Financing questions from newer investors usually arrive scrambled: should I use hard money, do I need an LLC first, why did the bank quote me a brutal rate on a 6-unit? Underneath almost all of them is one organizing fact nobody explains: your unit count and loan size decide which lending world you live in, and the rules change completely at the borders.
Here's the whole ladder, rung by rung, assembled from 17+ years of our own borrowing plus the lenders we regularly host on our community calls. Rates below carry their as-of dates on purpose; structures are the durable part.
Rung 1: Conventional (1-4 Units, Personal Income)
The 30-year fixed everyone knows. Qualification runs through YOUR income, tax returns, and debt-to-income ratio, which is exactly why investors age out of it: at some point your paper income (lovingly depreciated) stops supporting new loans. Investor pricing runs above owner-occupied, though at smaller loan sizes the premium can be modest. Conventional money is the cheapest you'll get on 1-4 units; ride it as long as your DTI allows.
Rung 2: DSCR (1-4 Units, Property Income; Stretches to 9)
DSCR loans qualify the property instead of you: does the rent cover the payment (taxes and insurance included) with margin? Lenders want a debt service coverage ratio around 1.2, they're LLC-friendly, and there's no tax return colonoscopy.
The numbers to know: expect roughly 0.5 to 1 point above conventional pricing (as of mid-2025, experienced investors saw around 6.75%, newer investors low 7s), $75,000 to $150,000 minimum loan sizes depending on the lender, purchases to around 85% LTV with cash-outs capped near 75% (as quoted to our community in late 2024). Two trap doors: prepayment penalties (the spread between a 3-year and 5-year prepay is only about an eighth to a quarter point, while 2-year to 3-year jumps three quarters of a point, which is why the 3-year is usually the sweet spot per the lender we hosted in September 2024), and market-rent appraisals, so underwrite to the low end of the rent range. Useful obscurity: DSCR-style products can stretch to 9 units, keeping you out of commercial underwriting entirely.
Rung 3: Hard Money / Fix-and-Flip / Construction (Condition Deals)
When the property can't qualify for permanent debt (bad condition, no income yet), you buy time with expensive money: hard money and bridge loans at 10 to 12% (model 12% to be safe), or DSCR construction products at 8.5%+ with leverage up to 90% of purchase and 100% of rehab for experienced borrowers. These loans are priced to be exited: your permanent financing plan should exist before you sign, and the refinance test should pass before you buy. Watch the fine print on experience claims, because lenders verify them days before closing, and leverage drops when they do.
Rung 4: The Commercial Dead Zone (5+ Units, Small Loans)
Here's the border nobody warns you about. At 5+ units you're in commercial lending, and commercial has a size problem: 5+ unit properties with loan amounts under roughly $1.1 million, as one of our guest lenders put it, "just get slaughtered with rates." Too big for residential products, too small for the agencies to care.
Escape routes: keep deals at 9 units or fewer to stay in DSCR land, go bigger so the loan clears the threshold, or work local portfolio banks who keep loans on their books and price relationships, not just deals (this is also HELOC country).
Rung 5: Agency and Bank Commercial (The Real Leagues)
Above that threshold, Fannie/Freddie commercial multifamily offers the best rates and terms in the business, in exchange for strict financials and stabilized occupancy (roughly 1.0+ DSCR and 80%+ occupancy; unstabilized buildings bridge first). Expect reserve requirements (6 to 12 months of payments demonstrated, not escrowed), and know the bank's sizing rules of thumb: commercial lenders commonly want net worth comparable to the loan amount and about 10% of it liquid.
Commercial debt's real cost isn't the rate, it's the terms: balloons and rate resets on YOUR timeline whether the market cooperates or not. Calendar every balloon the day you close (I've forgotten one; don't), and remember the line a member of our community said on a call that stuck with me: everyone he knows who's lost money in real estate, their debt is what got them.
Reading the Ladder
Three meta-rules that outlast any rate environment. First, sequence matters: use cheap conventional slots early, DSCR as you scale, commercial when the deals genuinely justify it. Second, a good broker asks about your deal, your liquidity, and your priorities (speed vs leverage vs rate) before quoting, and if you shop lenders like a commodity ("just text me terms"), you'll get commodity results; here's how I run a loan shopping process. Third, before originating any new debt, check whether better debt already exists on the property: assumable loans and seller carries frequently beat anything a lender can originate today (the terms conversation).
The ladder isn't advice to climb as fast as possible. It's a map so the bank's rules stop surprising you, because the investors who get hurt are rarely the ones who knew exactly which world their deal lived in.
FAQ
Q: What is a DSCR loan and who should use it? A: A loan qualified on the property's rental income covering the payment (typically a 1.2 ratio), not your personal income. It's the standard tool for investors whose tax returns no longer support conventional loans, with rates modestly above conventional and minimum loan sizes around $75,000-150,000.
Q: Why are loans on 5-8 unit buildings so expensive? A: They fall into the commercial dead zone: commercial underwriting with loan sizes too small (under roughly $1.1 million) for agency programs. Solutions: stay at 9 units or under with DSCR-style products, buy bigger, or use relationship-priced local portfolio banks.
Q: What do commercial lenders require for a multifamily loan? A: Commonly: net worth near the loan amount, roughly 10% of the loan in liquidity, 6-12 months of demonstrated reserves, stabilized occupancy around 80%+ with 1.0+ debt coverage, and your full financial story. Unstabilized properties take bridge debt first.
Q: Should I avoid prepayment penalties on investment loans? A: In a falling-rate environment, favor shorter prepays. Pricing quirk worth knowing: dropping from a 5-year to 3-year prepay costs only about an eighth to a quarter point, while 3-year to 2-year jumps about three quarters, making the 3-year the usual sweet spot. Run the break-even for your hold plan.
I'm not a financial advisor or lender, and this isn't lending advice. Rates and terms here carry their as-of dates and change constantly; verify current structures and pricing with your own lenders.
