Can You Buy a 5 Unit Property with FHA?

One of the most common questions from aspiring real estate investors is whether you can buy a 5 unit property with FHA financing. The short answer is no. FHA loans are limited to properties with 1-4 units. Once a property reaches 5 units, it crosses the line into commercial real estate and requires different financing.

Understanding why this limit exists and what alternatives are available helps you plan your investment strategy effectively, whether that means staying within FHA guidelines or preparing for commercial financing.

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Why Does FHA Have a 4-Unit Limit?

The FHA 4-unit limit is not arbitrary. It reflects a fundamental distinction in how the lending industry classifies real estate.

Properties with 1-4 units are classified as residential real estate. The assumption is that these properties serve primarily as housing, even when additional units generate rental income. Residential lending regulations protect consumers who are buying homes to live in.

Properties with 5 or more units are classified as commercial real estate. At this scale, the property is clearly an income-producing investment rather than a residence with some rental potential. Commercial lending regulations apply different standards appropriate for business investments.

FHA was created to help Americans achieve homeownership, not to finance commercial investments. The agency's mission focuses on making housing accessible through low down payments and flexible credit requirements. This consumer protection mandate explains the 4-unit limit.

The distinction also reflects practical underwriting differences. Residential loans evaluate your personal ability to make payments based on your income and debts. Commercial loans evaluate the property's ability to generate income that covers the debt service. These fundamentally different approaches require different loan structures.

This classification system means that a 4-unit building and a 5-unit building, despite being similar in many ways, require completely different financing approaches.

What Is the Difference Between FHA and Commercial Loans?

Understanding how FHA and commercial loans differ helps you appreciate why the 5-unit threshold matters so much.

FHA loans for 2-4 unit properties feature the hallmarks that make them attractive: 3.5% minimum down payment with a 580+ credit score, financing based primarily on your personal income and employment, terms up to 30 years with fixed interest rates, and government insurance that enables lenders to accept higher risk.

The trade-off is owner-occupancy. You must live in one of the units for at least 12 months after closing. FHA is designed to help you buy a home that happens to have additional income-producing units, not to finance pure investment properties.

Commercial loans for 5+ unit properties operate under entirely different principles. Lenders focus primarily on the property's net operating income (NOI) and its ability to cover debt service payments. Your personal income matters less than the building's cash flow.

Down payments typically range from 20% to 30% for commercial loans. Credit requirements generally start at 660-680, though property strength can offset personal credit weaknesses. Terms are usually shorter (5-25 years) with balloon payments requiring refinancing at maturity.

Commercial loans do not require owner-occupancy. You can purchase purely as an investment, never living on the property. This flexibility appeals to investors building portfolios of income-producing assets.

Our guide on getting a mortgage on an apartment building explains commercial loan options in detail.

What Financing Options Exist for 5+ Unit Properties?

While FHA is not available for 5+ unit buildings, several commercial financing options serve this market.

Agency loans from Fannie Mae and Freddie Mac represent the most common financing for apartment buildings. Their Small Balance Loan programs target properties with loan amounts between $750,000 and $6 million, making them accessible for smaller 5-20 unit buildings.

Agency loans offer competitive rates (often in the 6-7% range), terms up to 30 years, and non-recourse options that protect your personal assets. The trade-off is stricter qualification requirements including minimum occupancy (typically 90%), DSCR requirements (usually 1.20-1.25x), and documentation of the property's income history.

Bank portfolio loans provide relationship-based financing with more flexibility. Local banks may approve deals that agency guidelines would reject, particularly for borrowers with strong banking relationships or properties in markets the bank knows well.

SBA 504 loans offer an interesting option for owner-occupied commercial properties with down payments as low as 10%. If you plan to operate a business from the property (such as a full-time property management operation), SBA financing may apply.

Bridge loans finance value-add acquisitions where properties need improvement before qualifying for permanent financing. Rates are higher (8-12%) but terms are short (1-3 years), and the focus is on the property's potential rather than current performance.

Our guide on what kind of loan to buy an apartment building compares all available options.

How Much Down Payment Do You Need for a 5+ Unit Building?

Down payment requirements represent the biggest practical difference between FHA 4-unit and commercial 5+ unit financing.

FHA allows just 3.5% down on 2-4 unit properties. For a $500,000 fourplex, you need only $17,500 for the down payment (plus closing costs and reserves). This accessibility opens multifamily investing to people without significant savings.

Commercial loans for 5+ unit buildings typically require 20-30% down. For a $500,000 five-unit building, you would need $100,000 to $150,000 for the down payment. This substantial difference creates a significant barrier for investors trying to scale up.

The down payment jump explains why many investors pursue a specific progression: start with FHA-eligible properties to build equity, then use that accumulated wealth as down payment for larger commercial properties.

Some strategies can reduce the commercial down payment burden. Partnering with other investors spreads the capital requirement. Seller financing may provide part of the down payment. SBA 504 loans reduce requirements for owner-occupied properties.

However, there is no commercial equivalent to FHA's 3.5% down payment. Investors need to accept higher capital requirements or focus on building wealth through smaller properties first.

Should You Buy a 4-Unit or Save for a 5-Unit?

Many investors face this strategic choice: use FHA financing for a 4-unit property now, or wait and save for a 5-unit commercial property?

The 4-unit FHA approach offers several advantages. You can start investing with minimal capital. Owner-occupancy reduces your housing costs while building equity. You gain landlord experience with lower stakes. After one year, you can move out and keep the property as an investment while potentially buying another FHA property.

The disadvantages include living in your investment property (which may not suit everyone), mortgage insurance costs that persist for the life of the loan, and FHA property standards that may eliminate some opportunities.

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The 5-unit commercial approach offers different benefits. No owner-occupancy requirement means you can invest purely for return. Five units provide more cash flow than four units (all else equal). The property can support professional management more easily. Commercial loans have no mortgage insurance.

The disadvantages include the substantial down payment requirement (potentially $100,000 or more), stricter underwriting that may require demonstrated experience, and shorter loan terms that require eventual refinancing.

For most beginning investors, starting with FHA 4-unit properties and progressing to commercial financing makes strategic sense. The lower barrier to entry gets you started, and the experience and equity you build position you for larger deals.

What Is the Path from FHA to Commercial Financing?

Strategic investors often use FHA properties as stepping stones to commercial portfolios. Here is how the progression typically works.

Step 1: Start with a 2-4 unit property using FHA financing. Live in one unit while renting the others. The low down payment preserves capital, and the rental income may cover most or all of your housing costs.

Step 2: After 12 months, you meet the FHA occupancy requirement. Continue living there or move out while keeping the property. If you move, you can potentially use FHA again for another owner-occupied property.

Step 3: Build equity through appreciation and principal paydown. Also save additional cash from your income and the property's cash flow. Both contribute to your down payment fund for future commercial purchases.

Step 4: After 2-3 years managing smaller properties, you have demonstrated experience that commercial lenders want to see. Your track record includes rent collection, tenant management, maintenance coordination, and financial performance documentation.

Step 5: Use your accumulated equity and experience to qualify for commercial financing on a 5+ unit building. You have transformed from a first-time buyer into a qualified commercial borrower.

This progression is not required. Some investors skip directly to commercial financing if they have sufficient capital and can demonstrate relevant experience through other means. But for those starting with limited resources, the FHA-to-commercial path provides a proven roadmap.

What Experience Do Commercial Lenders Require?

Commercial lenders want confidence that you can successfully operate the property. Experience requirements vary by lender and loan program.

Agency loans (Fannie Mae and Freddie Mac) typically want to see 2+ years of property management experience and ownership of properties similar in size to the one you are purchasing. First-time apartment investors may need co-sponsors with experience or face additional requirements.

Bank loans vary widely. Community banks often take relationship-based approaches that may accommodate less experience if you have strong financials and a solid business plan. Building banking relationships before you need financing helps.

Bridge lenders focus more on the deal than the borrower. If the property and business plan make sense, bridge lenders may accept less experience, though they will charge accordingly.

Strategies to satisfy experience requirements include partnering with experienced operators, hiring professional property management (demonstrating you understand the importance of expertise), and starting with smaller properties to build track record.

The experience from managing FHA 2-4 unit properties counts toward commercial loan qualification. Documenting your performance, including rent collection, occupancy rates, and financial statements, creates evidence that commercial lenders want to see.

Are There Any Exceptions to the 5-Unit Rule?

Some investors wonder if any workarounds exist to use FHA-style financing for 5+ unit properties. The short answer is no, with very limited exceptions.

VA loans for eligible veterans and service members follow the same 1-4 unit limit as FHA. No military programs finance 5+ unit residential purchases.

USDA loans for rural properties also limit financing to 1-4 units. The rural housing programs do not extend to apartment buildings.

Conventional residential loans from Fannie Mae and Freddie Mac similarly stop at 4 units. Their multifamily programs for 5+ units are commercial products with different terms.

The only potential exception involves mixed-use properties where residential units are part of a larger commercial building. In rare cases, financing structures might vary. However, any property with 5+ residential units will require commercial financing for the apartment portion.

Investors should accept the 4-unit limit rather than searching for workarounds. Energy spent looking for exceptions is better used preparing for commercial financing when you are ready to scale.

What Should You Do If You Want to Invest in Apartments?

If your goal is building an apartment portfolio, understanding the financing landscape helps you plan effectively.

For immediate action with limited capital, use FHA financing to purchase a 2-4 unit property. The FHA loan for multi-unit properties approach gets you started with minimal cash while building experience and equity.

For investors with more capital but limited experience, consider a small (5-10 unit) building using bank financing. Local banks may be more flexible on experience requirements, and smaller buildings present lower operational complexity.

For experienced investors with capital, agency loans provide the best terms for stabilized apartment buildings. The commercial building down payment requirements are manageable when you have built resources through earlier investments.

For investors targeting value-add opportunities, bridge financing enables acquisitions of properties needing repositioning, regardless of your residential vs. commercial preference.

Use our commercial mortgage calculator to model scenarios and understand how different property sizes and loan types affect your returns.

Ready to Start Your Apartment Investment Journey?

While you cannot buy a 5-unit property with FHA, that limitation does not need to stop your investment ambitions. Understanding the financing landscape helps you plan a strategic path from first property to substantial portfolio.

FHA provides an accessible entry point for 2-4 unit properties. Commercial financing opens the door to larger buildings once you have capital and experience. The progression from one to the other creates a realistic path for investors at any starting point.

Whether you are determining if it is hard to get a multifamily loan or exploring different property loan options, the right information enables smart decisions.

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Our team helps investors at every stage, from first FHA purchase to commercial portfolio expansion. We will assess your situation, explain your options, and help you secure financing that matches your goals and resources. Contact us today to start your apartment investment journey.