Financing Differences Between 1-4 Unit Properties and 5+ Units

Many are confused between the differences and why they exist. Hopefully, this post will clear up that confusion.

1-4 Unit properties are considered “residential”, and a majority of the time can receive 30-year fixed financing, regardless if you’re financing with a DSCR lender or a conventional. Once you dive into 5 or more units, it’s considered “multi family residential”, or some will even call it “commercial” or “commercial residential”. Either way, the financing terms change.

Rates… Ahh. The most common topic when discussing financing. Traditionally speaking, 5+ unit financing is usually lower, but that depends on the lenders risk and the swap rates in the market. Lenders who usually do 1-4 unit financing but offer 5+ unit, usually don’t have competitive rates in the 5+ unit department, as multi family isn’t their main product. Lenders who specialize in 5+ unit projects will usually have the lower rates than a 1-4 unit deal. The reason is simple: math. A lender doing a 20-unit can have a profit spread of only 3% and make more than a 1-4 unit lender doing a profit spread of 4%, simply because the multi lender is making 3% spread on a $3 million loan, while the 1-4 unit lender is making 4% spread on a $200k loan.

I’ve worked with some lenders who will do 30-year fixed on 5+ units, but it’s usually capped at 10 units. A majority of lenders, at least in the current market, don’t offer 30-year fixed for 5+ unit properties. Terms are usually 20 or 30-year amortization, with 5 and 10-year terms, meaning the loan expires and is due in 5 or 10 years. So you can either refinance into a new loan, or sell the property before expiration.

The reason for this is simple: the buyers that buys the mortgage from your lender have a different view and strategy with these notes, and these sort of properties often have changing financing terms as the markets change. If a mortgage buyer buys a $200k note at, lets say, 5%, then 2 years later, inflation is at 7%, their risk isn’t as large. Whereas, if they buy a $2 million loan on a 10-unit and inflation rises, they are exposed to more risk. So offering shorter terms is favorable to the note buyers, which is why lenders usually don’t offer as long term.

In rocky markets like we saw during COVID and the ’22-’23 inflation crises, multi family lenders usually become more strict, making it harder to finance anything over 4 units. When markets get rocky, lenders try to reduce their risk. Risk is reduced by not allowing too large of a loan to a single borrower. Who’s doing the largest loans? The 5+ unit lenders. When inflation went from the 3’s to 9.1% in 2022, many 5+ unit lenders raised their requirements. Some raised DSCR requirements from 1.20 to 1.25. Some raised occupancy requirements, and some dropped max LTV by 5%.

Hopefully this clears up any confusion. Feel free to email me or comment with any questions.

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