If you’re looking to sell a 2-4 unit building in Los Angeles, the process differs significantly from selling larger multifamily properties. Understanding these differences can help you target the right buyers and maximize your sale price.

Why the 5-Unit Threshold Matters

If you own a Los Angeles apartment building, you might think the difference between a 4-unit and a 5-unit property is just one apartment. In reality, crossing that threshold fundamentally changes how your property is classified, financed, and valued—and dramatically affects who can buy it.

Understanding these differences is crucial whether you’re deciding to sell or evaluating an expansion. Here’s what every LA apartment owner should know.

Residential vs. Commercial Classification

The most significant distinction:

• 2-4 units: Classified as residential real estate
• 5+ units: Classified as commercial real estate

This classification affects nearly every aspect of a transaction, from financing to appraisal methodology to the professionals involved.

Financing: The Biggest Difference

2-4 Unit Properties

Buyers of 2-4 unit properties can use residential mortgage financing, including:

• Conventional loans: Fannie Mae and Freddie Mac programs with down payments as low as 15-25%
• FHA loans: Down payments as low as 3.5% if the buyer will occupy one unit
• VA loans: Zero down payment for qualifying veterans who will occupy one unit

Key advantages of residential financing:

• Lower interest rates (often 0.5-1.5% lower than commercial)
• Longer loan terms (30-year fixed available)
• Lower down payment requirements
• Qualification based primarily on borrower’s personal income and credit
• No prepayment penalties on most loans

5+ Unit Properties

Buyers of 5+ unit properties must use commercial mortgage financing:

• Bank loans: Local and regional banks offering portfolio products
• Agency loans: Fannie Mae and Freddie Mac multifamily programs (different from residential)
• CMBS loans: Commercial mortgage-backed securities
• Bridge loans: Short-term financing for value-add situations
• Private/hard money: Alternative lenders for unique situations

Commercial financing characteristics:

• Higher interest rates
• Shorter loan terms (5-10 year terms typical, with 25-30 year amortization)
• Higher down payments (typically 25-35%)
• Qualification based primarily on property income (DSCR), not just borrower income
• Prepayment penalties common (yield maintenance, defeasance, or step-down)
• More complex underwriting and longer closing timelines

How This Affects Your Buyer Pool

The financing difference creates dramatically different buyer pools:

2-4 Unit Buyers Include:

• Owner-occupants: Buyers who will live in one unit and rent the others (“house hacking”)
• First-time investors: Those using residential loans to enter real estate investing
• FHA/VA buyers: Those with limited down payments leveraging government programs
• Traditional investors: Those who prefer residential financing terms

This is a large, diverse buyer pool with strong demand, particularly in desirable LA neighborhoods.

5+ Unit Buyers Include:

• Professional investors: Those with experience in commercial real estate
• 1031 exchange buyers: Investors rolling proceeds from other property sales
• Syndicators: Groups pooling capital for larger acquisitions
• Institutional buyers: For larger properties, REITs and funds

This is a smaller, more sophisticated buyer pool that evaluates properties purely on financial metrics.

Valuation Methodology

2-4 Units: Comparable Sales Approach

Residential properties are primarily valued using the sales comparison approach—what have similar properties sold for recently? Appraisers look at:

• Recent sales of similar 2-4 unit properties nearby
• Price per unit
• Price per square foot
• Property condition and features

While income matters, a 4-unit building in a hot neighborhood can sell at a premium even if the income doesn’t fully justify the price—because owner-occupants and lifestyle buyers are willing to pay for location.

5+ Units: Income Approach

Commercial properties are valued primarily using the income approach—what income does the property generate, and what cap rate is appropriate? Appraisers and buyers focus on:

• Net Operating Income (NOI)
• Cap rate relative to comparable sales
• Gross Rent Multiplier (GRM)
• Price per unit (as a secondary metric)

A 10-unit building’s value is driven almost entirely by its income. Two identical buildings with different NOIs will have different values—the market is less forgiving of below-market rents or high expenses.

Pricing Implications

These differences create interesting pricing dynamics:

2-4 Units Often Command Premium Pricing

Because of the larger buyer pool and favorable financing, 2-4 unit properties in desirable areas often sell at lower cap rates (higher prices relative to income) than 5+ unit buildings. A 4-unit in Silver Lake might trade at a 4% cap rate, while a 10-unit nearby trades at 5%.

5+ Units Are Priced More Rationally

Commercial buyers are disciplined about returns. They won’t overpay for location if the numbers don’t work. This can actually benefit sellers of well-performing buildings—strong NOI translates directly to higher value.

Transaction Process Differences

Rent Control Considerations

In Los Angeles, rent control treatment also differs:

2-4 Units

• Buildings built before October 1, 1978 are subject to the LA Rent Stabilization Ordinance (RSO)
• Single-family homes and condos are exempt under Costa-Hawkins
• Owner-occupied duplexes may have different rules

5+ Units

• Buildings built before October 1, 1978 are subject to RSO
• Newer buildings (post-1978) are subject to AB 1482 (California Tenant Protection Act) statewide limits
• No owner-occupancy exemptions apply

Strategic Considerations for Sellers

If You Own a 4-Unit Building:

• Maximize your buyer pool: Market to both owner-occupants and investors
• Highlight livability: Owner-occupants care about the unit they’ll live in
• Consider timing: Low interest rate environments particularly benefit residential buyers
• Price strategically: You may achieve pricing that doesn’t make sense on a pure cap rate basis

If You Own a 5+ Unit Building:

• Focus on financials: Clean, accurate income and expense documentation is critical
• Maximize NOI: Every dollar of NOI increases your value
• Work with a commercial broker: Access to investor networks and proper marketing
• Prepare for longer timelines: Commercial transactions take longer to close

The Bottom Line

The 5-unit threshold isn’t arbitrary—it reflects fundamental differences in how the real estate industry categorizes, finances, and values properties. Understanding which side of this line your building falls on helps you:

• Set realistic pricing expectations
• Market to the right buyer pool
• Prepare appropriate documentation
• Choose the right professionals to assist your sale

Whether you own a duplex or a 50-unit complex, the key to a successful sale is understanding your market and positioning your property accordingly.

If you’re considering selling your Los Angeles apartment building—whether it’s 2 units or 200—contact me for a confidential consultation. I can help you understand your options and develop a strategy tailored to your specific property.

Whether you sell a 2-4 unit building or a 5+ unit property, the right strategy depends on your specific situation. Contact me to discuss the best approach for your property.