Transitioning from SFR to First 6-8 Unit Multi-Family

[Mike Hinton]

Hi Everyone - I am wrapping up my first Single-Family Rental (learned A LOT) and looking to scale into my first small multi-family asset. I am targeting buildings in the 6 to 8-unit range. My goal is to find a value-add property where I can force appreciation within 12 to 18 months, execute a cash-out refinance to do it again. Sound doable?

I am a remote investor, but I have a team in place that assisted with my initial SFR investment. They will be handling the physical on-site evaluations and due diligence for this multi-family purchase. However, because multi-family commercial dynamics are completely different from residential, I'd love to get the community's feedback on where I stand:

1. Value-Add & Operations Strategy

- Renovation Style: My plan is to update units as they naturally become vacant and bump rents to market. For those who have scaled into 6-8 unit buildings, do you prefer a phased approach as leases expire, or do you find it more efficient to turn units over all at once?

-Ancillary Income: I want to introduce additional revenue streams (pet rent, storage, laundry, parking). When evaluating a deal, do you specifically look for properties completely lacking these fees, or do you focus more on bringing existing under-market fees up to par? 

- Deferred Maintenance: I’m aiming for properties with mostly cosmetic upside and minimal deferred cap-ex. Is this a realistic "value-add" find in today's market, or do I need to get comfortable with heavier structural/mechanical lifts to find real margin?

2. Financing & Underwriting

- Down Payment: I’m expecting a 30% down payment for a commercial/portfolio loan. Is 30% standard for what you are seeing right now, or are there creative/agency products allowing closer to 20-25% down for non-owner occupants?

- Carry Costs :  Can I expect a lender to require 12 months cash reserves for carry cost?

- Insurance Budgeting: What metrics or rules of thumb are you currently using to estimate insurance premiums on a 6-8 unit asset?

3. Remote Property Management
Even with my local team handling the initial evaluation, I will be hiring a dedicated property management company for day-to-day operations from day one. What thresholds or red flags should I look out for regarding:

--- Management fees (percentage of gross receipts vs. flat monthly fees for this asset size)?

--- Leasing/placement fees and tenant screening rigor?

--- Maintenance markups (e.g., a percentage uplift on vendor invoices)?

I want to do thorough due diligence and limit my exposure to rookie mistakes. What am I missing here? If you transitioned from SFR to a 6-8 unit commercial asset, what is the #1 thing you wish you knew?

Thanks in advance for any guidance!

[Stacy Raskin]

On the lending side, there are 25% down options for a 5-8 unit 30 year fixed DSCR product- it will depend on your middle mortgage FICO score, DSCR ratio of at least a 1 and where the property is located as loan options vary state by state as lenders are licensed state by state. 6 months reserves is possible.

A 1-4 unit DSCR program generally has less stringent guidelines compared to a 5-8 unit if both programs are offered by the same lender. With the same borrower profile, a rate will be higher for a 5-8 unit program compared to a 1-4 unit program if the lender offers the same programs. An experienced, competent investment property mortgage broker can help you with options as the mortgage broker will have access to lenders that don't advertise directly to the public.

More info on DSCR loans: DSCR loans won't use your income to underwrite the loan. DSCR loans are based off of down payment, credit score and either actual or market rents so it helps to supercharge an investor's real estate goals and net worth.

Here's a bit more in detail about how rates are calculated for DSCR loans:

1. Credit score- the higher the best. 760-780+ generally gets best pricing for investment property loans with most lenders. From there every 20 point increment affect pricing differently. So for example, a 761 credit score will be in the 760-779 credit category, then going down to 740-759 and so on.

2. Loan to value ratio: The higher the loan to value ratio (LTV) is, pricing takes a hit. So your pricing will be higher for a 80% LTV loan than for a 60% LTV loan.

3. Prepayment penalties- usually 1-5 year terms. The shorter the prepayment term has an impact on increasing the rate.

4. Are you cash flowing the property? More on how that is calculated below. Is your DSCR ratio greater than 1-meaning are you cash flowing (according to the lender's criteria of mortgage, property taxes and insurance (and HOA) if applicable). Many lenders will not do a DSCR loan unless cash flowing. If they will do a loan with less than 1, the pricing takes a hit. This criteria is for 1-4 and 5-8 unit programs.

I've included an example below to help illustrate this.

So different lenders have different rates (which do vary even for DSCR loans) but these are factors they all consider.

See example below:

DSCR < 1

Principal + Interest = $1,700

Taxes = $350, Insurance = $100, Association Dues = $50

Total PITIA = $2200

Rent = $2000

DSCR = Rent/PITIA = 2000/2200 = 0.91

Since the DSCR is 0.91, we know the expenses are greater than the income of the property.

DSCR >1

Principal + Interest = $1,500

Taxes = $250, Insurance = $100, Association Dues = $25

Total PITIA = $1875 Rent = $2300

DSCR = Rent/PITIA = 2300/1875 = 1.23

If a purchase, you also generally need reserves / savings to show you have 3-6 month payments of PITIA for a 1-4 unit program (principal / interest (mortgage payment), property taxes and insurance and HOA (if applicable). If a cash out refinance, many lenders will allow the cash out to satisfy the reserves requirement for a 1-4 unit program.

DSCR lenders generally let you vest either individually or as an LLC. It's a great way to increase your net worth and these loans can also be used to pull cash out of a property as it appreciates allowing you to reinvest money into new deals. Happy to connect to discuss further.