Master Class: Multifamily Loans for Beginners

Thinking about buying your first multifamily property but unsure how to get the loan? This master class breaks down everything you need to know to secure financing—even if you’re brand new to real estate investing.

In this guide, we’ll walk through:

1. What lenders want to see in you and your deal
2. The key differences between residential and commercial multifamily loans
3. What lenders like (and don’t like) about your multifamily deal
4. How to build credibility as a first-time investor

Why Loans Matter for Beginners

Let’s start with the obvious: loans are essential for beginners because they allow you to buy multifamily properties using other people’s money. That’s how you build wealth faster. Faster than what? Faster than single-family homes.

Here’s why:

• Multifamily properties generate more income per unit, allowing for quicker scalability.
• Economies of scale kick in—maintenance, management, and upgrades become more efficient.
• Appreciation and cash flow are amplified when you own multiple doors under one roof.

There’s simply no comparison. A multifamily investor builds wealth exponentially faster than a single-family investor.

Mastering Multifamily Loans

There are two main types of multifamily loans: residential and commercial.

1. Residential Multifamily Loan (2–4 Units)

A four-unit apartment building falls under residential lending. It’s treated like buying a home and is easier to qualify for. The focus here is on you and the property and is based largely on your personal income and credit. If you’ve ever qualified for a home mortgage, you’re already halfway there. Buying a fourplex is essentially buying a home—with a few extra doors.

2. Commercial Multifamily Loan (5+ Units)

Anything five units or greater is considered commercial. The key difference? Commercial loan approval is based primarily on the property’s income. These loans are tougher to secure, with more documentation and underwriting, but absolutely doable. Lenders, whether residential or commercial, aren’t gatekeepers. They’re financial partners who want you to succeed. If you’re prepared, they’ll hand you the keys to your first multifamily deal. One of our students recently closed her first deal—a 12-unit apartment building. Before that, she only owned her home. Now she owns a beautiful cash flowing multifamily property.

Why Start with Residential Multifamily?

You might be wondering, “Peter, you’re the commercial guy—why are you talking about four-unit residential properties?” Great question. Sometimes it’s best to start with four units, sometimes with five. I produced a video called 4-Unit vs 5-Unit Multifamily: Which is Better? That video breaks it down for you with a real-world example. In this master class, we’ll focus on how to prepare for both a residential loan and commercial loan, plus the practical steps you need to take to get approved.

Preparing for Residential Multifamily Loans (2–4 Units)

A four-unit property is considered residential, so the loan process is similar to buying a home. The lender’s focus is primarily on two things: you and the property. In contrast, commercial loans (five units and up) require a third component—the business plan.

Residential Multifamily Loans: The Basics

Residential loans can be surprisingly accessible. FHA loans may require as little as 3.5% down, while conventional loans might ask for up to 25%. Interest rates tend to be lower than commercial loans, and you can lock in a fixed rate for up to 30 years. Best of all, there are no prepayment penalties—something commercial loans often include.

What Lenders Want to See

To get approved, lenders will evaluate several key factors:

• Credit Score — Lenders will look at your credit score, which typically needs to be between 620 and 680 depending on the loan type.

• Income Stability — They’ll also want to see income stability. Can you afford the mortgage if tenants move out or emergencies arise? Do you have a job, W-2 income, and money in the bank? These are the questions they’ll ask.

• Property’s Projected Income — Strong cash flow increases your chances of approval. And if you’re planning to live in one of the units while renting out the others (a strategy known as house hacking) you’ll be in an even better position. Veterans may qualify for VA loans with zero down payment, making this an incredibly powerful way to start investing.

Preparing for a Commercial Multifamily Loan (5+ Units)

Now let’s shift to the commercial side. You might be thinking, “I have no experience—how can I get approved for a commercial loan?” The answer is: it’s absolutely possible. We’ve mentored countless students who’ve never owned a home yet secured financing for their first commercial property. If you’re committed and prepared, lenders will take you seriously.

Commercial Multifamily Loans: The Fundamentals

Commercial loans typically require a down payment of 25–30%, sometimes more depending on location and lender requirements. Interest rates are higher than residential loans, and the terms are different. You’ll often face balloon payments due in 5, 7, or 10 years, with payments amortized over 25–30 years. Why the balloon structure? Commercial lenders prefer flexibility. They don’t want to be tied to a neighborhood or asset for three decades. Instead, they want the option to reassess or exit the loan after a few years. Prepayment penalties are common and can be steep—sometimes up to 5% if you pay off the loan early.

What Lenders Evaluate in Commercial Deals

Unlike residential lenders, commercial lenders care more about the property than the borrower. The approval criteria for commercial loans centers around the property’s income and financial health. Here’s what lenders will scrutinize:

• Net Operating Income (NOI): They’ll evaluate the net operating income (NOI), which is the property’s income after operating expenses. This must be strong enough to support the mortgage.

• Debt Coverage Ratio (DCR): They’ll look at the debt coverage ratio (DCR), a key metric in commercial lending. Most lenders require a DCR of 1.2 or higher, which means your property must generate at least 20% more income than the debt payments. If the DCR falls short, approval becomes unlikely.

• Credit and Net Worth: Your credit score and net worth still matter, but a strong property can offset weaknesses in your financial profile.

• Property Condition and Location: Lenders will assess the property’s current and future condition. They also evaluate the neighborhood’s trajectory—growth, stability, or decline. They’re not just investing in you—they’re protecting their collateral (the property).

The Three Pillars of Commercial Loan Approval

To summarize, commercial lenders evaluate:

1. You – your credit, experience, and financial standing
2. The Property – its income, expenses, and physical condition
3. The Plan – your strategy for managing, improving, and profiting from the asset

When these three pillars are solid, lenders are far more likely to approve your deal—even if you’re new to real estate.

Steps to Get Approved

Whether you’re pursuing a four-unit residential property or a 12-unit commercial building, loan approval starts with preparation. Let’s walk through how to get approved for both residential and commercial multifamily loans.

Residential Multifamily Loan (Four Units)

1. Boost Your Credit—For residential loans, start by boosting your credit. Pay off credit cards and resolve discrepancies using tools like Credit Karma.
2. Gather your documentation—tax returns, pay stubs, and bank statements. Lenders want to see financial stability and proof of income.
3. Find a lender—Explore local banks, credit unions, and brokers.
4. Get Pre-Qualified—Unlike commercial loans, residential loans allow pre-qualification before selecting a property. Once you’re pre-qualified, you’ll have the confidence to make offers.
5. Choose a Cash-Flowing Property— Choose a property with a DCR of at least 1.2 to ensure strong cash flow (a key indicator of financial health).

For a quick primer on getting started, watch 3 Steps to Get Started with Multifamily Investing. It’s short, actionable, and perfect for beginners.

Commercial Multifamily Loan (Five Units and Up)

With commercial loans, the focus shifts from you to the property and your plan. Here’s how to prepare:

1. Strong Net Operating Income (NOI)—Focus on finding a property with a strong NOI. In commercial real estate, the value of the property is tied directly to its income. A higher NOI means higher cash flow and higher property value.
2. Create a Business Plan—Detail current rents, expenses, and projected rent increases. This proforma will show lenders you understand the asset and have a strategy for growth.
3. Build a Team—Including an experienced property manager if you lack experience yourself.
4. Find a Multifamily—Savvy Lender—Find a lender who specializes in multifamily properties, not someone who only does home loans.
5. Be Tenacious—You may need to approach multiple lenders or bring in a co-signer. Lack of experience, limited funds, or needing a co-signer are common hurdles, so be persistent.

For a deeper dive, check out Can You Afford to Buy Your First Commercial Property?. It breaks down affordability and strategies for beginners.

What Lenders Like—and What They Don’t

Understanding lender preferences can dramatically improve your chances of approval. Let’s wrap up with what lenders want—and what they avoid. Lenders don’t like vacant properties—they’re too risky for beginners. They also avoid high-crime areas, where rent delinquency is higher. And if you’re new to investing, managing the property yourself without experience is a red flag. Hire a professional manager.

On the flip side, lenders love properties priced below market. Yes, they exist—and we teach our students how to find them. They also love rent growth potential because higher future rents mean higher NOI, DCR, and property value. And they love strong locations. Remember, you can fix a property, but you can’t fix a neighborhood. Good locations are non-negotiable for success and lender approval.

Your First Multifamily Deal Starts Here

Remember, lenders aren’t obstacles—they’re partners. They want to see you succeed because your success secures their investment. So build your team, sharpen your strategy, and choose properties that make financial sense. And most importantly, don’t let inexperience hold you back. We’ve helped countless beginners become multifamily owners, and you can be next.

Every Successful Commercial Real Estate Investor Has a Mentor

Get your mentor here:  Commercial Property Advisors Protege Program

If you have any comments or questions, text PETER to 833-942-4516.