROI improvements)
• Cosmetic upgrades (paint, flooring, fixtures)

Tenant Management: Keeping quality tenants reduces vacancy and turnover costs:

• Competitive pricing (don't squeeze every dollar if it increases vacancy)
• Responsive maintenance (prevents small issues from becoming big problems)
• Annual lease renewals with modest increases (losing a tenant costs 2-3 months rent)

Expense Management

Controlling expenses directly improves DSCR by reducing monthly debt service:

1. Property Taxes: Appeal assessments after purchase, especially if buying below market value

2. Insurance: Shop multiple carriers annually; bundling policies sometimes saves 10-15%

3. Utilities: If you cover utilities, consider:

• RUBS (Ratio Utility Billing System) to pass costs to tenants
• Energy efficiency upgrades that reduce consumption
• Negotiating with providers for multifamily rates

4. Maintenance: Preventive maintenance costs less than emergency repairs

Creative Financing Structures

Seller Financing Supplement: Seller carries a small second mortgage at low interest, reducing your primary DSCR loan amount and monthly payment.

Interest Rate Buydown: Paying points upfront to reduce rate improves DSCR. A 0.5% rate reduction on a $400K loan saves ~$115/month.

Extended Amortization: Some lenders offer 35-40 year amortization periods (rare but available), reducing monthly payments at the cost of total interest paid.

Common Challenges and Solutions

Challenge: Below-Market Rents

Situation: Property has long-term tenants paying $1,200 when market is $1,500.

Solution: Use appraised market rents for DSCR calculation, then plan tenant transitions:

• Wait for natural turnover if DSCR qualifies with current rents
• Provide notice and raise rents to market (check local rent control laws)
• Offer small upgrades to justify increases
• Budget for potential vacancy during transition

Challenge: High Vacancy at Purchase

Situation: Buying a triplex with one unit vacant, one tenant giving notice.

Solution:

• DSCR lenders use appraised market rents regardless of occupancy
• Negotiate lower purchase price reflecting vacancy
• Line up tenants before closing
• Ensure reserves cover 6+ months to weather lease-up period

Challenge: Deferred Maintenance

Situation: Property needs new roof, HVAC updates, or other major repairs.

Solution:

• DSCR Renovation Loan: Rolls repair costs into mortgage
• Escrow Holdback: Seller leaves funds in escrow to complete repairs post-closing
• Price Reduction: Negotiate purchase price down by estimated repair costs
• Cash Reserves: Complete repairs from reserves, improving property value and rent potential

Challenge: Marginal DSCR (0.95-1.05)

Situation: Property almost qualifies but DSCR falls slightly short.

Solution:

• Larger down payment: Reduces loan amount and monthly debt service
• No-Ratio DSCR loan: Some lenders offer sub-1.0 DSCR loans at premium rates
• Rent increase projections: If appraisal supports higher market rents
• Co-borrower: Add a partner to strengthen application (though this defeats no-income-verification benefit)
• Seller concessions: Negotiate seller-paid points to buy down rate

Tax Advantages of Small Multifamily

Accelerated Depreciation

2-4 unit properties qualify for residential depreciation (27.5 years) versus commercial (39 years), allowing faster write-offs:

Example Fourplex:

• Purchase price: $600,000
• Land value: $120,000
• Depreciable basis: $480,000
• Annual depreciation: $17,455

Cost Segregation: Engineering-based analysis that reclassifies components (appliances, flooring, fixtures) for 5-7 year depreciation instead of 27.5 years, creating significant paper losses.

Expense Deductions

Every expense related to property operation is tax-deductible:

• Mortgage interest (typically 70-80% of early payments)
• Property taxes
• Insurance
• Repairs and maintenance
• Property management fees
• Utilities you pay
• Professional services (CPA, attorney)
• Travel to/from property
• Office supplies and software

1031 Exchange Opportunities

Small multifamily properties serve as excellent stepping stones in 1031 exchanges:

• Trade up from single-family to duplex/triplex
• Trade four separate single-families for one fourplex (easier management)
• Trade 2-4 units for larger commercial multifamily (5+ units)
• Defer capital gains indefinitely while building equity

When DSCR Loans Make Sense vs. Alternatives

Choose DSCR Loans When:

• You're self-employed with complex tax returns
• You're scaling beyond 10 financed properties
• You want to close in an LLC for liability protection
• Speed matters (21-30 day closings)
• Your personal DTI (debt-to-income) is maxed out
• The property has strong cash flow (1.25+ DSCR)

Consider Conventional Loans When:

• It's your first investment property
• You have clean W-2 income and low DTI
• You have fewer than 4 financed properties
• You qualify for better rates (typically 1-2% lower than DSCR)
• You can house-hack (live in one unit, rent the others)

Consider Commercial Loans When:

• You're buying 5+ units
• You want longer terms (15-25 year amortization)
• You have established real estate LLC
• You're comfortable with balloon payments and refinancing

Finding the Right Property

Market Selection Criteria

Job Growth: Markets adding diverse, high-paying jobs support rent growth Population Trends: Growing populations increase housing demand Affordability: Markets where rents are 30-40% of median income balance cash flow and tenant quality Landlord-Friendly Laws: Avoid markets with strict rent control or tenant-favorable eviction laws Supply Constraints: Markets where new construction is limited support value appreciation

Property Selection Checklist

Location:

• Within 30 minutes of your home (or where you have management)
• Safe neighborhood with low crime
• Near employment centers, schools, shopping
• Strong public transportation (if applicable)

Physical Condition:

• Roof: 10+ years remaining life
• HVAC systems: Functional and serviceable
• Plumbing/electrical: Code-compliant, no major issues
• Foundation: No settling, cracking, or water intrusion
• Deferred maintenance under $15,000

Unit Mix:

• Balanced mix (not all 1BR or all 3BR)
• Similar size/quality units (easier to manage)
• Separate utilities (tenants pay own electric/gas)
• Adequate parking (1.5-2 spaces per unit)

Financials:

• Achieves 1.20+ DSCR at market rents
• Current rents at or near market
• Operating expenses under 40% of gross rents
• Property taxes reflect current assessment
• No pending special assessments

The Bottom Line

Small multifamily properties financed with DSCR loans offer real estate investors a powerful combination: multiple income streams, residential financing advantages, and qualification based solely on property performance. Whether you're stepping up from single-family rentals or building a multifamily portfolio, the 2-4 unit category provides optimal scale, manageable complexity, and superior cash flow potential.

Success requires finding properties where the numbers work—strong DSCR, positive cash flow, and solid appreciation potential. Master the underwriting, choose properties in growing markets, and build a portfolio that generates wealth through cash flow and equity growth.