Certain aspects of property investing are confusing. Take the terminology, for example. To someone not involved in property investments, it might seem like a multi-family residential building would always be classified as residential property. Yet some investors consider it commercial property. What’s the deal?
Distinguishing between residential and commercial property is something banks do in order to define their lending strategies. In terms of actually buying and making money from real estate, the difference is more semantic than anything else. Nonetheless, it is helpful to new investors to understand how their veteran peers define residential and commercial multi-family properties.
Know that what you are about to read constitutes generally accepted views within the real estate industry. They are not hard and fast rules. Investor opinions can vary quite a bit on this particular topic.
For starters, a multi-family building is one that houses multiple families in separate, self-contained units. All such buildings are residential in terms of function. For investing purposes though, a multi-family residential property would consist of a single building with between two and four units.
Single apartment buildings usually qualify. So do older houses that have been converted into multiple apartment units. In terms of the latter, you tend to find a lot of the converted houses in city environments. The larger houses of days gone by are purchased and turned into multi-family properties.
Defining multi-family residential should give you a clearer understanding of multi-family commercial. A multi-family commercial building has five or more units. In almost all cases, these units exist within the context of an entire apartment complex with dozens of buildings. Smaller properties consisting of just two or three multi-family commercial buildings do exist.
These larger buildings are considered commercial properties because, for the investor’s purposes, they only exist for one reason: to generate profit. Purchasing and running this type of property is considered in business, thus the properties themselves are commercial properties.
Financing Multi-Family Properties
There is another key difference between the two types of properties. That difference is in financing. An investor looking to obtain a multi-family residential property would have to apply for a residential loan. They would be applying as a landlord. The bank would follow an approval and underwriting process similar to what occurs when people apply for mortgages.
Acquiring a multi-family commercial property is difficult to do through bank loans. It is not impossible, but it certainly is not easy. Therefore, most investments of this type are financed through hard money loans. A lender like Salt Lake City’s Actium Partners fronts the money on a short-term basis. The borrower then pays off the loan via property revenue or by arranging traditional financing at a later date.
The advantage of hard money is that approval is based on the value of the asset in question. That means there is no long, drawn out approval process. It does not take hard money lenders several months to complete underwriting. The net result is that hard money loans can often be approved and funded in a matter of days.
Whatever the Investor Prefers
The money question is whether multi-family commercial property constitutes a better investment than its residential counterpart. Here is the simple answer: no. As with most things investment related, it boils down to whatever the investor prefers.
Some investors drool over multi-family residential properties. Others insist on only investing in commercial properties. There is no right or wrong choice. If an investor can make enough money on a property to satisfy their financial goals, it really doesn’t matter whether it’s residential or commercial.