A DSCR loan on a duplex, triplex or fourplex works the same way it does on a single family rental, with one change that matters: the lender adds up the rent from every unit and divides that total by the one monthly payment on the building. Our program finances 2 to 4 unit rentals on long term leases, closes in an LLC, and qualifies on that combined rent with no tax returns or pay stubs. The differences show up in the details. The appraisal uses a different form, each unit needs its own lease or market rent, insurance usually costs more, and you cannot live in one of the units. This guide walks through each piece and a full worked example so you can test a small multifamily deal before you write an offer.
How the ratio works on more than one unit
DSCR is monthly rent divided by monthly PITIA, meaning principal, interest, taxes, insurance and any association dues. On a single family house there is one rent. On a fourplex there are four, and the lender adds them together.
That has a useful effect. Small multifamily properties often produce more rent per dollar of purchase price than single family homes in the same neighborhood, so they can clear a ratio that a house at the same price could not. It also has a cost. One vacancy on a duplex removes half of the income, so lenders look closely at how each unit's rent is supported.
The thresholds are the same as on any DSCR loan. Above 1.25 is strong and prices best, 1.0 means the rent covers the payment exactly and still qualifies, and under 1.0 does not qualify on our program. You can run any property through our DSCR calculator using the combined rent.
A worked example on a duplex
Say you are buying a duplex for $350,000 at 80% loan to value, so the loan is $280,000. At an example rate of 7.5% on a 30 year fixed, used here only to show the math and not as a quote, principal and interest come to about $1,958 a month.
- Principal and interest: $1,958
- Property taxes: $225 a month
- Insurance: $175 a month
- HOA: none
- Total PITIA: $2,358
Unit A rents for $1,350 and unit B for $1,300. Combined rent is $2,650. Divide $2,650 by $2,358 and the ratio is about 1.12. The deal qualifies with room to spare.
Now suppose unit B is vacant at closing and the appraiser sets its market rent at $1,250 instead. Combined rent drops to $2,600 and the ratio to about 1.10. Still fine. The lesson is that the ratio holds up when the rents are supported. Where a deal falls apart is when a seller's rent roll shows numbers the appraiser will not confirm.
The appraisal: Form 1025 and the rent schedule
A single family rental is usually appraised on a standard residential form with a separate rent schedule attached. A 2 to 4 unit property is appraised on the Small Residential Income Property Appraisal Report, commonly called Form 1025. It does two jobs in one report.
- Value: the appraiser compares your building to recent sales of similar 2 to 4 unit properties, and often also looks at value per unit and per room.
- Rent: the appraiser lists comparable rentals for each unit type and gives an opinion of market rent for every unit, alongside the actual lease rents you provide.
Two practical points follow. First, comparable sales for small multifamily can be thin in some neighborhoods, which can make the value harder to support than on a house. Second, the appraiser's rent opinion matters as much as the value, because it can cap or replace the rents used in the ratio. If a lease rent sits well above what the appraiser supports, expect the lower number to be the one that counts.
What you need for each unit
Leases
Expect to provide the current lease for every occupied unit. Leases that are month to month, expired, or missing for one unit are not automatically a problem, but they will get questions, and the lender may lean on the appraiser's market rent for that unit instead.
A rent roll
A simple rent roll listing each unit, the tenant, the monthly rent, the lease dates and any deposit makes underwriting faster. On a purchase, get it from the seller early and check it against the leases. Mismatches between the two are one of the most common sources of delay on small multifamily files.
Vacant units
A vacant unit can usually be counted at the appraiser's market rent. Some lenders limit how much vacancy they will accept, or ask for more reserves when a building is partly empty. Ask before you close if one unit will sit empty while you renovate it.
Costs that run higher on 2 to 4 units
None of these change the formula, but each one moves the numbers.
- Insurance. A landlord policy on a building with several kitchens and several households usually costs more than one on a single house of similar value. Get a real quote before you rely on the ratio, because insurance sits inside PITIA.
- Taxes. Some jurisdictions assess small income properties differently from owner occupied homes. Pull the actual tax bill rather than estimating.
- Utilities. If the owner pays water, sewer or a house meter, that cost is not in the DSCR formula, but it comes out of your cash flow every month. A building that qualifies at 1.05 with the owner paying water may barely break even in real life.
- Appraisal. The 1025 is more work than a single family report and typically costs more.
What does not qualify
Our DSCR program covers single family homes, condos and 2 to 4 unit properties on long term leases. These are outside it:
- Living in one unit. House hacking a duplex is owner occupancy, and our DSCR loans are for non owner occupied rentals only. An owner occupied 2 to 4 unit purchase belongs with a residential mortgage lender.
- Short term rentals. Units rented by the night or for stays under 30 days are not eligible on our program, even if the other units carry long term leases.
- Five or more units. At five units a property becomes commercial multifamily, which uses different loan products and underwriting.
- Mixed use. A storefront with apartments above is a commercial property for lending purposes.
Buying a 2 to 4 unit that needs work
A lot of small multifamily is sold tired, with one unit down for repairs or every unit overdue for updates. DSCR expects a rent ready building. When the property needs real rehab, the usual path is to buy it with a rehab loan, finish the work, lease the units, then refinance into a DSCR loan on the improved rents. Our guide to DSCR loans on properties that need work explains where that line sits.
Questions to answer before you write the offer
- What is each unit actually leased for, and does the lease match the rent roll?
- What would an appraiser call market rent for each unit type, based on what is listed nearby right now?
- What does a real insurance quote on the building cost per month?
- Who pays which utilities, and what is the owner's share each month?
- Is every unit legal and rent ready, or will one sit vacant during work?
- With all of that, does the combined rent divided by PITIA still land at or above 1.0, and where does it land if one unit comes in at a lower market rent?
If the answers hold, a duplex or fourplex can be one of the cleanest DSCR deals there is, more rent per closing, one loan, one appraisal, one insurance policy. Run the combined rent through the DSCR calculator, check the full DSCR loan requirements, and send us the property when you want terms.