The situation.
The client owned a six-unit rental property in his personal name. The building was full, the rent income was consistent, and the equity was there. He had held it for years and wanted to draw on some of that equity to fund future building projects.
Every lender he approached read the file the same way. Six units meant commercial. Commercial meant a different department, a longer process, higher pricing and a qualification built on the building alone. His own bank had quoted commercial terms without looking further.
By the time he came to us, he had accepted that a building this size was a commercial file.
What we found.
The five unit cutoff is real for most of the mortgage market. Most lenders draw the line there. However, there are a few that will write a six unit property as a residential mortgage rather than a commercial one. Their guidelines treat the property as residential up to a slightly higher unit count, but only under specific conditions. One of those conditions, almost always, is that the property must be held in the borrower’s personal name, not in a holding company or a numbered corporation.
For this client, the property fit. He had purchased it years ago in his personal name and never moved it into a corporate structure.
We had access to a lender willing to write the file as residential. The rate differential was significant. Residential pricing versus commercial pricing on a building of this size meant a much different mortgage payment, different cash flow on the property, and a different overall picture of what the refinance would look like.
What we did.
On a commercial mortgage, the property has to carry itself. The lender qualifies the file based on the building’s net operating income and its ability to service the debt independently. If the building’s cash flow is tight, the file is tight.
On a residential mortgage, the analysis is different. The property’s rental income matters, but the borrower’s personal income and overall financial position are also part of the analysis. A small shortfall in the property’s standalone cash flow can be offset by the borrower’s broader financial strength.
Several tenants had been in place for years and their rents were below current market, which is common in long-held rental properties. The client was not planning to push rents aggressively. He had a longer term plan to bring them in line gradually as units turned over. He needed a financing structure that worked with the current numbers, not against them.
Financing the property as residential made this possible. The borrower’s personal income absorbed the small current shortfall, the property was written at 75% loan to value at conventional pricing, and the refinance went through cleanly.
How it ended.
The client closed the refinance on residential terms at conventional pricing. The cash flow on the property is comfortable under the new structure, partly because of the lower rate and partly because of how the income was qualified. He now has room to bring rents up gradually as units turn, room to pursue another purchase if the right opportunity comes along, and room to operate the building the way a long-held rental should be operated.
If the file had gone commercial, which is what every other conversation had pointed toward, none of that flexibility would exist.
What this scenario illustrates.
Most lenders treat five units as the ceiling for residential financing. A few do not, and the difference matters significantly on a file like this. Knowing which lenders have different thresholds is part of what a broker is supposed to bring to a file. It is also part of what gets skipped when files get routed based on assumptions rather than actual knowledge of the market.
The ownership structure detail is worth naming separately. Many investors hold rental properties in corporations for legitimate tax and liability reasons, and that is often the right choice. But ownership structure is not a neutral decision from a mortgage perspective. A property held in a corporation is a commercial file by default at almost every lender, regardless of unit count. Personal ownership keeps doors open that corporate ownership closes. Investors making that decision early should understand what they are trading off either way.