5 to 9 Unit Properties: The Small Multifamily Gap
@griffinadbr808
A fourplex and a 50-unit building are both called multifamily. Lenders do not treat them the same way. Buildings with 5 to 9 units sit in an awkward middle zone. They are too large for standard residential loan rules and too small for many commercial lenders. Investors who buy here often feel stuck.
This article explains the gap, why it exists, and how an investor can work through it. It is general education only. Consult your CPA or attorney for tax and legal questions.
Where the gap comes from
Loans on one to four units follow residential rules. Investors can use rental loans, fix and flip loans and many other products built for small properties. Once a building reaches five units, it moves into commercial territory. Underwriting changes. The lender starts to care about the building as a business, with an income statement and a rent roll.
Large commercial lenders often set minimum loan sizes that make a small apartment building not worth their time. A 6-unit building in a small town might cost a few hundred thousand dollars. That falls below the floor for many multifamily programs. So the buyer ends up between two sets of rules, and neither one fits well. Those new to the subject may find Section 1031 exchanges helpful as a reference.
Why small buildings are still worth a look
Investors like this size for good reasons. Prices per door are often lower than in large complexes. Competition from big institutions is lighter. A single owner can often manage the building without a large staff. And with five or more doors, income does not collapse when one tenant leaves.
There is also room to add value. Small buildings are often run by owners who have not raised rents in years or updated the interiors. A buyer who improves the property may see a real rise in income. That is why many investors start their commercial path with a 5 to 9 unit purchase.
Financing options at this size
The lender states that it funds a range of property types, including 2 to 4 units, 5 to 9 units and 10 or more. Which program applies depends on the deal. Here is how the main choices compare.
A rental loan for a stabilized building
If the building is full and the rents are solid, a long-term loan may be the right tool. The program page lists rental loans from $75K to $5M, up to 80% LTV, with a 30-year fixed or several ARM choices, and no W-2s required. Those loans look at the property income rather than your pay stubs. For buyers who plan to hold, see rental loans for small apartment buildings with five to nine units to read the current terms.
A hard money loan for a building that needs work
If the building is half empty or needs repairs, a bank may pass. A short-term asset-based loan can fill that need. The program page lists hard money loans from $75K to $5M, up to 60% LTV and 80% CLTV, with 3 to 9 months of interest-only payments. Investors planning heavy work on a small building can read about hard money loans for buying 6 to 9 units quickly to see if the structure fits.
The multifamily bridge program
The multifamily bridge program starts at $1M, which is larger than many 5 to 9 unit purchases. A buyer closing on a bigger 9-unit building, or buying several buildings as a group, may land in range. The program page lists 5 to 350 doors. Anyone close to the minimum can review multifamily bridge loans when a 9 unit purchase reaches one million to check eligibility.
All of these terms are offered only to qualified borrowers and subject to change.
What underwriting looks at in a small building
Asset-based lenders focus on the deal. The lender states that approval rests on cash, equity and experience, with credit as a factor and not the only one. For a small apartment building, that usually means the lender wants to see your reserves, your down payment, the condition and location of the property, and the income it produces.
You should be ready with a rent roll, a list of expenses and a plan for repairs. Even if a lender does not ask for every item, having them shows you know the building. It also helps you catch a bad deal before you pay for an appraisal.
Owner occupancy at five units and up
Rules change on occupancy once a building reaches five units. According to the brief on the lender, most states allow the owner to live in the building at up to 50% of the livable square footage, and New Jersey requires six or more units. Commercial space can also house google.com the borrower's own business. Occupancy rules differ by program, so check the occupancy rules for apartment buildings with five or more units before you plan to move in.
Buildings with one to four units are investment-only with this lender. If you plan to live in a smaller building, this lender is not the right fit.
How to close the gap in your own plan
Start with the purchase price and the plan. Decide whether you will hold the building or sell it. A hold plan points toward a rental loan after any repairs are done. A sell plan points toward a short bridge and a clean exit.
Next, test the numbers. Estimate the rents, the expenses and the payment. Use the calculators page to compare loan sizes and see whether the income covers the debt. A deal that only works with perfect rents is not a deal.
Finally, line up your team. A good property manager, a reliable contractor and a clear title company reduce delays. Small buildings can hide big surprises, so inspect before you commit.
Get your options in front of you
The simplest way to see where your building fits is to ask. Kings of Capital funds apartment buildings with five or more units and says it returns preliminary terms within one business day. The first step is a survey that takes about 60 seconds and asks for no documents or fees.
If you want to talk it over, book a call about financing a small apartment building. For a question about one specific building, you can also ask about your 5 to 9 units through the contact page.
Every program is priced to the property, and terms are offered only to qualified borrowers and subject to change.