Buying a 5-10 unit apartment building in California
TL;DR: To buy a 5- to 10-unit California building with a DSCR-style loan, the seller’s rent roll, leases and operating statement have to hold up, and your numbers have to use the tax bill you will pay after the sale. Lenders size the loan on in-place rents, not a plan to raise them. We arrange and shop the purchase loan with wholesale lenders.
Quick answer
A purchase loan on a 5-10 unit building is underwritten on the rent the building collects at closing. Before you remove contingencies, get the seller’s rent roll, leases, deposit ledger and trailing operating statement, rebuild property taxes at your purchase price under Prop 13, and get a real insurance quote. If several units are vacant or the building needs heavy work, a bridge loan may come first.
Read the seller’s numbers like an underwriter
Listing packages for small apartment buildings often show a pro forma: what the building could earn if every unit were at market rent. Lenders do not lend on that. They want the actual rent roll, the leases behind it, and an operating statement that shows what the building really costs to run.
Ask for the documents early, and check that they match. If the rent roll says unit 4 pays $2,150 but the lease says $1,980 with a concession, the underwriter will find it. Tenant estoppel certificates, where the tenant confirms rent, deposit and lease terms in writing, are common on purchases of this size and settle those questions before closing.
- Unit-by-unit rent roll with lease start and end dates.
- Copies of every lease, including month-to-month tenancies.
- Security deposit ledger and any rent credits or arrears.
- Trailing operating statement, commonly twelve months.
- Utility bills for owner-paid services.
- Local rent program registration, if the city has one.
Rebuild the expense line at your purchase price
Under Proposition 13, a sale is a change in ownership and the county reassesses the building to roughly what you paid. A seller who has owned for twenty years may be paying a fraction of the tax you will owe, and you may also receive a supplemental bill after closing. Use your own estimated tax figure in the coverage math, not the seller’s.
Insurance is the second rebuild. Older wood-frame buildings, properties near wildfire zones and coastal locations can draw fewer carriers and higher premiums. A quote in hand before you finalize the numbers is worth more than any estimate.
In-place rent, rent caps and the business plan
Many investors buy a 5-10 unit building because some units are below market. That can be a sound plan, but the loan will usually be sized on the rents in place at closing. California’s Tenant Protection Act limits how fast existing tenants’ rents can rise, and a local rent ordinance may limit it further. When a unit turns over, the owner can generally set the new starting rent.
Plan the purchase so the building carries itself on today’s rents. If it only works on future rents, consider a smaller loan now and a refinance after the higher rents are actually in place.
Timing the loan with your contingencies
The appraisal, the rent roll review and the insurance quote take time on a multifamily file. Give your contingency periods room for them, and do not remove your loan contingency until the lender has reviewed the leases and the appraisal is back. We set up the file so those items start the day you are in contract.
Why the seller’s tax bill matters on an eight-unit purchase
Same building, same rent, same loan. The only change is the tax bill the buyer will actually receive after reassessment.
Hypothetical worked example with made-up inputs to show the arithmetic. Not a quote, not an offer, and not a promise of terms. Pricing is set by the lender and is not shown on this site.
Who this fits, and who it does not
A good fit when
- You are buying a stabilized 5-10 unit building that you will not live in.
- The seller can produce leases, a rent roll and an operating statement that agree with each other.
- The numbers work on in-place rents and your post-sale tax bill.
- You can document reserves after the down payment and closing costs.
Not the right tool when
- You plan to live in one of the units.
- The purchase only works if rents rise quickly after closing.
- More than a unit or two is vacant or uninhabitable at closing.
- The seller will not provide leases or an operating statement.
How the file moves
Before you write an offer
Send the listing package. We flag pro forma rents, missing documents and likely tax and insurance changes.
In contract
Collect the rent roll, leases, deposits, operating statement and estoppels. We start the program comparison.
Appraisal and review
The lender orders an appraisal with an income approach and reviews the leases against the rent roll.
Close
Entity documents, insurance binder and title wrap up. The lender funds the loan.
Questions investors ask about this loan
Will the lender count the higher rents I plan to charge after I buy?
Usually not at first. Lenders generally use in-place rents, checked against market rent from the appraisal. In California, increases for existing tenants are also limited by the Tenant Protection Act and any local ordinance. Many investors refinance after the higher rents are in place.
Do I need tenant estoppels on a 5-10 unit purchase?
Many lenders ask for them on buildings this size, and they protect you as the buyer either way. An estoppel is the tenant’s signed confirmation of rent, deposit and lease terms.
How does Prop 13 change my numbers on a building I am buying?
A purchase is generally a change in ownership, so the county reassesses to market value and may send a supplemental bill. Base the tax figure in your coverage estimate on your purchase price, not the seller’s current bill.
Related reading
Send us the building, not just the borrower
Address, unit count, a current rent roll and the loan you have in mind. We read it the way a 5-10 unit underwriter will and tell you which wholesale programs are worth the appraisal.