How to Finance a 5 Unit Property: A Comprehensive Guide

Real estate investors with growing long term and short term rental property portfolios are willing to learn how to finance a 5 unit property.

As a matter of fact, it looks different from buying a single family home, a townhouse, or even a 2-4 unit property, as 5 unit properties do not qualify for conventional mortgages. Thus, investors need to look into alternative financing options that are applicable to such a property type and within their budgets.

Table of Contents

1. Commercial Real Estate Loan
2. Real Estate Syndication
3. Real Estate Partnership
4. Real Estate Crowdfunding
5. Hard Money Loans
6. Private Money Lenders
7. Seller Financing
8. How to Finance a 5 Unit Investment Property: 5 Tips

In this article, we’ll look at 7 different loans and strategies that both landlords and short term rental investors can use to finance the purchase of a property with 5 (or more) rental units. We’ll also provide you with 5 specific tips that will help you find the most profitable small multifamily real estate investing opportunities. We’ll teach you how to finance them in the best possible way.

We’ll also show you what real estate tools you can use in the process for the most favorable investment outcomes.

Let’s get started!

Commercial Real Estate Loan

One of the best loans for investment property with 5 housing units is a commercial real estate loan. Although there are similarities between commercial loans for financing a 5 unit property and conventional mortgages, they are two different loan types and should be treated differently.

In most cases, commercial loans are taken by business entities rather than individuals, which means that you’d need to form an LLC, corporation, partnership, or another company to qualify. Usually, banks provide such type of financing. However, insurance companies, private lenders, and others might also lend money to commercial real estate investors.

Similar to residential mortgage loans, solid credit history and rating are required from the borrower.  The financial institution will look into your and your partners’ credit score. It is especially true in case you’re establishing an entity for the sole purpose of buying a 5 unit property, so it doesn’t have any credit history.

In terms of the size of the loan, most commercial real estate loans range between 65% and 80% of the property price. It means that investors still need to provide a sizable down payment, especially since multifamily properties cost more than single family homes, apartments, and condos.

Another commercial loan requirement for real estate investment properties to keep in mind is the loan term. Most frequently, it ranges between 5 and 20 years, so you need to make sure that the rental income you’ll generate from the 5 units will be more than enough to repay the loan and make profit.

The most significant benefit of commercial real estate loans is that they are established loans provided by reputable lenders. One drawback is the eligibility requirements, which might not fit the situation of all investors.

Related: 3 Best Investment Property Lenders for 2023

Real Estate Syndication

A second way of how to finance a 5 unit property is through real estate syndication. It is preferred by people who don’t mind doing the active work but lack the financial capability to buy a rental property on their own.

A syndication entails a formalized partnership between a sponsor and a number of investors. The sponsor is responsible for finding the market and rental property for sale. They also do the financial analysis, negotiate and close the deal, and manage the investment. The sponsor is not expected to invest more than 20% of the property value.

Meanwhile, the investors provide the bulk of the money—anything from 80% to 95% of the property value. In exchange for their financial commitment, they handle very limited tasks.

The exact rights and responsibilities of each party must be agreed on, written down, and signed on before buying an investment property. It is the only way to guarantee that there won’t be any disagreements and disputes between the involved parties down the road.

The main advantage of the said financial arrangement is the unlimited budget and the flexibility in terms of requirements and terms. The more investors that you add to your real estate syndication, the more expensive property you can buy. That’s why the strategy works well for a 5 unit property.

On the flip side, if you don’t have much initial capital and end up being the sponsor, you’ll be far from making passive income from real estate investing. You’ll need to do a lot of hard work to make the endeavor profitable.

Real Estate Partnership

Yet another strategy of how to finance a 5 unit investment property is via a real estate partnership. It is similar to syndication but is even less regulated and limited. You can agree on any formal structure, rights and responsibilities breakdown, and financing scheme. They are based on your and your partners’ skills, interests, availability, and financial abilities.

The key to a successful real estate partnership for buying and running a 5 unit property is agreeing on every single detail in advance and writing down everything in a formal contract. Then, each partner needs to sign the contract to ensure that it has legal standing. It will be the reference point for any situation that might arise in the future.

Depending on the partnership you go for, the money for the investment property can come from each partner’s pocket or you can apply together for a commercial or another type of loan. So, you can join a deal even if your financial resources to invest are limited.

The best perk of this financial method by far is the endless flexibility. You can come up with terms that fit your specific financial situation and investment expectations.

The main risk, on the other hand, is finding reliable partners who have not only the real estate skills and experience and the financial means but also the required morale. To succeed with this strategy, it’s best to invest together with people you already know personally or through your network. Moreover, you need to sign a clear contract that covers all possible scenarios.

Real Estate Crowdfunding

A fourth strategy that makes it possible to finance the purchase of a 5 unit property without being a real estate mogul is crowdfunding. Though that’s a relatively new financing method, the size of the global real estate crowdfunding market is forecast to reach $251 billion by 2023.

Crowdfunding a 5 unit investment property entails collecting relatively small amounts of money from a lot of individual investors to buy a commonly shared property. You charge them specific fees for doing all the active work, like choosing a property, buying it, and managing it. The cash flow is distributed among investors depending on their share of initial capital.

In a way, this resembles a syndication or a partnership, but there are also major differences. In real estate crowdfunding, you work with a large number of investors that you don’t even know in person. All the communication and agreements are done online through a dedicated platform.

The main advantage of crowdfunding is that you can collect a big amount of money in no time as you need only small contributions from many investors. The disadvantage is that you will have a lot of active work to establish the platform, choose the property, and ensure it results in positive cash flow.

Hard Money Loans

If you’re looking for yet another way how to finance a 5 unit rental property, you can consider borrowing from hard money lenders. They are real estate investors who lend money to other investors to buy properties. The way that hard money lenders profit is from the interest that they are being paid on the loans that they provide.

Hard money lenders are usually financial institutions that are smaller and less formal than banks and other mortgage providers. However, they are not individuals either.

With a hard money loan, the required down payment is usually 10%-35%, which makes it more affordable than a commercial real estate loan. Nevertheless, the interest rate is high (at 8-%15%), and the repayment period is short (up to around 3 years).

It means that investors need to conduct a very thorough rental property analysis before taking on hard money loans. Repaying the loan is not easy unless you generate strong positive cash flow month after month. Otherwise, you risk losing your income property altogether.

So, the benefits of the said strategy include the loose requirements and the large loan amount. The drawbacks are the interest rate above conventional mortgage rates and the restricted repayment period.

Related: 3 Crucial Tips on Using Hard Money Loans for Real Estate Investments

Private Money Lenders

When you want to finance a 5 unit property, you can also choose a private money loan. The loans are provided by private lenders, who are individuals that lend money to active investors and make a profit from the interest. Indeed, many private money lenders started as real estate investors, and when they got enough capital, they switched towards such a more passive strategy.

Private money loans are one of the most flexible investment property loans that you can possibly take. The down payment, the loan amount, the interest rate, and the repayment period all depend on the individual lender and your agreement with them. Sometimes, the lenders might come from your own network and offer you very favorable terms.

Generally speaking though, if you consider borrowing a private money loan to buy a 5 unit property, be ready to pay a relatively high interest rate and repay in a few years.

The best thing about private money loans is the flexibility and the lack of formal requirements in terms of credit history and down payment. In this way, even beginner investors with poor credit scores get access to investing in real estate.

However, they will likely need to pay a significant interest and return the money fast. If they fail to do so, they can lose their property, which is usually used as a collateral.

Seller Financing

The last strategy of how to finance a 5 unit property is seller financing. In this case, the property seller acts like the bank so that you pay the money to them directly instead of going through a middleman. To do it though, you need to find a seller who’s willing to get their money over the next few years rather than immediately.

Seller financing can be somewhat flexible, but in most cases, the interest rates range between 8% and 10%, and the payment period is about 5 years. After making monthly payments, at the end, the buyer usually makes a balloon payment for the rest of the amount.

The strategy’s pros include the possibility for some flexibility and the avoidance of a middleman. The latter saves money from various fees that established financial institutions like banks charge.

The main disadvantage is that it’s hard to find a seller who’s ready to postpone their financial gains over the course of a few years. Moreover, you’ll end up paying a lot of money in interest (more than with a commercial loan), and you’ll have only a few years to pay for the entire 5 unit property. In addition to paying monthly, you’ll also need to save for the balloon payment.

Related: Seller Financing: The Ultimate Guide for Real Estate Investors

How to Finance a 5 Unit Investment Property: 5 Tips

With so many options on how to pay for a 5 unit rental property, you need to choose the method that’s specifically best for you. Once you’ve done it, you still need to proceed with caution and care in order to be successful and make a good profit.

Here, we offer you 5 specific tips on how to invest in a small multifamily property for maximum return:

Tip #1: Take Into Account Your Finances

The first step in financing a 5 unit home is evaluating your financial situation and estimating how much you can afford to spend on a down payment and on loan monthly payments. The calculations should include your savings, your income streams, and the cash flow you expect to make from your investment property.

One of the worst mistakes you can make as an investor is to go for a property and a loan that you cannot afford. As there are multiple ways to finance a 5 unit property, you should make the right choice.

Tip #2: Consider Your Background and Knowledge

Different financing methods come with different requirements and expectations from different parties. For example, if you opt for being a sponsor in a real estate syndication or for organizing a crowdfunding investment project, all the work will fall on you. It means that you need a previous real estate career and enough experience to handle such a massive endeavor.

If you lack the necessary background and skills, you can look into another type of partnership where you invest more money but share responsibilities with other investors. So, whichever financial option you choose, make sure it’s in line with your experience, as well as strengths and weaknesses.

Tip #3: Find the Best Real Estate Market for a 5 Unit Property

Investing in real estate is a local business. You will earn very different results based on the market where you buy a property. You need to conduct thorough market analysis to find the best place to invest in multifamily real estate properties.

Beginner investors who are clueless about where to get started can use Mashvisor’s Market Finder tool to locate the best locations for investing in small multifamily rental properties. The tool allows investors to conduct nationwide rental market analysis in a matter of minutes.

All you need to do is to enter any of the following search criteria:

• Property value based on your personal financial analysis
• Preferred property type
• Expected monthly rental income
• Required occupancy rate
• Cap rate

You can also choose Mashmeter score, school ranking, and crime and safety ranking in your market search. The more filters you use, the more precise and accurate the selected markets will be to fit your exact investment requirements.

As soon as you enter all your expectations, you’ll get a list of the top US markets that match your requirements. You can access detailed information on each city to view all the multifamily real estate metrics that you need to take into consideration when choosing a market for your 5 unit property.

Moreover, you can use the interactive heatmap to locate the best neighborhoods for multifamily investments within each city.

To find the best markets for 5 unit investment properties, sign up for a 7-day free trial of Mashvisor.

Tip #4: Search for Properties for Sale in a Smart Way

Finding the best market for a 5 unit property to finance is a must but is not enough to guarantee a successful investment. You also need to locate the best property, as not all properties make for equally good rentals.

You can use Mashvisor’s Property Finder tool to search for multifamily investment properties for sale.

The available search filters include:

• Location
• Budget
• Number of bedrooms
• Number of bathrooms

In this way, with a few clicks of a button, you can get access to active multifamily listings as well as offline properties that promise to be profitable real estate investments. The results will be sorted starting from the highest cash on cash return down. It will help you save months of looking for good opportunities while still getting the best possible outcomes.

Tip #5: Use Real Estate Investing Tools

In recent years, the real estate industry has seen a boom in the development and use of new technology tools that help investors and other professionals. To remain competitive among other investors in 5 unit properties, you need to make use of AI-powered tools and platforms. They can help you speed up your market analysis, property search, and property analysis.

The Mashvisor platform gives you access to the Market Finder, the Property Finder, and a rental property calculator to find and analyze the best deals.

Investing in a 5 Unit Property: Conclusion

Buying a small multifamily property to rent out to tenants can be a lucrative real estate investment. You will manage a single property that requires less upkeep and maintenance than a few single family homes, while making more rental income than from one housing unit.

Importantly, there are 7 different ways how to finance a 5 unit property, and one of them is guaranteed to fit the needs and requirements of any investor. Just follow our 5 proven tips to start on the right foot and choose the best market, property, and financing method for your specific situation. Also, remember to access Mashvisor for the most valuable tools to help you in your real estate investing journey.

To learn more about how Mashvisor can help you make profitable investments in small multifamily properties, schedule a demo with our team of real estate professionals.