Why can five units change the underwriting approach?
One to four unit properties are treated as residential, even when they are rentals. At five units and up, most lenders treat the building as commercial real estate. That shifts the focus from comparing gross rent with a monthly payment to analyzing the building like a small business: income, operating expenses, vacancy and the annual cost of the debt.
How do net operating income and debt coverage work together?
Net operating income (NOI) is gross rental income minus vacancy and operating expenses such as taxes, insurance, utilities the owner pays, repairs, management and reserves for replacements. The debt coverage ratio is NOI divided by the annual principal and interest.
Example: an 8-unit building collects $9,600 a month, or $115,200 a year. After a vacancy allowance and operating expenses, NOI comes to $64,000. If annual principal and interest on the proposed loan is $50,000, coverage is $64,000 ÷ $50,000 = 1.28. Commercial lenders set their own minimum coverage and expense assumptions, which is why the same building can be sized differently by different lenders.
How do lenders review mixed-use buildings?
A building with apartments over a storefront can be financed through some residential investor programs when the commercial share is small, and through commercial programs when it is larger. Lenders look at the type of commercial tenant, lease terms and how much of the income depends on that space.
Which documents might a commercial lender request?
Expect a more detailed package than a single-family rental:
- Current rent roll with unit mix, rents and lease dates
- Trailing operating statements, often twelve months or more
- Property tax bills, insurance quote and utility information
- Purchase contract or current loan statement
- Entity documents and a schedule of real estate owned
- Property condition information, and for some loans an environmental review
How can our brokerage help you prepare?
Small-balance commercial programs vary in minimum loan sizes, prepayment structures, recourse and how they treat older buildings or partial vacancy. We gather the rent roll and operating history once, identify lenders whose programs fit the building, and present the structures side by side.
What else do investors ask?
Is a 5-unit building a residential or commercial loan?
Most lenders treat five or more units as commercial real estate, underwritten on net operating income rather than a residential DSCR formula.
Can I finance a mixed-use building with apartments and a shop?
Yes, through either residential investor or commercial programs, based on how much of the building and income is commercial. The tenant and lease terms matter.
Do small commercial loans require personal tax returns?
Some do and some do not. Many focus on the property operating history plus your credit, experience and liquidity. We will tell you what each program asks for.