Financing Multi-Unit Investment Properties
Multi-unit investment properties can provide investors with opportunities to generate income from multiple residential units. Financing options vary substantially depending on the number of units, property type, rental income, borrower experience, loan amount, and lender or investor guidelines.
Property Definition
What Is a Multi-Unit Investment Property?
A multi-unit investment property generally contains multiple residential units that are owned primarily for rental-income or investment purposes. Financing can differ significantly depending on the number of units.
"Properties with 2–4 residential units may qualify under certain residential mortgage programs, while properties with 5 or more units generally fall into multifamily or commercial financing categories."
Side-by-Side
2–4 Units vs. 5+ Units
2–4 Unit Residential Property
May potentially be financed through certain residential investment-property programs. Potential options may include:
- Conventional investment financing
- Certain DSCR programs
- Portfolio lending
- Other eligible residential investment programs
5+ Unit Multifamily Property
Generally evaluated under multifamily or commercial lending standards. Potential financing options may include:
- Multifamily loans
- Commercial real-estate loans
- Portfolio financing
- Bridge financing
- Private or hard-money financing
- Other specialized programs
"The number of units can change the entire underwriting approach."
Underwriting Fundamentals
Multifamily Underwriting, NOI, DSCR, Rent Roll & Occupancy
Underwriting
Multifamily Underwriting
Larger multifamily properties are often evaluated based more heavily on the financial performance of the property. Potential factors may include:
- Rental income
- Operating expenses
- Net operating income
- Property occupancy
- Debt service
- Property condition
- Borrower experience
- Liquidity
- Net worth
- Market conditions
- Loan amount
NOI
What Is Net Operating Income?
Net Operating Income, commonly called NOI, generally reflects property income after certain operating expenses are deducted, but before mortgage debt service and certain other items.
Lenders may use NOI when evaluating income-producing multifamily properties. Treatment of expenses can vary by lender and program.
DSCR
Debt Service Coverage Ratio
Debt Service Coverage Ratio, or DSCR, is commonly used in investment and multifamily financing to compare qualifying property income with the property's required debt service.
"Required DSCR levels vary by lender, program, property type, and transaction."
Rent Roll
Rent Roll
A rent roll provides information about the rental units and current tenancy. It may include:
- Unit numbers
- Current rents
- Lease status
- Occupancy
- Tenant information
- Other property-income details
Lenders may request an updated rent roll during underwriting.
Operating Statements
Operating Statements
For larger multifamily properties, lenders may request documentation showing historical or projected property performance. Potential documents may include:
- Income statements
- Operating statements
- Tax returns
- Expense reports
- Rent rolls
- Leases
- Other financial records
Occupancy
Property Occupancy
The percentage of occupied units can affect financing. Lenders may evaluate:
- Current occupancy
- Vacancy history
- Lease-up status
- Market demand
- Stabilization
- Property type
No universal minimum occupancy requirement is published here.
Property Status & Financing Types
Stabilized vs. Unstabilized, Bridge, Permanent & Private Financing
Property Status
Stabilized vs. Unstabilized Properties
A stabilized multifamily property generally has established occupancy and operating history. An unstabilized property may involve:
- Significant vacancy
- Renovation
- Lease-up
- Deferred maintenance
- Repositioning
- Incomplete construction
- Other transitional circumstances
Unstabilized properties may require bridge, private, or transitional financing. Availability is not promised.
Bridge Financing
Bridge Financing
Bridge financing may potentially be used for certain short-term investment situations where the property does not yet qualify for permanent long-term financing. Potential situations may include:
- Property acquisition
- Renovation
- Repositioning
- Lease-up
- Stabilization
- Time-sensitive transactions
"Bridge financing is generally temporary and may involve different rates, fees, terms, and exit requirements than permanent financing."
Permanent Financing
Permanent Multifamily Financing
Stabilized multifamily properties may potentially qualify for longer-term permanent financing. Potential sources may include:
- Banks
- Credit unions
- Commercial mortgage lenders
- Portfolio lenders
- Agency or government-related multifamily programs when applicable
- Other institutional lenders
Availability of any specific source is not promised.
Private / Hard-Money
Private and Hard-Money Financing
Private or hard-money lenders may be considered for certain multifamily investment transactions, particularly when:
- Speed is important
- The property needs renovation
- The property is not fully stabilized
- Traditional financing is not immediately available
- A short-term financing solution is needed
These loans may involve higher rates, fees, and shorter terms.
Private financing is not appropriate for every investor.
Valuation & Borrower Profile
Property Value, Cap Rate, Borrower Experience & Equity
Property Value
Property Value
The lender may evaluate property value using an appraisal and may consider both:
- Comparable property sales
- Income-producing capability
For larger multifamily properties, income-based valuation methods may be especially relevant.
No specific appraised value is promised.
Cap Rate
What Is a Capitalization Rate?
Capitalization rate, commonly called cap rate, is one way investors and real-estate professionals may compare a property's income performance with its value. Cap rates can vary substantially by:
- Market
- Property type
- Property condition
- Location
- Investor demand
- Economic conditions
No particular cap rate is described as universally "good" or "bad."
Borrower Experience
Borrower Experience
Lenders may evaluate the sponsor or borrower's experience with:
- Multifamily ownership
- Property management
- Renovation
- Construction
- Leasing
- Real-estate investment
- Similar-sized projects
Experience requirements vary by lender. First-time multifamily investors are not universally excluded.
Liquidity & Net Worth
Liquidity and Net Worth
Commercial and multifamily lenders may evaluate the borrower or sponsor's financial strength. Potential considerations may include:
- Liquidity
- Net worth
- Cash reserves
- Other real-estate holdings
- Existing debt
- Financial statements
No universal liquidity or net-worth requirements are published here.
Down Payment / Equity
Down Payment / Equity
Required borrower equity can vary significantly depending on:
- Property value
- Loan amount
- Property condition
- Occupancy
- Borrower experience
- Financing type
- Lender guidelines
No universal down-payment percentage is published here.
Recourse / Non-Recourse
Recourse vs. Non-Recourse
Some multifamily loans may be structured as recourse loans, meaning the borrower or guarantor may have personal liability under the loan terms. Certain other commercial programs may offer non-recourse structures, subject to exceptions and specific loan terms.
"Borrowers should carefully review guaranty and recourse provisions with qualified legal and financial professionals."
Entity, Mixed-Use & Renovation
LLC Ownership, Mixed-Use, Renovation & Construction
LLC & Entity Ownership
LLC and Entity Ownership
Multifamily investment properties are often owned through LLCs or other business entities. The financing structure may involve:
- Borrowing entity
- Personal guarantors
- Ownership percentages
- Organizational documents
- Operating agreements
- Other lender-required documentation
Approval of any entity structure is not guaranteed.
Mixed-Use
Mixed-Use Properties
Some multifamily properties include commercial space, such as retail, office, restaurant, or other commercial uses. These properties may require specialized mixed-use or commercial financing. Eligibility can depend on:
- Percentage of residential income
- Amount of commercial space
- Tenant mix
- Property use
- Lender guidelines
Mixed-use properties are not treated as standard residential loans.
Renovation / Value-Add
Renovation and Value-Add Multifamily
Investors may purchase properties that require renovations or operational improvements. Potential strategies may involve:
- Interior renovations
- Exterior improvements
- Unit upgrades
- Deferred-maintenance correction
- Lease-up
- Expense management
- Property repositioning
Specialized acquisition-and-renovation financing may be available through certain lenders. Financing is not promised.
Ground-Up Construction
Ground-Up Multifamily Construction
New multifamily construction generally requires a separate construction-financing analysis. Potential considerations may include:
- Land
- Zoning
- Entitlements
- Plans and specifications
- Construction budget
- Developer experience
- Equity
- Construction timeline
- Exit strategy
"Ground-up construction is a specialized financing category and should be evaluated separately."
Refinancing
Refinancing Multifamily Properties
Refinancing Options
Refinancing Multifamily Properties
Existing multifamily owners may potentially explore:
- Rate-and-term refinancing
- Cash-out refinancing
- Bridge-to-permanent financing
- Portfolio refinancing
- Other commercial lending structures
Refinancing depends on current property performance, value, borrower qualifications, and lender guidelines. Savings or cash proceeds are not promised.
Cash-Out Refi
Cash-Out Refinancing
Eligible investors may potentially access some available equity through cash-out refinancing. Potential uses may include:
- Renovations
- Acquisition of additional properties
- Business purposes
- Capital improvements
- Other investment objectives
"Cash-out refinancing increases or restructures debt secured by the property."
Documentation
Documents a Lender May Request
Ask a Professional
Questions to Ask Before Financing
The Big Picture
"Larger multifamily financing is based heavily on the property's financial performance and the strength of the overall transaction."
Prosper Path Group can help investors explore:
Ready to Begin?
Explore Financing for Your Multi-Unit Investment Property
Whether you are purchasing, refinancing, renovating, repositioning, or expanding a multifamily portfolio, Prosper Path Group can help you explore financing options based on the property, income, business plan, and investment goals.
Multifamily and commercial real-estate financing requirements vary by lender, loan program, property size, property performance, occupancy, borrower or sponsor experience, liquidity, net worth, collateral, market conditions, and transaction structure. Financing for properties with five or more residential units may be evaluated under commercial or multifamily underwriting standards rather than residential mortgage guidelines. Not all borrowers, sponsors, or properties will qualify. This information is provided for general educational purposes and is not a commitment to lend.
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