Answers ~7 min read Updated
Multifamily Loans: How to Finance an Apartment Building
Apartment buildings with 5 or more units use commercial loans. Banks typically lend 70% to 75% of value, want a DSCR of 1.20 to 1.25 on the property's income, and look closely at the rent roll and your experience.
An apartment building with 5 or more units is financed with a commercial real estate loan, not a home mortgage. Banks typically lend 70% to 75% of the property's value, want the building's net operating income to cover the loan payments 1.20 to 1.25 times, and look closely at the rent roll and your experience as an owner.
The big difference from a house: the lender cares most about the property's income, not yours. A building that pays for itself with room to spare is the deal lenders want.
Your financing options
| Option | Typical loan-to-value | Best for |
|---|---|---|
| Community or regional bank | 70% to 75% | Most small and mid-sized buildings; relationship pricing |
| Fannie Mae / Freddie Mac (agency) | Up to about 75% to 80% | Stabilized buildings; long fixed rates |
| DSCR investor loans | About 70% to 80% | Investors who qualify on property income, not tax returns; higher rates |
| Bridge loans | Varies | Buildings being renovated or leased up; short term, then refinance |
| HUD / FHA programs | Higher | Larger buildings and new construction; long process |
SBA loans aren't an option here. The SBA doesn't finance passive rental real estate.
How the lender sizes the loan
- Net operating income (NOI). Rent and other income, minus a vacancy allowance (often at least 5%), minus operating expenses like taxes, insurance, repairs, management, and utilities. Loan payments aren't an expense in NOI.
- DSCR. NOI ÷ annual loan payments. Most banks want 1.20 to 1.25.
- Loan-to-value. The loan ÷ the appraised value. Usually 75% or less.
- Debt yield (on larger loans). NOI ÷ loan amount. Many lenders want 8% to 10% or more.
The loan ends up at the lowest amount allowed by these tests.
What to bring
- Rent roll: every unit, tenant, rent, lease dates, and deposits.
- T-12: the last 12 months of income and expenses for the property.
- Purchase contract, or current loan details if refinancing.
- Your real estate schedule: every property you own, with loans and income.
- Personal financial statement and tax returns. Banks look at your global cash flow and how much cash you have after closing.
Terms to expect
Bank loans often have a 5- to 10-year term with a 25- to 30-year amortization, so a balloon payment comes due at the end. Ask about prepayment penalties, rate reset terms, and whether the loan requires a personal guarantee. Read Chapter 7 for how term, amortization, and balloons work.
Check the building's numbers with the DSCR calculator, using NOI in place of EBITDA and the proposed loan's annual payments.
Common questions
How much down payment do I need for a multifamily property?
For a commercial loan on 5 or more units, usually 25% to 30%. Banks typically lend 70% to 75% of the property's value. Agency loans can go somewhat higher for strong properties and borrowers.
Can I use an SBA loan to buy an apartment building?
No. SBA 7(a) and 504 loans don't finance passive rental real estate, and an apartment building you rent to tenants falls in that category. Investors use bank, agency, or other commercial real estate loans instead.
What DSCR do lenders require for a multifamily loan?
Most banks look for 1.20 to 1.25, based on the property's net operating income. They will usually build in a vacancy allowance of at least 5% even if the building is full.
What's the difference between a 4-unit and a 5-unit building for financing?
One to four units can be financed with a residential mortgage. Five or more units is commercial real estate. The loan is underwritten mainly on the property's income, with shorter terms, different rates, and more documentation.