Many seasoned Bay Area investors cut their teeth on 2–4 unit properties. The move into 5+ unit or mixed-use buildings seems natural — until the financing conversation changes.

I’ve worked with investors for decades who were surprised to learn that commercial rules are not residential rules, even if the property still “feels” similar.

The Investor Profiles I See Most Often

  • Long-time self-employed investors with conservative tax returns
  • Owners expanding into properties with non-conforming or unwarranted units
  • Residential 2-4 unit building investors discovering attractive 5–10 unit or mixed-use pricing and assuming familiar loan terms

That assumption often derails the transaction.

A Brief Lending Reality Check

Post-2008 regulations reshaped real estate finance. Traditional banks adopted global underwriting, examining the borrower’s entire financial picture — not just the property.

Commercial lenders historically took a different approach:
Does the building itself support the debt?

This is measured through Debt Service Coverage Ratio (DSCR) — typically requiring $1.25 of net income for every $1.00 of mortgage payment.

The Five Friction Points That Blocked Deals

  1. Down Payment Expectations
    San Francisco multifamily deals often required ~50% down. Sometimes less when there were vacant units.
  2. Loan Term Limitations
    Fixed terms were short, with balloons and refinance risk.
  3. Expanded Expense Analysis
    Vacancy, management, maintenance, and reserves reduced borrowing power.
  4. Limited Interest-Only Structures
    Cash-flow flexibility was minimal.
  5. Mandatory Deposit Relationships
    Banks required liquidity beyond the down payment.

What’s Different Now

Alternative lenders — often outside the traditional banking system — have shifted the landscape:

  • Lower effective down payments driven by NOI-focused underwriting
  • 30-year fixed options available for multifamily and mixed-use assets
  • Fewer operating expenses counted, increasing loan proceeds
  • Extended interest-only periods, improving cash flow
  • No required deposits, freeing capital for reserves or future deals
  • No borrower tax returns or employment verifications, this is automatic and may or may not appeal as a selling point depending on how the borrower files their tax returns

On a $2MM property, this can mean hundreds of thousands of dollars less capital required upfront.

Final Thought

Moving from 2–4 units to 5+ units isn’t about stretching — it’s about re-thinking structure.

Investors who succeed understand that commercial lending is a different chessboard — and the rules matter.

🔎 BROKER’S EDGE – Smarter Real Estate Lending
🤝 Looking out for your Best Interest, and Helping Homeowners, Investors & Small Business Owners since 1990

📞 Steven Hook | Residential & Commercial Mortgage Broker

📱 415-260-9376 | 📠 415-449-3428

🎓 MBA | CMPS | CMA

👉 Schedule a Call
🌐 SanFranciscoLoanOptions.com
🌐 shook@Uamco.com or smhloans007@gmail.com

🆔 NMLS #303544   Ca DRE #00987187

This content is provided for informational purposes only and is not a loan commitment or guarantee of financing. Loan programs, rates, terms, and conditions are subject to change and borrower qualification. Individual results may vary.

Posted in Uncategorized