Are Multi-Family units Commercial

6 Replies

Hello BiggerPockets Community,

I was listing to/watching one of the BiggerPockets webinars, and Brandon Turner mentioned that he liked 2, 3 and 4 family multi-unit properties because they are considered residential... 

I did a quick search online as well as on BiggerPockets, and though I am certain the answer is out there, I couldn't quickly track it down. So, though up to 4 units is considered residential, is there a certain number of units per building that then makes it become commercial real estate? I was searching for Pennsylvania (even Philadelphia specifically) as I know that laws can change depending on the jurisdiction.

If there is a quick answer to this, that would be great, but I realize that it may be  a case by case matter. 

Thanks BiggerPockets Community and Best of Luck!

5 and above is commercial

that's right 5 and above is commercial

Five units and up is considered commercial. This impacts the type of financing that you are able to obtain on them. Four and under you can get a traditional 30-yr mortgage like you do on your residence. Once you are in the commercial realm, the lending terms differ (shorter amortization, shorter term to maturity, etc.)

Plus, after 5, lenders begin to care more about the property / specific deal than they do about you  and your personal ability to pay for it.

The also don't appreciate in the same way that residential properties do, at the whim of the rest of the residential market. Commercial properties are generally valuate solely on their cap rate. So if you can increase the profit, (decrease costs / increase income) you can increase the value directly.

Originally posted by @John Matthews :

The also don't appreciate in the same way that residential properties do, at the whim of the rest of the residential market. Commercial properties are generally valuate solely on their cap rate. So if you can increase the profit, (decrease costs / increase income) you can increase the value directly.

Almost. Commercial properties, like any other business, are generally valued on the revenue stream they produce and the cash flow they throw off. The CAP rate is just a simple ratio to ideally enable a buyer to compare the cost of similar cash flows within a specific local area. The catch is the CAP is generally only as good as its inputs and to be certain you are comparing apples to apples {even then, you will likely have Spartans, Dudleys, and Honeycrisps} the CAP rate for each cash-flow needs to be determined using the same methodology.

@Roy N.  Right, I guess I don't mean cap rate specifically so much as their actual net income.

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