How to Finance a 6-Unit Investment Property

Acquiring a 6-unit investment property represents a significant step in real estate investing. Properties with five or more units are considered commercial real estate, distinguishing them from 1-4 unit residential properties. This commercial designation directly impacts the financing options available and the requirements lenders impose. Understanding these differences is essential for navigating the loan acquisition process effectively.

Available Financing Options

Conventional commercial mortgages are a common avenue, offered by banks and credit unions. These loans typically feature terms ranging from 5 to 10 years, with amortization periods that can extend to 25 years or more, and often include a balloon payment at the end of the term. Commercial lenders assess the property’s income-generating potential alongside the borrower’s financial strength.

Small Business Administration (SBA) loans, such as the SBA 504 program, can sometimes be used for real estate. However, these are generally not suitable for pure investment properties due to owner-occupancy requirements, as the business must occupy a significant portion of the property. This means an SBA loan is typically not an option if the entire 6-unit property is intended solely for rental income.

Some financial institutions offer portfolio loans, which they retain on their balance sheets rather than selling on the secondary market. This approach can provide greater flexibility in underwriting criteria and loan terms, potentially accommodating properties or borrowers that might not fit traditional commercial loan guidelines.

Private or hard money loans serve as another financing source, often used for short-term needs or properties that do not qualify for conventional lending due to their condition or the borrower’s circumstances. These loans typically come with higher interest rates and shorter repayment periods. They can be a viable option for quick closings or distressed properties.

Traditional residential loan products, such as those backed by Fannie Mae, Freddie Mac, FHA, or VA, are generally not applicable to 6-unit properties. These agencies typically cap their financing at properties with 1-4 units. Investors pursuing a 6-unit property must seek commercial financing solutions, which involve different underwriting standards and documentation requirements.

Lender Requirements and Preparations

Lenders evaluate both the borrower’s financial standing and the property’s income potential when considering a loan for a 6-unit property. A strong personal credit history and score are important, as lenders assess the borrower’s reliability. Borrowers will typically need to provide comprehensive personal financial statements, detailing assets, liabilities, and net worth.

Lenders also require evidence of sufficient liquidity or cash reserves to cover potential operating expenses or vacancies after closing. Demonstrating prior experience in real estate investment can also be a favorable factor, signaling to lenders a borrower’s understanding of property management and market dynamics. These financial indicators help lenders gauge the borrower’s capacity to manage the investment and repay the loan.

The property’s financial viability is analyzed through pro forma income and expense statements. These projections detail anticipated rental income and itemize operating expenses such as property taxes, insurance, maintenance, and utility costs. The Debt Service Coverage Ratio (DSCR) indicates the property’s ability to generate enough income to cover its mortgage payments. The DSCR is calculated by dividing the property’s net operating income (NOI) by its annual debt service. Lenders typically require a minimum DSCR of 1.20x to 1.35x for multifamily properties.

Another key financial requirement is the Loan-to-Value (LTV) ratio, which compares the loan amount to the property’s appraised value. Commercial real estate loans typically have LTVs ranging from 65% to 80%, meaning a down payment of 20% to 35% is generally expected.

To prepare for an application, borrowers should gather documents. This typically includes personal tax returns for the past two to three years, recent bank statements (personal and business), and existing property leases or a detailed rent roll. If the property has existing operations, operating statements and a business plan outlining the investment strategy are also necessary.

Securing Your Loan

The process of securing a loan for a 6-unit investment property typically begins with pre-qualification or pre-approval. This initial step involves providing preliminary financial and property information to a lender, who then offers an estimated loan amount and potential terms. This stage helps borrowers understand their borrowing capacity before committing to a specific property.

Once preliminary terms are understood, the formal application submission follows, where all prepared documents are submitted to the lender. This complete package, including all financial statements, property details, and personal information, is essential for the lender’s comprehensive review.

The submitted application then enters the underwriting process, a detailed review by the lender to assess the loan’s risk. Underwriters scrutinize financial statements, order a professional appraisal of the property, and conduct title searches. Environmental reports may also be required.

Upon successful completion of underwriting, the loan receives approval, and the lender issues a commitment letter. This letter outlines the final terms and conditions of the loan, including interest rates, repayment schedules, and any remaining requirements before closing.

The final stage is the closing process, where all legal documents are signed, funds are transferred, and the mortgage and deed are officially recorded. Commercial loan closings typically take longer than residential ones, often ranging from 30 to 90 days.