Two to four units versus five and up
Lenders treat a duplex, triplex or fourplex as residential property. These are underwritten much like a single-family DSCR loan, with a residential appraisal, a rent schedule for each unit and the same PITIA-based ratio. Many California investors hold exactly this kind of building, often bought years ago and carrying significant equity.
Five units and above moves into commercial-style underwriting. Programs that serve this space still focus on property cash flow, but they look at a full rent roll, operating expenses and sometimes a trailing operating statement. Guideline sets differ widely, which is where shopping across wholesale lenders pays off.
How rent is counted on a California rent roll
On multifamily, the rent figure is the sum of every unit. Underwriters compare in-place leases with the appraiser’s market estimate. Long-held California buildings frequently have one or two units far below market because of rent stabilization or simply because the owner never pushed increases. Expect most programs to use leases in place for occupied units rather than the market figure.
Vacant units are usually counted at market rent from the appraisal, though some programs cap how much vacancy they accept. If you are mid-turnover, ask us about timing before ordering the appraisal.
Expenses that move the ratio on multifamily
Coverage on small multifamily often hinges on line items that owners underestimate:
- Property taxes that reflect a recent reassessment, if the building changed hands or was transferred
- Master insurance policies, which in some California areas now cost far more than they did a few years ago
- Owner-paid utilities such as water, sewer and trash, which some programs consider on larger buildings
- Deferred maintenance flagged in the appraisal that a lender may require you to address
Using multifamily equity to scale
A common pattern: an investor owns a fourplex free and clear or nearly so, takes a DSCR cash-out, and uses the proceeds as the down payment on another building. The new loan must still cover itself, so we run the numbers on both sides before recommending a structure.
Test a building in the DSCR calculator by entering total rent across all units, then read our California cash-out markets overview for local context. When the numbers work, start the application.