Residential vs commercial

[Dirk J Mc Kenzie]

I have heard that residential is less than 5 units and commercial 5 and up. What are the differences in entry barriers to go commercial vs residential? What are the rules concerning loans, financing etc?

[Geordy Rostad]

@Dirk J Mc Kenzie

What you have heard is more or less true although there are exceptions. In some cases you could financial an 8 unit apartment complex with two conventional loans if they are split up as 2 fourplexes on two tax parcels for instance.

Alternatively, you could finance a 2-4u with a commercial loan in some cases if that makes more sense.

Aside from these exceptions, the qualification process is completely different. With a residential investment loan, you'll have to meet guidelines just like for your primary residence. Lots of rules layered upon other rules. Conversely, if you are moving into one of the units, you could use an FHA loan and potentially put down less than 5%. You won't find that with any commercial loan I know of.

With commercial loans, forget everything you think you know. Every different lender you speak with will most likely have wildly different rates, LTVs, amortization schedules, prepayment penalties, etc that they are offering. You have to ask and understand ALL of the terms of the loan. You won't really be comparing apples to apples. Someone might offer a 65% LTV, 20 year amortization at 5.5% interest but then the bank next door might offer you 80% LTV, 30 year amortization at 4.2% interest with no loan fees. You just really never know. Commercial loans rely far more on relationships with commercial lenders. One thing the commercial lender will want to see is experience. If not experience, they will want to see that you are hiring someone experienced to manage the property.