Most investors inherently understand the difference between commercial real estate and residential real estate. Properties used for business operations (stores, offices, storage units, etc.) are commercial real estate properties. Homes and townhouses are residential.
However, one unique property type falls into both categories: large multi-family properties like apartment complexes. If you’re considering investing in multi-family properties, it’s essential to understand the difference between properties that are considered strictly residential and those that are also regarded as commercial investments.
What is a multi-family property?
Multi-family properties are usually any property with more than two dwelling units. They can be used for commercial or residential purposes, but most Multi-family properties are residential. When multi-family properties have fewer than 5 units, they’re considered strictly residential.
In most cases, the primary purpose of a residential property is to provide housing.
What is commercial property?
Commercial property refers to buildings that serve commercial purposes only. In most cases, commercial property is completely separate from residential in that the units are for business use only, and nobody lives on the premises. In fact, local ordinances usually differentiate the property types and outline regulations regarding occupancy rules. The primary purpose of a commercial property is to make money.
Large multi-family properties like student housing, apartment complexes, and retirement facilities hover in both categories. Since large multi-family properties provide housing, they’re considered residential. However, since their primary purpose is to make money, they’re also regarded as commercial. Additionally, since larger properties typically have multiple buildings, they often require multiple deeds versus a duplex or similar property requiring only one.
The cost to invest
A key difference between residential and commercial residential is the cost of investing. Smaller residential properties (single-family homes, duplexes, and townhomes) are much more affordable for beginning investors. While smaller residential properties can create profit and cash flow, it’s at a lower level.
Larger properties with more than five units are considered commercial properties because their primary purpose is to earn money. While they provide housing, the main goal of larger units is to create income.
Multi-family properties are more expensive and harder to obtain, so you may have a more challenging time expanding your investment portfolio. In addition to high acquisition costs, they can be more expensive to maintain and manage.
While you could purchase single-family homes or duplexes for 10% to 20% down, multi-family units typically require between a 25% and 30% down payment.
Should I invest in multi-family real estate?
Multi-family real estate is an excellent option for many investors. Some common benefits of choosing a multi-family property include:
- Less lag between tenants (you have other tenants paying even if one unit is empty)
- Paying to manage multiple units is more economical than paying to manage a single property
- Lenders are often more willing to fund multi-family units because they are viewed as a lower risk since income isn’t dependent on one tenant.
For most investors, the biggest drawback is the cost. Commercial-sized multi-family units are much more expensive than smaller properties. The initial investment can be intimidating. If you’re new to investing, you might consider acquiring smaller properties first to build up leverage and experience. However, if you’re ready to diversify your portfolio and potentially increase your returns substantially, these types of properties might be a good fit for you.
Do you have any questions about buying or selling multi-family properties? Call us today.