Residential vs Commercial Real Estate

[Mason Jenkins]

I’m looking into residential vs commercial real estate properties. Does anybody have a preference to one versus the other? What are the pros and cons of each? What are the expenses associated with commercial as opposed to residential?

[Nick Belsky]

@Mason Jenkins

I do both Commercial and Residential lending.  Many good points have already been brought up in the responses above.  Here are my additions or corrections:

Commercial

Possibly higher taxes, higher insurances

Loan costs will be much higher (rates, closing costs, origination fees, etc...)

Most lenders require you have a formed business entity such as an LLC

Lenders will have more flexibility with terms and conditions as they are not bound by Fannie Mae or Freddie Mac.

No special licenses needed to originate or broker commercial loans in most states. Higher costs and little to no regulation for borrowers.

Blanket Loans (some call Portfolio Loans) - Multiple properties under one contract and closing

Residential

Property value can also be valued based on Cash Flow. You don't have to be an LLC or in a commercial loan to get this benefit.

Restricted to certain building types (E.g. 1-4 units, SFR, Condos, Mixed Use Res/Comm) I have a lender who will do up to 8 units as residential, but costs are higher.

Lenders and brokers are far more regulated than with commercial, which means better rates, lower closing costs, more transparency, etc...

Secondary market and broker competition, keeps costs down for borrowers

I am sure there are many other things that could be added. But the main questions are really about what are your goals? Once you determine your goals, both short and long term, then determine the path in which to get there. Many begin with a SFR then build to Multi-Unit, then up to Multi-Family. Some even change classes all together and go into warehouses or mobile home parks. Many start with a goal in mind then that goal changes along the journey. There are ways to flip back and forth and change direction, but be sure you do you homework and have a good CPA to help guide you.

Good Luck!

Nick Belsky