Commercial and multifamily loans: the building carries the file

Once a property has five units or more, or its income comes from businesses rather than households, it leaves the residential system entirely. The loan is written against an operating asset, so the rent roll, the real expenses and your ability to run the place are what decide it.

What it is

The dividing line is units and use. One to four units is residential property no matter who lives there, and that is where conventional and most DSCR programs stop. Five units or more is commercial multifamily. Mixed use, where apartments sit above a storefront, falls on one side or the other depending on how much of the building is commercial, measured by space or by income, and lenders draw that line differently. True commercial, meaning retail, office, industrial, self storage and the occasional special purpose building, is its own world again, priced on who the tenants are and how long they are committed.

Above that line, underwriting starts with what the property earns once it is actually operated. It begins at the rent roll, then tests it against what has really been collected. Out come vacancy and credit loss. Then taxes, insurance, management, repairs, and a reserve for the roof and the parking lot. What survives that subtraction is net operating income, and the relationship between it and the payment is what the lender is pricing. An underwriter will often assume higher expenses and more vacancy than your own statements show, which is a common reason a loan comes back smaller than the owner expected. You are underwritten too: credit, net worth, liquidity after closing, and whether you have run a building like this before. The lender is taking a view on the operator and the asset at the same time.

The structure differs in ways that matter more than the rate. Terms are commonly shorter than the amortization schedule, which leaves a balance due at maturity, so the refinance or the sale is part of the deal from the first day. These loans commonly close in an entity, and the entity on its own does not usually remove a personal guarantee. Third party reports go well past an appraisal, often to an environmental review and a property condition report, they are commonly paid up front, and they add weeks to a timeline that is already longer than residential. Then the honest headline: commercial terms vary far more than residential ones. There is no single rate sheet behind this market the way there is in residential, so two lenders can look at the same building and come back with structures that are not comparable on price alone. So we read the structures side by side rather than the rates, and we do it before you commission a single report.

Who it fits

• Owners of a one to four unit rental buying the next building up, where residential programs stop and most of what you learned on the last file does not carry over.
• Buyers of mixed use property, where apartments sit over a storefront and part of the income is commercial.
• Investors acquiring retail, office, industrial or self storage, where the leases rather than the comparable sales carry the value.
• Owners of a stabilized building refinancing out of a bridge loan, a construction loan, or a balance that is coming due at maturity.

What we will need

• The rent roll: every unit or suite, who is in it, what they pay, when the lease started and when it ends, and what is actually being collected.
• Operating statements for the trailing period, plus the current tax and insurance bills. Expect the lender to test your numbers against its own assumptions.
• The leases on any commercial space. Who pays the taxes, insurance and maintenance changes the income a lender is willing to use.
• Your history as an operator, the ownership entity and its organizational documents. If a third party manages the property, tell us who.
• A personal financial statement. Net worth, liquidity and reserves after closing, which commercial lenders commonly weigh against the loan amount rather than against the monthly payment.

The honest trade

• Getting to the closing table costs more than it does on the residential investor side, and pricing commonly runs higher too. Worse, the third party reports are commonly paid up front, so you can spend real money on an appraisal and an environmental review and still not end up with a loan.
• The term is usually shorter than the amortization, so a balance comes due at maturity. If occupancy or the market is worse on that date, the refinance you were counting on becomes the actual risk in the deal, not the rate.
• Recourse and a personal guarantee are common, so putting the building in an entity does not by itself put the entity between you and the debt. Non-recourse structures do exist on some assets, and they generally ask something in return, in price or in leverage.
• Prepayment terms are commonly harsher than the residential version, and because the variance between lenders is so wide, two offers on the same building may not be comparable at all. Read the exit terms before you read the rate.

Questions

What makes a property commercial instead of residential?

Units and use. One to four units is residential property even if you never set foot in it, which is why conventional and most DSCR programs stop there. Five units or more is commercial multifamily, underwritten on the whole building's income rather than on what one door rents for. Mixed use sits in between, and lenders split it differently depending on how much of the building the commercial space takes up and how much of the income it produces. If you are not sure which side your property falls on, settle that first, because it changes every other answer.

How is the loan amount decided?

By what the property earns, then capped by what it is worth. The lender rebuilds your operating statement, subtracts vacancy, management, repairs and reserves, and compares what is left to the payment. The appraisal runs on the same logic, valuing the building on its income rather than mainly on nearby sales. Two things follow. Expense assumptions you would call too conservative can shrink the loan, and the appraised value can land under your contract price, which moves the equity you have to bring. Better to hear that now than after the report lands.

Why does a commercial loan have a balance due at the end?

Because the term and the amortization are commonly different lengths. The payment is calculated as though the loan runs for decades, while the loan itself matures much sooner, which leaves a balance at maturity. It is not a trick, it is how this market prices a risk few lenders want to hold for decades. What it means for you is that a sale or a refinance belongs in the plan from day one, with a view on what the building has to be earning by then. The maturity date is part of the deal, so treat it like one.

Do I need experience to buy my first commercial building?

It helps, and lenders ask about it directly, because they are underwriting the operator alongside the asset. A first commercial purchase is not out of reach, and owners cross that line constantly. What commonly makes the difference is more equity, stronger liquidity after closing, a simpler property, or professional management named in the file. Nobody can promise you an outcome, us included. What we can do is tell you early where your file looks thin to an underwriter, and whether a smaller or simpler building is the better first move.