Tag Archive for: commercial lending

Passive Income Through Real Estate  – Part 1 of 3

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Passive Income Through Real Estate  

Leverage & Financing Fundamentals

dtd. 9/8/26

This report is for general educational purposes only and does not constitute financial, tax, or legal advice. Consult a qualified CPA, attorney, and licensed lender before making investment decisions.

This is Part 1 of a 3 Part Series. Part 2 covers cap rates by property type, short-term vs. long-term rentals, and historical appreciation. Part 3 wraps up with tax advantages and a full summary of the series.

Introduction

Real estate remains one of the most popular vehicles for building passive income, largely because of a feature no other major asset class offers in the same way: leverage. A buyer can control a $1,000,000 asset with a fraction of that amount in cash, finance the rest with a mortgage, and let rental income service the debt while the asset (hopefully) appreciates. But how much leverage is available, and how much cash flow it produces, varies enormously by property type.

This first installment focuses on the financing side of the equation: how down payment requirements differ between small residential rentals and larger commercial multifamily deals in California, and what that means for cash flow. Later installments in this series compare property types and rental strategies (Part 2), and wrap up with tax treatment and a full series summary (Part 3).

Leverage 101: 

Why Down Payment Requirements Drive Strategy

Leverage is the ratio of borrowed money to total purchase price. A property bought with 20% down is leveraged at 80% loan-to-value (LTV); one bought with 40% down is leveraged at 60% LTV. Leverage magnifies returns in both directions — it increases cash-on-cash return when a property performs well, and increases risk when income falls short of debt service.

The central divide in California residential and commercial real estate is the unit count.   Properties of 1 to 4 units are financed as residential real estate — even when they are non-owner-occupied rental investments — and qualify for conventional, FHA, or VA-style underwriting. Properties of 5 or more units are treated as commercial real estate and financed against the income the property produces, not the borrower’s personal income alone.

1–4 Unit Residential Financing (Single-Family, Condo, Townhome, Duplex–Fourplex)

Property TypeTypical Down PaymentFinancing Path
Single-family home / condo / townhome (investment)15% – 25%Conventional (Fannie Mae/Freddie Mac)
Owner-occupied 2–4 unit (house-hack)3.5% – 5%FHA (3.5%) or conventional (5%, as of the late-2023 Fannie Mae policy change)
Non-owner-occupied 2–4 unit~25%Conventional investment financing

Sources: Fannie Mae Selling Guide guidance as reported by AmeriSave and RentToRetirement (2026); agoodlender.com California multifamily lending overview.

5+ Unit Commercial / Multifamily Financing

Once a property crosses the 5-unit threshold, California lenders underwrite it as commercial real estate. Pricing is driven by the property’s net operating income (NOI) and debt-service coverage ratio (DSCR), not the borrower’s W-2 income, and down payment requirements rise sharply.

Loan ProgramTypical Down PaymentNotes
Agency (Fannie Mae / Freddie Mac multifamily)20% – 25%Requires stabilized occupancy, ~90% for 90 days; DSCR typically 1.25x minimum
Bank / portfolio lender20% – 30%More flexible underwriting, often shorter terms
CMBS25% – 35%Non-recourse; debt yield floors of 8–10% often size the loan below the LTV cap
Life insurance company30% – 45%Reserved for high-quality assets and strong sponsors; most conservative leverage
Hospitality / self-storage / special-use commercial30% – 50%Treated as operating businesses as much as real estate; highest equity requirements

Sources: rentalrealestate.com (2026 Multifamily Loan Guide), clscre.com, axiantpartners.com, fidelityca.com.

This is why the pattern holds true in practice: once you are underwriting a California multifamily deal in the 5+ unit / commercial category, 25–35% down is the norm, and many investors target 40–45% down (i.e., 55–60% LTV) specifically to make monthly cash flow pencil out at today’s interest rates, rather than to satisfy a lender minimum. Lower leverage means a larger equity check, but a materially stronger DSCR cushion and more monthly cash left over after debt service.

Case Study: Evaluating a 50+ Unit Acquisition

To illustrate how these numbers interact, consider a hypothetical 50+ unit property generating $1,200,000 in annual gross income with a 40% expense ratio. This is illustrative math only; actual pricing, rate, and terms will vary by property and lender.

MetricIllustrative Value
Gross Annual Income$1,200,000
Operating Expense Ratio40%
Net Operating Income (NOI)$720,000
Assumed Market Cap Rate (2026 multifamily average)5.6%
Implied Property Value (NOI ÷ Cap Rate)≈ $12,860,000
Loan at 60% LTV≈ $7,716,000
Down Payment (40%)≈ $5,144,000
Illustrative Annual Debt Service (6.25%, 30-yr amortization)≈ $570,000
Estimated Annual Pre-Tax Cash Flow (NOI − Debt Service)≈ $150,000
Estimated DSCR≈ 1.26x
Estimated Cash-on-Cash Return (before depreciation benefit)≈ 2.9%

The 2.9% cash-on-cash figure looks modest next to the headline income, which is the core trade-off of low-leverage commercial acquisitions: a larger equity check produces a safer DSCR and steadier cash flow, but a lower cash-on-cash yield — before principal paydown, appreciation, and depreciation-driven tax savings, all of which meaningfully improve total return (more on this in Part 3).

Coming Up in Part 2

Next in this series: How cap rates compare across single-family, multifamily, self-storage, senior housing, skilled nursing, and hospitality — plus a detailed look at short-term (Airbnb/VRBO) versus long-term rental cash flow, and what the Case-Shiller Index shows about California home price appreciation over time.

Disclosure…This document is provided for educational purposes only and does not constitute financial, investment, tax, or legal advice. It should not be relied upon as the sole basis for any investment or financing decision. For guidance specific to your situation, please consult a licensed financial advisor, tax advisor, lender, and/or estate planner.

 

Any questions, please contact me at 650-465-8957 or at Rob@101loan.com.

Best Regards,

Rob McCarthy
Senior Mortgage Advisor
www.101Loan.com 
650-465-8957 c  rob@101loan.com
CA DRE #01165697  NMLS #121019
101 Loan – 14435 C Big Basin Way, Saratoga, CA 95070

Products/Services/Accolades:

  •    Residential Financing for Purchases and Refinances on 1 to 4 unit properties.
  •     Reverse Mortgage Financing to include Conforming, Jumbo, HELOC Jumbo’s.
  •     Commercial & SBA Financing to include Multifamily, Office, Retail and Light Industrial.
  •     Construction Financing and Private Money, also know as Hard Money
  •     Access to over 30 banks with over 300 “Five Star” Reviews on Yelp, Google & Linkedin.
  •    Over 30 years of lending experience with over $2b in closed loan volume.

Note: Interest rates and loan programs quoted are subject to change without notice or until locked and approved by lender.

We Offer Multiple Lending Products…

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It’s so refreshing to offer lending products, I wasn’t able to provide at a previous company.

These include:

  • Bridge Financing that’s Less Expensive (See Article/Info on Product)
  • Doctor Program at 0% Down up to $2m in loan amount (See Article/Info on Product) Doctors, Dentists, PharmD and Nurses that are CRNA qualify for the program.
  • Reverse 2nd’s that allow a homeowner to keep their current first mortgage (See Article/Info on Product)
  • Traditional Reverse Mortgages that pay off debt and/or a mortgage and allow the client to obtain a HELOC they can draw on in the future with no mortgage payment. (See Article for More Info)
  • DSCR program where the client does not need to show tax documentation, when needing rental property financing.

In addition, I can now provide the following:

  • Competitive Rates on Delayed Financing / Cash Recoup Loan Program where a client paid cash for a home that wanted a portion of his cash back after closing.  We just closed that refinance and this is what the client shared with me… “I have to say that this process was remarkably easy.  I expected it to have a certain amount of pain, but it was incredibly smooth.  Thank you for all your help!  I’ll definitely recommend you to others!”
  • Purchase Loan Closings in 15 days from start to finish.

In closing, I specialize in:

  • Residential and Commercial Financing
  • SBA and Construction Financing
  • Reverse Financing, Bridge Financing and Hard Money

Let my 30+ years of lending experience and access to over 30 banks guide you when it comes to anything real estate or financing related!  Contact me today.

Rob McCarthy
Senior Mortgage Advisor
https://www.101loan.com
650-465-8957 c  rob@101loan.com
CA DRE #01165697 NMLS #121019
101 Loan – 99 South Almaden Blvd, # 600. San Jose, CA 95113

Products/Services/Accolades:

* Residential Financing for Purchases and Refinances on 1 to 4 unit properties.
* Reverse Mortgage Financing to include Conforming, Jumbo, HELOC Jumbo’s.
* Commercial & SBA Financing to include Multifamily, Office, Retail and Light Industrial.
* Construction Financing and Private Money, also know as Hard Money
* Access to over 60 banks with over 300 “Five Star” Reviews on Yelp, Google & Linkedin.
* Over 30 years of lending experience with over $2b in closed loan volume.

 

 

Interesting Times in Real Estate – Recent Changes in Commercial & Construction Financing – Part 4

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This is the final article of my series titled “Interesting Times in Real Estate” that covers the following key real estate trends:

  • Housing Inventory
  • Interest Rates
  • Recent Changes in Residential Real Estate
  • Recent Changes in Commercial and Construction Financing (Today’s article)

If you have questions about these or any other topics related to real estate, real estate financing or real estate trends, please feel free to reach out to me.

Now for Part 4 – Recent Changes in the World of Commercial and Construction Financing.

First of All…What is Commercial and Construction Financing?

Answer: Any building, structure or location where business is conducted and where revenue may be created that needs financing.  In addition, any residential style property equal to 5 units or more, often referred to as multifamily or apartments where renters reside.  Lastly, if the structure or building is not built, often times investors or buyers will build out the property and have the need for financing, also called Construction financing.

Next…

What are the Types of Commercial Property?

  • Multifamily/Apartments
  • Retail
  • Office
  • Light Industrial
  • Auto Dealerships
  • Parking Structures
  • Skilled Nursing
  • Anything Hospitality

What Happened Last Year and This Year?

Do you remember these three letters, SVB?  Well in 2023, Silicon Valley Bank closed their doors only to be purchased by First Citizens Bank on March 23, 2023.

Why did SVB close? 

For two reasons, that include a lack of diversification where much of their customers’ deposits were from tech companies. SVB then invested those funds in long term U.S. treasuries and mortgage-backed securities, which got crushed when the Federal Reserve increased rates in 2022 and part of 2023 causing these assets to lose significant value.  That was followed by a bank run where customers withdrew their money as news spread that SVB may go out of business, which it did, creating mass losses for the bank and for the FDIC to the tune of $20B.

Other banks followed suit including First Republic and Signature Bank as well as others.

As banks closed, consumer confidence suffered not only for depositors but for other banks throughout the U.S. as well.  This caused banks to tread carefully in creating lending relationships with new clients but also seriously looking at existing clients that lost liquidity or showed declining income or declining cash reserves.  The bank’s focus in lending went from focus on the property to the borrower and if the borrower was not perfect, the lender would cease ties to them especially if they had a lending relationship with them.

Interesting how this feels like SOX in that one company can have a negative impact on the entire real estate and banking industry and its banking customers.

What is Commercial Lending Like Today?

In one word – conservative!  Or maybe better yet, two words – very conservative!

In the past, banks that loaned on commercial type properties mostly focused on the property in terms of location, cash flow and condition of property.  With construction, bank financing would typically be based on what was being built and the potential market for the finished product whether the property was a home, townhouse, condo, 4 unit or commercial property.

Today those property factors are still a concern, but now lenders are very much concerned about the borrower’s experience, relationship with the bank, cash reserves, credit, solvency etc.  If any red flags emerge, the bank will simply decline the deal with little explanation.  In fact, some banks aren’t taking on any new business whatsoever until consumer and banking confidence increases.

Imagine if you’re a commercial loan officer at a bank that currently isn’t willing to loan to anyone…What do you do?  Quit and go to another bank that could do the very same thing?  Better yet, imagine you’re the customer and you’re looking to get a deal done where financing is needed and the bank says, we are not lending right now and have no plans in the immediate future to lend.

This year and last year, I had many commercial banks that were once my “go to” for financing, but today some are simply saying they aren’t lending in the current climate regardless of what the client has in reserves or in experience or what the property cash flows at.  As a mortgage broker, having access to multiple banks is critical in today’s climate and I’m grateful to have access to more than 60 banks, many of which are still lending at favorable terms.

Recent Story about Lending…

Recently I had a client looking to obtain construction financing equal to $15M to build 5 custom homes and all of the big banks stated that there was too much risk in building homes on spec (to be sold in the future).

My response to these banks…Wait a minute…the borrower owns the land, residential inventory is at an all-time low and demand is at an all-time high.  What risk?  We ended up getting it done with a local bank that asked the client to deposit a little less than 10% of the loan proceeds (something that is very common right now).

Another Story…

Another client that was looking to purchase a medical office and use SBA which is super expensive as rates are at an all-time high coupled with high fees. I offered a better solution that uses the client’s income and the current rents from the property to qualify.  It requires 15% down versus 10% down but saves the client about 1% in rate and about $20k in closing costs.

Being a mortgage broker in this market sure has its benefits as it gives our clients much more freedom and flexibility than working with a large bank that has lots of rules and no flexibility all due to what occurred last year with SVB and First Republic.

Last Story…

Have a client that rents an office space and their landlord which is also the owner of the building recently had a “margin call” from their lender after finding out that the building they purchased 3 years ago has lost 50% of its value.  This was due to declining rents and lack of tenants as so many businesses work out of their home today.  As a result, the owner of the building has decided to walk away from the building and let the bank have the property.  The owner just wanted to inform their tenant.  Aren’t you glad you’re not the owner.  BTW…Property was worth $80M 3 years ago and today its worth $40m and their loan is $40m.  OUCH!  Hope they did not personally guarantee that loan!

Conclusion…

Real estate has its ups and its downs just like any industry, but working with people that understand the changing markets and adapt to those markets are the ones you want to work with.  If you have any need in Residential or Commercial Real Estate, please feel free to contact me.

All the Best,

101 Loan
Senior Mortgage Advisor
www.101Loan.com
650-465-8957 c
CA DRE #01205444  NMLS #326829
101 Loan – 14435 C Big Basin Way, Saratoga, CA 95070

Products/Services/Accolades:

  1. Residential Financing for Purchases and Refinances on 1 to 4 unit properties.
  2. Reverse Mortgage Financing to include Conforming, Jumbo, HELOC Jumbo’s.
  3. Commercial & SBA Financing to include Multifamily, Office, Retail and Light Industrial.
  4. Access to over 60 banks with over 300 “Five Star” Reviews on Yelp, Google and Linkedin.
  5. Over 30 years of lending experience with over $2b in closed loan volume.