Commercial Loans on 5-8 Units: What Changes and What It Costs

A fourplex is a house with extra kitchens as far as a lender is concerned. Add one more unit and the same lender treats the building as a business. The loan is sized on the property's income, the term is shorter than the amortization, and you will probably sign a personal guarantee on top of it all.

The cost of missing that shift shows up at the offer stage. In the example below, a buyer of a $900,000 six-unit building expects a 75% loan of $675,000. The lender's math produces $594,000. The buyer needs $81,000 more cash than planned, and finds out after the contract is signed.

The line at five units: why the loan world changes

One to four units is residential lending. The loans are standardized, sold to Fannie Mae and Freddie Mac, underwritten mainly on your personal income and credit, and available as 30-year fixed mortgages.

Five units and up is commercial lending. The building's net operating income is the primary source of repayment, the appraisal leans on the income approach, and the borrower is usually an LLC. For a 5 to 8 unit building the realistic lenders are local and regional banks, credit unions, and some DSCR lenders with small multifamily programs. The agency small-balance multifamily programs exist too, but their minimum loan sizes often exclude a loan of $600,000, so check the current minimums before counting on one.

If you have been buying duplexes with 30-year money, every row in the right-hand column is a change to your model.

How commercial lenders size a loan: DSCR and debt yield

A commercial lender runs three tests and lends the smallest result.

Max loan by LTV = Appraised value x Maximum LTV

Max loan by DSCR = (NOI / Minimum DSCR) / Annual loan constant

Max loan by debt yield = NOI / Minimum debt yield

DSCR is NOI divided by annual debt service, with minimums commonly 1.20 to 1.25. The background is in how DSCR works. Debt yield is NOI divided by the loan amount. It ignores rate and amortization entirely, which is why lenders like it: it tells them what return they would earn on their loan if they took the building back. Not every small bank uses a debt yield test, but when one does, the floor is commonly in the 8% to 10% range.

The NOI in those formulas is the lender's, not the broker's. Lenders underwrite a vacancy factor of at least 5% even when the building is full, a management fee even when you manage it yourself, and replacement reserves per unit. A reserve of $250 to $300 per unit per year is a common rule of thumb.

Example: a six-unit building at $900,000

This is an example with illustrative terms: 7.00% rate, 25-year amortization, 1.25 minimum DSCR, 9% minimum debt yield, 75% maximum LTV. Six units rent for $1,450 each, so gross potential rent is $104,400.

Now size the loan on the lender's $63,000.

• LTV test. $900,000 times 75% is $675,000.
• DSCR test. $63,000 divided by 1.25 allows $50,400 of annual debt service. At 7.00% over 25 years, a year of payments equals 8.4814% of the loan amount, so $50,400 supports $594,245. Call it $594,000.
• Debt yield test. $63,000 divided by 9% is $700,000.

The DSCR test binds. The loan is $594,000, which is 66% of the price, with a payment of $4,198 a month or $50,376 a year. Coverage is 1.25 and debt yield is 10.6%. The down payment is $306,000, which is $81,000 more than the $225,000 a 75% loan would have required.

The broker's numbers explain why buyers get this wrong. On an NOI of $71,847, the $675,000 loan has debt service of $57,252 and coverage of 1.25, so the pro forma says the 75% loan works. On the lender's NOI the same loan covers at 1.10 and fails.

Rate moves proceeds too, because DSCR sizing runs through the payment. Same NOI, same 1.25 test:

Each half point of rate removes $24,000 to $28,000 of loan.

Terms that surprise residential buyers: balloons, resets, recourse

The term is shorter than the amortization. Payments are calculated over 25 years, but the loan comes due in 5, 7 or 10 years. On the $594,000 example, the balance is $541,522 after five years and $467,129 after ten. That balloon has to be refinanced or paid off, and the refinance is sized by the same three tests at whatever rates exist then.

Here is how that goes wrong. Suppose NOI is still $63,000 at year five and the example refinance rate is 8.50%. The DSCR test supports $521,592. The balloon is $541,522. You bring $19,930 to the closing table, plus a new round of loan costs, to keep a building you already own.

Some loans reset instead of ballooning. A common bank structure is fixed for five years, then reprices to an index plus a margin for another five. If the example loan reset to 8.50% with 20 years of amortization left, the payment would go from $4,198 to $4,699 a month, or $56,388 a year. At a flat $63,000 of NOI, coverage falls to 1.12. Holding 1.25 would take NOI of $70,485, which is 11.9% above where it started, or about 2.3% growth a year for five years. Your rent growth assumption is now a loan covenant question.

Prepayment costs money. Bank loans often carry a step-down penalty, for example 5% of the balance in year one, then 4%, 3%, 2% and 1%. Agency and securitized loans use yield maintenance or defeasance, which can be far more expensive when rates have fallen. If your plan is to renovate, raise rents and refinance in year two, the prepayment schedule belongs in the model.

Small-balance loans are usually recourse. At this size, expect a full personal guarantee from every owner above the lender's ownership threshold. The LLC holds title, and you are still personally liable for the debt. Non-recourse loans exist in the agency small-balance programs and on larger deals, and even those carry carve-outs that bring back personal liability for fraud, waste, unauthorized transfers and bankruptcy filings. Ask about recourse on the first call. Do not assume the entity answers the question.

The lender stays involved. Expect to send annual operating statements and a rent roll. Some loans test coverage every year, and some require you to keep operating accounts at the bank.

The application: what a commercial lender wants to see

A residential file is about you. A commercial file has two subjects, and the building goes first.

For the property:

• Current rent roll with lease dates, deposits and any delinquency.
• Trailing 12-month operating statement, plus the prior two or three years if the seller has them.
• Copies of leases.
• Tax bills, insurance quote, utility history.
• Your pro forma and a short business plan if you are changing anything.

For the sponsor:

• Personal financial statement and a schedule of real estate owned.
• Two or three years of personal and entity tax returns.
• Entity documents: articles, operating agreement, ownership chart.
• Proof of liquidity after closing.
• Experience, or a named third-party manager if you have none at this size.

Lenders commonly look for net worth around the loan amount and post-closing liquidity near 10% of the loan. Both are rules of thumb that vary by bank. First-time commercial borrowers get approved regularly, but usually with a lower loan amount, a professional manager, or a stronger guarantor beside them.

The lender orders a commercial appraisal and an environmental report, and sometimes a property condition report. You pay for all of them, usually up front. Closings commonly run 45 to 75 days, so a 30-day financing contingency copied from a house contract is a mistake.

Rate and cost reality for small-balance commercial in 2026

I will not quote a rate here. Commercial pricing moves every week, and a stale number is worse than none. Here is how pricing works, so you can read a quote.

Fixed commercial rates are an index plus a spread. The index is usually the Treasury yield matching the fixed period, or the bank's own cost of funds. Floating rates are quoted over SOFR or Prime. The spread is wider on small loans than on large ones, because the legal and underwriting work is the same either way. Expect quotes at or above what you would see on a conventional investment property loan, for a shorter fixed period.

What to look up the week you shop: the 5-year and 10-year Treasury yields. Then ask three lenders the same eight questions: rate, index and spread, fixed period, amortization, maximum LTV, minimum DSCR, recourse, and prepayment. Quotes usually differ more on terms than on rate.

Closing costs are heavier than residential. An example budget for the $594,000 loan, with figures that are illustrations to be replaced by real quotes:

That is 3.2% of the loan. Added to the $306,000 down payment, cash to close is $325,140 before operating reserves.

Underwrite to the lender's math before you offer

The fix is to size the loan before you price the building.

1. Rebuild NOI the way a lender will: 5% vacancy or actual if higher, a management fee, reserves per unit, and taxes at the post-sale assessment.
2. Run all three tests at a rate half a point above your quote. Take the smallest loan.
3. Work back to price. In the example, a buyer with $225,000 for a down payment and a $594,000 loan can pay $819,000, which is 72.5% LTV. That is the offer the financing supports, and the lender's NOI worksheet is the evidence to hand the seller's broker.
4. Test the exit. Size the refinance at the balloon date with flat NOI and a higher rate. If it does not cover the balance, you need a longer term, more amortization paid down, or a lower price.
5. Get term sheets from three lenders before the inspection period ends, and compare recourse and prepayment before rate.

Deal analysis itself is covered in how to analyze a multifamily deal and the small multifamily operator playbook. For the financing side, the multifamily calculator underwrites like a commercial lender, with NOI, DSCR and debt yield on the same screen where you analyze the deal. Enter the lender's vacancy, management and reserve assumptions, and the loan amount you see is the one the bank will offer.