California DSCR loans for 5-10 unit apartment buildings

Why five units is where the loan changes

Residential mortgage rules treat one to four units as housing. The fifth unit moves the building into multifamily, and most lenders route it to a different desk with a different checklist. The rent-based idea stays the same: the property has to carry its own debt. What changes is how much of the building the lender wants to see.

On a duplex, an underwriter can live with a lease and an appraiser’s rent opinion. On a seven-unit walk-up, the underwriter wants the whole picture: every unit, every lease date, every concession, a trailing operating statement, and an appraisal that leans on the income approach and recent small apartment sales.

• Rent roll first: unit, tenant or vacant, lease dates, current rent, deposit, last increase.
• Operating history: commonly a trailing twelve-month statement of income and expenses.
• Appraisal: income approach plus comparable 5-20 unit sales, not single-family comps.
• Program fit: not every DSCR lender goes past four units, and those that do set their own limits on unit count, location, condition and minimum loan size.

How the coverage ratio is calculated on a small building

The basic arithmetic is simple. Add up the monthly rent the lender will count, then divide by the monthly principal and interest plus property taxes, insurance and any association dues. A result above 1.00x means the rent covers the payment. Each lender sets its own minimum, and the minimum can move with unit count, condition and loan size.

Small-balance multifamily lenders often add a second test based on net operating income, which subtracts operating costs that a single-family file ignores: owner-paid water, sewer and trash, common-area electricity, repairs, a management allowance and a vacancy factor. A building that clears the simple test can still be tight on the NOI test, so we run both before a file goes out.

The California items that move a 5-10 unit file

California adds four recurring questions to every small apartment file. First, the Tenant Protection Act (Civil Code § 1947.12) caps annual rent increases on most covered housing more than 15 years old, so lenders size today’s in-place rents rather than a plan to raise them. Second, many cities have their own rent stabilization ordinances that reach most of the older 5-10 unit stock. Third, Proposition 13 reassessment means a buyer’s tax bill is rebuilt from the purchase price. Fourth, insurance on older wood-frame buildings, wildfire-exposed hillsides and coastal blocks can be harder to place and has to be quoted, not guessed.

Some cities also require seismic retrofits of soft-story wood-frame apartment buildings. If a building is on a city list and the work is not finished, expect the lender to ask about the scope, cost and deadline.

Where a broker fits on this size of building

We are a mortgage broker. We arrange and shop financing from wholesale lenders, and the lender underwrites and funds the loan under its own guidelines. On 5-10 unit buildings that matters, because the set of programs that accept five-plus units is smaller and their rules differ more than they do on single-family rentals.

Our job is to read the rent roll the way an underwriter will, flag rent-cap and local ordinance questions early, and send the file only to programs whose unit-count, location and condition rules fit it. We arrange business-purpose loans on non-owner-occupied buildings only. Every unit has to be rented to tenants.