DSCR for Small Multifamily (2–4 Units): Vacancy, Leases & DSCR Math

Financing a 2–4 unit property with a DSCR loan? The math isn't just about rental income versus your mortgage payment. Lenders apply vacancy factors, require lease documentation, and calculate debt service coverage differently than you might expect. Here's exactly how it works—and how to position your deal for approval.

Quick Summary

• Vacancy factors: Most lenders apply a 25% vacancy factor to gross rental income, even if units are fully occupied
• Lease requirements: Active leases are typically required for 2–4 unit properties; some lenders want 6+ months remaining
• DSCR minimums: Most DSCR lenders require 1.0–1.25x coverage; 1.25x+ gets you better rates
• Income calculation: Net rental income = (Gross rent × 0.75) - Operating expenses - Debt service

How Lenders Calculate Rental Income for 2–4 Units

Unlike single-family rentals, small multifamily properties get more scrutiny. Lenders want to see:

1. Active leases for all occupied units
2. Market rent analysis if units are vacant
3. Vacancy factor applied to gross income (typically 25%)

The Vacancy Factor Reality

Even if your property is 100% occupied with long-term tenants, most DSCR lenders will still apply a vacancy factor. Here's why:

• Turnover risk: 2–4 unit properties have higher turnover than single-family
• Market volatility: Small multifamily is more sensitive to local economic shifts
• Conservative underwriting: Lenders want a buffer for unexpected vacancies

Example: If your 4-unit property generates $4,000/month in gross rent:

• Gross income: $4,000/month
• After 25% vacancy factor: $3,000/month
• This is what the lender uses for DSCR calculation

Lease Documentation Requirements

For 2–4 unit properties, lenders typically require:

• Active leases for all occupied units (signed, dated, current)
• Lease terms: Some lenders prefer 6+ months remaining on leases
• Rent rolls: A document showing unit numbers, tenant names, monthly rent, lease start/end dates
• Security deposits: Proof of deposits held (shows tenant quality)

Pro tip: If you're buying a property with existing tenants, get copies of all leases during due diligence. Missing leases can delay or derail your loan.

DSCR Calculation for Small Multifamily

The debt service coverage ratio formula is:

DSCR = Net Rental Income ÷ Total Debt Service

Where:

• Net Rental Income = (Gross rent × (1 - Vacancy factor)) - Operating expenses
• Total Debt Service = Principal + Interest + Taxes + Insurance (PITI)

Operating Expenses That Reduce Income

Lenders typically deduct these from rental income:

• Property taxes (actual or estimated)
• Insurance (hazard, landlord liability)
• HOA fees (if applicable)
• Property management (if you use a manager, typically 8–10% of gross rent)
• Reserves (some lenders require 2–6 months of reserves)

What's NOT deducted: Utilities paid by tenants, maintenance/repairs (unless you're using a property manager), capital improvements.

Real Example: 4-Unit Property

Let's say you're buying a 4-unit property:

• Purchase price: $500,000
• Down payment: 25% ($125,000)
• Loan amount: $375,000
• Interest rate: 7.5%
• Loan term: 30 years
• Monthly P&I: ~$2,622
• Property taxes: $500/month
• Insurance: $200/month
• Total debt service: $3,322/month

Rental income calculation:

• Gross rent (4 units × $1,200): $4,800/month
• After 25% vacancy factor: $3,600/month
• Less property taxes: -$500
• Less insurance: -$200
• Less property management (10%): -$480
• Net rental income: $2,420/month

DSCR: $2,420 ÷ $3,322 = 0.73x ❌ (Too low)

To get to 1.25x DSCR, you'd need:

• Net rental income: $4,153/month
• Gross rent needed: ~$5,900/month (after vacancy factor and expenses)

When Each Approach Works Best

2-Unit Properties (Duplexes)

• Easier to qualify: Lower vacancy risk, simpler to manage
• Owner-occupancy option: Some lenders allow you to live in one unit and count both units' rent
• Lower vacancy factors: Some lenders apply 20% instead of 25%

3-Unit Properties

• Standard treatment: Typically treated like 4-unit properties
• Lease requirements: All units need active leases
• Market rent analysis: Vacant units use market rent, not potential rent

4-Unit Properties

• Maximum for residential: 4 units is the cutoff for "residential" loans
• Stricter requirements: Full lease documentation, higher reserves
• Better rates at scale: Some lenders offer better terms for 4-unit properties

Common Mistakes That Kill DSCR Deals

1. Using potential rent instead of actual rent: Lenders use current leases or market rent, not "what you could get"
2. Ignoring vacancy factors: Don't assume 100% occupancy in your calculations
3. Missing lease documentation: Get all leases before closing
4. Underestimating expenses: Property management, reserves, and maintenance add up
5. Not shopping lenders: DSCR terms vary widely; some are more flexible on vacancy factors

How to Improve Your DSCR

If your DSCR is too low, consider:

• Increase down payment: Lower loan amount = lower debt service
• Negotiate purchase price: Lower price = lower loan amount
• Increase rents: If leases are expiring, raise rents to market rate
• Reduce expenses: Self-manage (if allowed), shop insurance, appeal property taxes
• Choose a different lender: Some lenders use 20% vacancy factors or allow higher DSCR minimums

What To Do Next

1. Gather all lease documentation — Get signed, current leases for every occupied unit before you apply
2. Calculate your DSCR realistically — Use 25% vacancy factor and include all operating expenses
3. Shop multiple DSCR lenders — Terms vary; some are more flexible on vacancy factors and minimum DSCR
4. Talk with Harry — Get personalized guidance on your specific property and situation

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Quick FAQ

Do I need leases for all units to get a DSCR loan on a 2–4 unit property?

Yes, most lenders require active leases for all occupied units. If units are vacant, they'll use market rent analysis. Some lenders allow one vacant unit if you can show it's marketable.

Can I use potential rent instead of actual rent for vacant units?

No. Lenders use market rent analysis based on comparable properties, not your projections. If you're buying a property with vacant units, get a rent roll and market analysis before making an offer.

What's the minimum DSCR for 2–4 unit properties?

Most DSCR lenders require 1.0–1.25x minimum. Rates improve at 1.25x+ coverage. Some lenders allow 0.95x–1.0x with higher rates or additional reserves.

Do I need property management for a 2–4 unit property?

Not always, but some lenders require it for 3–4 unit properties. If you self-manage, you may need to show experience or have it deducted anyway (typically 8–10% of gross rent).

Can I live in one unit and count all units' rent?

Some lenders allow this for 2–4 unit properties if you owner-occupy one unit. The rental income from other units still counts toward DSCR, but you may need to show personal income to cover your unit's "rent."

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Educational only; not a commitment to lend. Qualification and terms subject to credit, income, collateral, and underwriting approval. Equal Housing Lender. Rockhouse Mortgage, LLC. NMLS #2469785.