What Is Five-Plus Units?
Five-plus-units properties (5+ units) cross from residential loan to commercial loan territory. You lose FHA and conventional residential programs; financing uses DSCR and NOI underwriting. Valuation is cap rate-based. Apartment buildings in this range (5–50+ units) are the core of small and mid-size multifamily investing. Cost per door and per-unit analysis apply. Scale increases—more units, more common areas, more operating expenses—but so does income diversification.
Five-plus units refers to multifamily properties with 5 or more dwelling units—the threshold where commercial loans replace residential loans and cap rate valuation applies.
At a Glance
- What it is: Multifamily with 5+ units; commercial loan and cap rate territory
- Why it matters: Financing, valuation, and management differ from two-to-four-units
- Key detail: No FHA/conventional residential; DSCR and NOI underwrite the deal
- Related: Commercial loan, apartment building, two-to-four units, cap rate
- Watch for: Operating expenses and common areas scale; verify expense ratio
How It Works
Financing. Commercial loans apply. Lenders underwrite on NOI and DSCR. Terms are typically 5–25 years with balloon payments. Fannie Mae and Freddie Mac have dedicated multifamily financing programs for five-plus-units—competitive rates and longer terms.
Valuation. Cap rate = NOI ÷ value. NOI comes from rent, ancillary income, minus operating expenses. Cost per door supports comparison. Cap rate by unit count often shows five-plus-units trading at different caps than two-to-four-units.
Management. 5–20 units may be self-managed or use a part-time manager. 20+ units typically need professional property management. Common areas, operating expenses, and expense ratio become more material.
Real-World Example
Park Place Apartments, 8 units, Kansas City. Purchased for $640,000 ($80,000/door). NOI was $38,400. The investor used a commercial loan—DSCR 1.25, 7% rate, 25-year amortization, 5-year balloon. Loan amount was $480,000 (75% LTV); down payment $160,000. Operating expenses included $6,400 for common areas (laundry, hallway, exterior). She added laundry income ($1,200/year) and raised rents 3% on renewals. NOI grew to $41,200. At a 5.8% exit cap, value increased to $710,000—an 11% gain in 2 years.
Pros & Cons
- Commercial loan underwriting on NOI; no personal income cap
- More units = more income diversification; one vacancy is smaller % of total
- Ancillary income potential (laundry, parking) increases with scale
- No FHA/conventional residential; higher down payment, shorter terms
- Operating expenses and common areas scale up
- Balloon risk on commercial loans
Watch Out
- Expense verification: Sellers often understate operating expenses. Verify expense ratio with actuals and benchmarks.
- Cap rate shift: Cap rate by unit count can differ from two-to-four-units; model exit at appropriate cap.
- Management transition: Moving from two-to-four-units to five-plus-units may require hiring property management.
Ask an Investor
The Takeaway
Five-plus units is where multifamily investing scales—commercial financing, cap rate valuation, and more operating expenses. Factor expense ratio and common areas carefully in multifamily due diligence.