Five or More Units: What are the Requirements?

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August 2, 2020
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What constitutes an apartment building?

Detached homes, condominiums, duplexes, triplexes and fourplexes typically are classified as one-to-four-unit properties, or one-to-fours. Properties that have five to fifteen residential units do not require an onsite manager or custodian as opposed to a property with sixteen units or more which require an onsite manager or custodian.

A loan for a duplex, triplex or fourplex does not differ much (if at all) from a loan for a detached house, but loans for larger properties (5 or more units) involve a little different underwriting, a little higher qualification.

How to Qualify

One difference is that before an apartment loan is approved the lender might consider more qualitative information to try to understand the borrower’s experience as a rental property owner or manager.

A candidate will be looked at to determine what that person has owned and what has been their management experience collecting rent, managing properties and handling a project of that size.

The borrower’s credit score, income and personal and business tax returns will be considered along with two years’ operating statements and a current rent roll for the property.

The most important property metrics are:

  • Net operating income: The annual income, minus expenses that a property generates from its operations
  • Debt service coverage: Measure of cash flow relative to debt payment obligations
  • Loan-to-value (LTV) ratio: A measure of the loan amount relative to the value of the property

The property is required to service its debt at a comfortable margin. Borrowers who need more flexibility might want to turn to a small bank. Typically, a 30 percent down payment and above average credit score is important, but it is not a deal-breaker. It is not uncommon if someone is stronger in one area and weaker in another.

Mixed-use and partially occupied properties

Mixed-use properties might be classified as commercial or residential, depending in part on the proportions of each use. A typical configuration of many apartments over a few stores is treated as an apartment loan.

When the ratio is 50-50 or there’s a lot more commercial, the underwriting changes and it becomes a little more conservative structure.

Apartment buildings that are vacant or only partially occupied can be financed; however, the loan might be short-term and have a variable rate with the expectation that it would be replaced with long-term financing once the property has been stabilized.

If the rents do not support the debt, a high net worth borrower’s cash flow could suffice.

Conforming or portfolio?

Like one-to-four loans, apartment loans come in standardized types that lenders can sell to Fannie Mae or Freddie Mac and customized types, known as portfolio loans, that lenders keep on their own books.

Standardized or conforming loans typically have a slightly lower interest rate, but the guidelines are more rigid.

Other apartment loans have a prepayment scheme known as a step down. The 3-2-1 format is an example.

Loan terms and types

Apartment loans can be long term (25 or 30 years) or short term (five, seven or 10 years).

Interest rates can be fixed, variable or hybrid, which start out fixed and then reset or become variable after a specified period of time.

Shorter-term loans can be renewed or refinanced at the end of the initial term, though the interest rate likely will adjust and some fees could be involved. There may be a rate change when the loan matures.

Loan amount

Most lenders offer apartment loans from $1 million or $2 million up to many millions. LTVs top out at 70 or 75 percent, which means the borrower needs a 25 or 30 percent down payment to buy (or that much equity to refinance). A lower LTV usually gets a lower rate.


Borrowers typically pay a loan origination fee and customary closing costs, including appraisal, title and escrow costs, plus expenses for any inspection, environmental or other due diligence reports. Property insurance is a must. Flood insurance will be required if the property is located in a government-designated flood zone.


Most buyers purchase an apartment building through a limited liability corporation, or LLC. It is rare that an individual has the title in their name. LLCs do what their name implies: limit liability. Most borrowers own their separate properties all in their own special purpose entity, or SPE. They do that so if one property has an issue, (such as) a slip-and-fall accident, to avoid bleeding into (the owner’s) other assets.

Another level of complexity that might be required for a large apartment loan is the single-asset bankruptcy-remote entity, which protects the property from the borrower’s personal bankruptcy and bankruptcies of his or her other properties.

Loan amount

Some apartment loans have a prepayment penalty known as yield maintenance. If the borrower pays off all or a large portion of the loan, the lender applies a formula to determine how much the borrower must pay to make up the forgone interest.

Other apartment loans have a prepayment scheme known as a step down. The 3-2-1 format is an example.

If the loan is paid off in year one, you owe 3 percent of the amount you prepaid. Year two, it is 2 percent. Year three, it is 1 percent. Commencing in year four, at month 37 or after, zero prepayment.

The same scheme could be applied with a 5-4-3-2-1 format.

“Like one-to-four loans, apartment loans come in standardized types that lenders can sell to Fannie Mae or Freddie Mac and customized types, known as portfolio loans, that lenders keep on their own books.”


Some apartment loans are assumable, which means a new borrower can take over the original borrower’s loan. An assumption can be used to sell a property and avoid a prepayment penalty.

The same credit guidelines imposed on the original borrower would be imposed on the incoming borrower,If approved, that borrower would enjoy the remainder of the terms and conditions of the loan that’s being assumed.

Not all loans are assumable, borrowers should ask whether a loan has this feature.

Recourse, non-recourse loans

If the loan is “full recourse,” the lender can seize the borrower’s (or guarantor’s) personal assets if the loan is not repaid it accordance to the agreed upon terms. If it is nonrecourse, the lender’s only option to satisfy the loan in default is to foreclose and take the property. A non-recourse loan would price a little higher because the bank is taking a little more risk.


Once the decision to apply for a loan has been made, the borrower would provide the following to give the lender:

  • Pictures of the property
  • Property description: lot size, year of construction, number of units and existing amenities
  • Plans for upgrades such as a dog park, children’s playground, new appliances, countertops, plumbing or lighting fixtures, and how much those improvements will cost
  • Map showing the location of the property and nearby competing properties
  • Explanation of how competing properties compare with the property to be acquired
  • Rents and how much they will be raised or lowered
  • Copies of floor plans
  • Summary of sources and uses of funds for the transaction
  • Purchase price and closing costs
  • Loan amount and cash equity amount
  • Contingency fund amount
  • Names of real estate brokers, title companies, attorneys and other professionals involved in the transaction

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