Financing a five to ten unit building or a small mixed-use property

A residential building of five to ten units, or a small mixed-use building with homes and a shop or office, can be financed with a business-purpose loan based on the building’s rent rather than your personal income. The difference from a duplex or a fourplex is how closely the building is examined. A building this size is valued much like a small commercial property, so the appraisal studies the rent roll and the building’s income and expenses, programs ask for a larger down payment and more reserves than on a single rental, and they usually want a landlord with a recent record of owning and managing rental property.

If you are stepping up from small rentals, that is the change to plan for.

Why five units changes the rules

Home lending in the United States is built around properties of one to four units. Federal mortgage rules define a dwelling (opens in a new tab) as a residential structure of one to four units, and Fannie Mae’s single-family guide (opens in a new tab) covers properties of one to four units as well. A fifth unit moves a building into multifamily territory, where it is valued on the income it produces, much like a small commercial property. For an investor who will not live there, the loan is business purpose whatever the number of units, as the official interpretation of the Truth in Lending rules (opens in a new tab) explains.

That is why the loan for a six-unit building feels different from the loan for a fourplex, even on the same street.

How the loan is underwritten

The rent carries the loan. The lender compares the building’s total rent with its full monthly payment, including taxes, insurance and any association dues, and the rent must cover the payment by the margin the program sets. No tax returns or pay stubs are used.

Rent is counted carefully:

• any management fee the appraiser shows is taken off the rent first;
• vacant units count at only part of their market rent, and the number of vacant units is limited;
• short-term rental income is not counted on these buildings.

You can try your own figures in our DSCR calculator, which has a property type for five to ten units and for mixed use.

Mixed use: what counts

A mixed-use building here means a building of two to eight units with shops, offices or a restaurant on part of the property. Most of the building must be residential, and the commercial space must be leased. In some programs your own business may use one of the commercial units.

If your property is purely commercial, such as an office or retail building, call us to talk it through before you apply. The loans described here are for buildings that are mainly residential.

What the appraisal involves

The appraiser inspects every unit and reports the market rents, the income and the expenses. Many programs also ask for a second valuation of the building. Build the extra time into your contract dates.

What to have ready

No tax returns or pay stubs. Most investors can start with these:

• the rent roll and current leases for every unit;
• the building’s income and expense statement;
• company documents, if you will hold title in a company;
• a list of the properties you own and your record as a landlord;
• bank statements for the down payment, closing costs and reserves;
• your purchase contract, or the current mortgage statement on a refinance;
• photo identification for each borrower and each owner who signs.

At closing

You sign business-purpose and occupancy statements, and the owners back the loan personally. Rent-loss insurance is required, and mixed-use buildings also need commercial liability cover. Many business-purpose rental loans have a prepayment penalty for the first years where state law allows it, and some programs offer a version without one; your loan officer can show you both.

Frequently asked questions

Can I or my family live in one of the units?

No. These are business-purpose loans for investment property, and you sign a statement that no one on the loan will live in the building.

Do I need experience as a landlord?

Usually, yes. Most programs for buildings of this size want a recent record of owning and managing rental property.

Can short-term rental income count?

Not on these buildings. A unit let by the night or week is not counted toward the rent.

Can I put several rentals under one loan instead?

For experienced investors, some programs finance a limited number of rental homes, all in the same state, under one loan. A property can be released from the loan when you sell it, on terms set in the loan documents. See our page on loans for small apartment buildings and mixed-use property.