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What Distinguishes Commercial Real Estate from Residential Real Estate?

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How is Residential vs. Commercial Real Estate Defined in the Investment World?


In the realm of real estate investing, the distinction between residential and commercial properties can differ from the everyday understanding of these terms. Some properties that are mainly used for residential purposes may actually be classified as commercial in this context.


For investors, residential properties refer to those designated or intended for residential use, typically with no more than four units. This category includes:


  • Single-family homes, where only one residence is situated on a lot

  • Condominiums

  • Townhouses

  • Duplexes, triplexes, and quadruplexes (all grouped as ‘multifamily’)


Understanding Commercial Property


Commercial properties refer to both those intended for business use and those with multiple residential units. A property designed exclusively for one to four residential units is not considered commercial. Commercial properties typically have one or more of these features:


·       Properties specifically zoned or designated for business purposes

·       Mixed-use properties that combine commercial and residential spaces, such as buildings with shops on the lower floors and apartments above

·       Multifamily properties with five or more units, like apartment complexes, are classified as commercial by lenders, while those with four or fewer units are considered residential.


Commercial vs. Residential Real Estate Agents:


Expertise Required 


Each real estate category demands specific knowledge and experience, as buyers of residential and commercial properties often have distinct priorities. Working with an agent who has the right experience and certifications can help investors make well-informed choices. For projects involving leasing to individuals, families, or businesses, it’s crucial to have an agent who understands the specific type of property involved.


A residential agent may need to be familiar with:

- Residential mortgage options, including government-backed loans like FHA or VA

- Local schools and their quality

- Nearby amenities, such as parks

- Homeowners’ association (HOA) rules, if applicable


On the other hand, a commercial real estate agent might need to focus on factors like:

- Commercial financing options

- Traffic patterns, parking, and transportation issues affecting customers

- Competition from nearby businesses

- Zoning regulations

- Permitting requirements

- Coordinating paperwork for multiple parties involved in the sale


How Do Loans for Commercial and Residential Properties Differ?


Some lenders focus exclusively on one type of property and may not offer loans for the other. For instance, traditional mortgage lenders may not finance commercial properties, or they might not provide the best loan terms for them.

Banks and many private lenders offer loans for both residential and commercial properties, but the terms can vary significantly. Hard money lenders are another option and can fund both residential and commercial investment projects. To learn more, it’s recommended to contact a hard money lender directly.


Key Differences Between Commercial and Residential Loans:


  • Interest Rates: Commercial loans generally have higher rates than residential mortgages.

  • Eligible Borrowers: Commercial loans are typically given to business entities (LLCs, corporations) rather than individuals.

  • Loan Terms: Commercial loans usually have shorter terms, ranging from 2 to 20 years.

  • Amortization: Commercial loans may have a longer amortization period than the loan term, with a balloon payment at the end.

  • LTV (Loan-to-Value): Commercial loans usually have lower LTV ratios, often capped at 80%.

  • DSCR (Debt-Service Coverage Ratio): Lenders focus on the DSCR, which measures a business’s ability to cover its debt with rental income. A DSCR below 1 indicates negative cash flow.


In conclusion, commercial and residential loans differ significantly in terms of interest rates, loan terms, eligibility, and repayment structures. Understanding these differences is crucial for making informed investment decisions. If you're looking to explore your options further and gain personalized guidance, reaching out to Boston Trust can provide you with expert advice tailored to your specific real estate needs. Our team is ready to help you navigate these complexities and find the best financing solutions for your projects.

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