5-8 Unit Commercial Multifamily Financing

By Bill Lyons | Published on February 1, 2024

In this article, we’ll discuss 5-8 unit commercial multifamily financing, exploring the unique opportunities associated with this niche real estate market. Whether you’re a seasoned investor looking to expand your portfolio or a newcomer exploring the potential of commercial multifamily properties, understanding multifamily financing is crucial for making informed decisions. 

Keep reading to learn more about 5-8 commercial multifamily financing, including the types of mortgages available, qualification criteria, and key considerations for successful funding. 

What Is a Multifamily Home Loan?

A multifamily home loan is a type of mortgage specifically designed to finance properties that consist of two or more residential units. Unlike traditional single-family home loans, which are intended for individual houses, multifamily loans are tailored to accommodate the unique characteristics of properties with multiple dwelling units. These loans play a crucial role in facilitating the acquisition of residential properties that house multiple families or tenants. 

5-8 unit multifamily loans represent a unique type of investment niche within the broader multifamily financing landscape. Properties in this size range provide a balance between scale and manageability, making them an attractive option for investors looking to enter or expand within the multifamily real estate market. 

5-8 unit multifamily loans are structured to accommodate the specific needs of properties with a moderate number of residential units. This category offers more income potential compared to smaller properties while being more manageable than larger apartment complexes. These loans are typically sought by real estate investors, developers, or property wonders looking to finance the purchase of multifamily properties with a unit count ranging from five to eight. 

What Type of Loan Can I Use to Finance a Multifamily Property?

When it comes to financing a multifamily property, investors have various options, and the choice of the loan depends on factors such as the size of the property, the borrower’s financial profile, and the investor’s overall strategy. Griffin Funding offers several commercial loan options specifically tailored for multifamily properties, including: 

• DSCR loans: Debt service coverage ratio (DSCR) loans are a common type of commercial financing used for multifamily properties. The DSCR is a key metric in these loans, representing the property’s ability to generate enough income to cover its debt obligations, including the mortgage. Investors and property owners typically need to demonstrate a solid DSCR to qualify for these loans, ensuring that the property’s rental income is sufficient to cover the loan payments. 
• Small balance commercial multifamily DSCR loans (up to 10 units): Griffin Funding offers DSCR loans specifically tailored for small balance commercial multifamily properties with up to 10 units. This loan caters to investors interested in smaller multifamily projects. Small balance loans are often more accessible for individual investors or those looking to start with a smaller-scale multifamily investment. 

Loan Types That Can’t Be Used for 5-8 Unit Commercial Multifamily Properties

When it comes to financing 5-8 unit commercial multifamily properties, certain loan types that are commonly used for single-family homes or smaller residential properties may not be available. Here are some loan types that generally can’t be used for commercial multifamily properties: 

• VA loans: VA loans are government-backed loans designed to help eligible veterans and active-duty service members purchase homes. These loans are primarily intended for owner-occupied 1-4 unit residential properties and aren’t typically used for investment or commercial multifamily properties. 
• FHA loans: FHA loans are popular for residential 1-4 unit home purchases and are geared toward helping individuals with lower down payments. However, FHA loans are not suitable for commercial multifamily properties. 
• USDA loans: USDA loans are designed to support rural home buyers and have restrictions on property types and usage. These loans are not intended for commercial multifamily properties and are more aligned with residential, single-family homes. 

In general, most traditional mortgages, including those offered by various banks for single-family homes, aren’t typically structured to accommodate the complexities and risk profiles associated with commercial multifamily properties. 

Investors seeking financing for 5-8 unit commercial multifamily properties often turn to specialized commercial loans like DSCR loans. These loans are specifically tailored to meet the unique needs of investors. 

Benefits of Taking Out a Multifamily Mortgage

Owning and financing a multifamily property through a multifamily mortgage can offer various benefits for investors, such as: 

• Steady rental income: One of the most appealing aspects of owning a multifamily property is the potential for a reliable and steady rental income stream. With multiple units within a single property, investors can diversify their revenue sources. Even if one or two units are vacant or face temporary challenges, the overall impact on cash flow is likely to be less severe compared to a single-family property. This stability in rental income is a fundamental advantage for investors seeking consistent returns.
• Risk diversification: The multifamily structure inherently provides risk diversification. In a single-family property, the departure of a tenant can significantly impact cash flow. In contrast, a 5-8 unit multifamily property spreads the risk across multiple units. If one tenant moves out or faces financial difficulties, the other units can continue to generate income, minimizing the impact on the property’s overall financial performance.
• Economies of scale: Managing and maintaining multiple units within a multifamily property often results in economies of scale. The cost per unit for services such as property management, landscaping, and maintenance tends to be lower than the equivalent costs for individual single-family properties. This efficiency contributes to improved cash flow and overall profitability, particularly in the case of a 5-8 unit property.
• Appreciation potential: Like any real estate investment, multifamily properties have the potential for appreciation over time. The demand for rental housing in certain areas can drive property values higher. As the property appreciates, investors can benefit not only from ongoing rental income but also from the increased value of the asset. This appreciation adds a valuable dimension to the overall return on investment.
• Tax advantages: Multifamily property ownership often comes with various tax advantages. Investors may be eligible for deductions on mortgage interest, property depreciation, and certain operating expenses. These tax benefits for real estate investors can significantly enhance the property’s financial performance and contribute to a more favorable bottom line. Investors should work closely with tax professionals to maximize these advantages within the bounds of applicable tax laws.
• Financing options: Multifamily mortgages offer investors a range of financing options, providing the ability to leverage their capital effectively. With a relatively small amount of their own capital, investors can control a larger asset. This leverage magnifies the potential return on investment, allowing investors to amplify their gains while minimizing their initial financial burden
• Wealth building: Multifamily properties are tools for long-term wealth building. As the mortgage is paid down over time and the property appreciates, investors build equity. This equity can be leveraged for future investments or used as a source of retirement income. Multifamily properties, especially in desirable locations, have the potential to become significant contributors to an investor’s overall net worth.
• Professional property management: Investors in 5-8 unit multifamily properties often have the option to enlist professional property management services. This can be particularly beneficial for those who prefer a more hands-off approach to property management. Professional property managers can handle day-to-day responsibilities, including tenant relations, maintenance, and rent collection, allowing investors to focus on strategic decision-making and portfolio growth.
• Adaptability: Multifamily properties demonstrate resilience in various market conditions. During economic downturns, the demand for rental housing may increase as individuals may choose to rent rather than buy. This increased demand can provide a degree of stability for property owners, making multifamily investments adaptable to changing market dynamics.
• Portfolio diversification: Including a 5-8 unit multifamily property in an investment portfolio contributes to overall diversification. Real estate often exhibits different risk-return characteristics compared to other asset classes, such as stocks or bonds. Diversification is a key principle of risk management, and multifamily properties offer investors the opportunity to balance their portfolios with assets that have unique market dynamics.

Multifamily Mortgage Requirements

When considering a multifamily mortgage, there are specific requirements and criteria that the borrower must meet. While lender requirements vary, general lending criteria often include the following: 

• Debt service coverage ratio: The DSCR measures the property’s ability to cover its debt payments and is calculated by dividing the property’s rental income by its annual debt service or mortgage payments. Lenders typically like to see a DSCR above 1.0, indicating that the property generates sufficient income to cover its debt obligations. 
• Property cash flow: Property cash flow is the net income generated by the property after deducting all operating expenses from the rental income. Lenders assess the property’s cash flow to ensure it’s positive and sufficient to cover ongoing operational expenses and mortgage payments and provide a return on investment. 
• Loan-to-Value (LTV) ratio: The LTV ratio is the ratio of the loan amount to the property’s appraised value. Lenders typically have maximum LTV ratios, indicating the highest percentage of the property’s value that can be financed. Lower LTV ratios may result in more favorable loan terms. 
• Creditworthiness: Borrowers are evaluated based on their credit history and financial stability. A strong credit profile increases the likelihood of loan approval and may result in more favorable interest rates. 
• Property location and condition: Lenders consider the property’s location and condition. A property in a desirable location with good market potential and property maintenance may be viewed more favorably.
• Documentation of income and expenses: Borrowers must provide accurate and detailed documentation of the property’s income and expenses. This includes rental income, operating expenses, and any other financial information related to the property. 
• Reserve requirements: Some lenders may require borrowers to have cash reserves to cover unforeseen expenses or periods of lower rental income. This provides a safety net and ensures the property’s ongoing financial stability. 

Tips for Financing a 5-8 Unit Commercial Multifamily Property

Financing a 5-8 unit commercial multifamily property requires careful consideration and strategic planning. Successful investors understand that each step plays a crucial role in securing favorable financing terms. Here are a few key tips to follow for commercial multifamily financing: 

Learn about investing in real estate

Before applying for a multifamily home loan, it’s essential to learn as much as possible about investing in real estate. This involves familiarizing yourself with the unique dynamics of the commercial multifamily sector. 

Take advantage of educational resources, including books, online courses, and seminars, to enhance your knowledge. You should also understand the risks and rewards of investing. Real estate investment comes with both advantages and disadvantages. Assess the potential challenges and benefits associated with commercial multifamily properties. 

You can also network with experienced investors to gain insights, learn from their experiences, and build a network that can provide valuable support and advice. 

Research different markets

The choice of market significantly influences the success of your investment. Thorough market research can help identify locations with growth potential and favorable conditions for multifamily properties. 

You can research economic indicators such as job growth, population trends, and income levels to gauge the economic health of potential markets. Then, analyze local real estate trends, including property values, rental rates, and demand for multifamily housing. 

Come up with a business plan

A well-crafted business plan is instrumental in securing financing and guiding your investment strategy. Your plan should outline your investment goals, financial projections, and the steps you’ll take to achieve success. Here’s how to create an effective business plan: 

• Define your investment goals: Clearly articulate your short-term and long-term investment goals. Whether it’s generating rental income, property appreciation, or a combination, be specific about what you aim to achieve.
• Financial projections: Develop detailed financial projections, including expected rental income, operating expenses, and potential returns on investment. Realistic projections demonstrate a thorough understanding of the investment.
• Risk mitigation strategy: Identify potential risks and outline strategies to mitigate them. Lenders and investors appreciate a well-thought-out plan that addresses potential challenges.
• Exit strategy: Include an exit strategy in your business plan. Whether it’s selling the property, refinancing, or holding for the long term, a clear exit strategy provides a roadmap for your investment journey.

Compare loan types

Before committing to 5 unit multifamily financing, it’s crucial to compare different loan types to find the one that aligns with your financial goals and risk tolerance. Consider the following factors: 

• Interest rates and terms: Compare interest rates and loan terms offered by different lenders. Assess whether fixed-rate or adjustable-rate mortgages (ARMs) better suit your investment strategy. 
• Down payment requirements: Different loan types may have varying down payment requirements. Evaluate how much capital you can allocate upfront and choose a loan that aligns with your financial capacity. 
• Amortization period: Examine the amortization period or the time it takes to pay off the loan. Longer amortization periods can result in lower monthly payments but may have higher overall interest.

Shop around for rates

To secure the most competitive multifamily mortgage, it’s essential to shop around for interest rates. Don’t settle for the first offer you receive. Instead, consult with multiple lenders to understand the range of interest rates and terms available. 

Once you’ve gathered multiple quotes, don’t hesitate to negotiate with lenders. Your creditworthiness and the overall strength of your application can influence the offered rates. 

In addition to interest rates, consider the associated fees, including closing costs and origination fees. These fees can impact the overall cost of the loan. 

Look into property management services

Engaging professional property management services can be a wise decision for investors who lack experience in real estate investing or property management. 

Property managers bring expertise in tenant relations, property maintenance, and compliance with local regulations. Their experience can streamline property management tasks and enhance overall efficiency. 

While these services cost money, they also save time. Property management can be time-consuming, especially when dealing with multiple units. Hiring professionals allows you to focus on strategic decision-making and portfolio growth. 

Additionally, property managers are skilled in tenant screening, lease agreements, and addressing tenant concerns. This expertise can contribute to lower vacancy rates and better tenant retention. 

Get Competitive Rates on Loans for Multifamily Properties

Securing competitive rates is paramount for optimizing returns on 5-8 unit multifamily properties. Griffin Funding is a trusted partner for investors navigating the intricacies of multifamily mortgages. Specializing in DSCR loans tailored for properties with up to 10 units, Griffin Funding offers a unique advantage in commercial lending. Investors benefit from competitive rates and the expertise and personalized service we provide. Apply for a multifamily mortgage online today. 

Frequently Asked Questions

Is it a good idea to get a multifamily mortgage loan?

Multifamily properties have unique advantages that can make obtaining a multifamily mortgage loan a compelling option. The potential for steady rental income, risk diversification across multiple units, and economies of scale in property management are key benefits. Additionally, the ability to leverage financing for larger assets and the potential for property appreciation contribute to the attractiveness of multifamily investments. 

However, the decision to get a multifamily mortgage loan requires careful consideration. Investors should assess their ability to manage a multifamily property, considering factors like property location, market conditions, and their own experience in real estate investing. 

Is it hard to get a multifamily mortgage?

Obtaining a multifamily mortgage can be difficult for some individuals, but it mainly depends on personal circumstances and the property in question. Many big banks no longer offer 5-8 unit commercial multifamily home loans, so investors must work with private mortgage lenders. 

Compared to residential mortgages, multifamily mortgages often involve a more complex underwriting process due to the higher loan amounts. Lenders may scrutinize the property’s cash flow, evaluating its ability to cover mortgage payments and operating expenses while generating a satisfactory return. The borrower’s creditworthiness, debt-to-income (DTI) ratio, and experience in real estate investment can also influence the loan approval process. 

Additionally, the size of the multifamily property and the number of units can impact the ease of securing financing. Smaller multifamily properties are more accessible for individual investors, while larger properties may require a more extensive financial and operational track record. 

So, while the process of getting a multifamily home loan may pose challenges, working with experienced lenders can increase the likelihood of success. You should be prepared to provide detailed financial documentation, demonstrate a clear understanding of the market, and present a compelling case for the property’s income potential. 

Why should I get a multifamily mortgage through Griffin Funding?

Griffin Funding offers specialized commercial loans, including those tailored for small balance commercial multifamily properties. The emphasis on the property’s DSCR aligns with the unique needs of multifamily investors, providing a financial structure that prioritizes the property’s ability to generate enough income to cover debts. 

Our commitment to competitive rates, flexible terms, and personalized service enhances the appeal for investors seeking favorable financing terms. We offer a streamlined application process and the Griffin Gold app, allowing borrowers to access information, apply for loans, and track the progress of their finances conveniently.

Moreover, Griffin Funding’s focus on transparency and communication ensures that borrowers are well-informed throughout the loan process. Whether you’re an experienced investor or entering the multifamily market for the first time, Griffin Funding’s expertise in the commercial lending space can provide valuable support and guidance.

By choosing Griffin Funding for your multifamily mortgage, you gain access to a lender with a track record of understanding the intricacies of multifamily investments, offering tailored loan products, and prioritizing client satisfaction.

Bill Lyons

Bill Lyons is the Founder, CEO & President of Griffin Funding. Founded in 2013, Griffin Funding is a national boutique mortgage lender focusing on delivering 5-star service to its clients. Mr. Lyons has 22 years of experience in the mortgage business. Lyons is seen as an industry leader and expert in real estate finance. Lyons has been featured in Forbes, Inc., Wall Street Journal, HousingWire, and more. As a member of the Mortgage Bankers Association, Lyons is able to keep up with important changes in the industry to deliver the most value to Griffin's clients. Under Lyons' leadership, Griffin Funding has made the Inc. 5000 fastest-growing companies list five times in its 10 years in business.