When does Residential become Commercial?

Question

Hello all. For some reason I am thinking that I heard somewhere that anything over 4 units is considered commercial, but my realtor told me that anywhere someone lives is considered residential, no matter how many units there are? What is the rule on this, or does this vary from state to state?

Thanks,

Mike

Thanks,

Mike

Jon Holdman · Answer

Depends on what question you are asking.  For loan purposes, anything over four units needs a commercial loan.  Residential loans only work for 1-4 unit properties.

If you mean for IRS depreciation purposes, residential is anything people live in and gets a 27.5 year depreciation period.  Commercial is offices, retail, industrial, etc., and gets a 39 year depreciation period.

Jon

Michael Rossi · Answer

John,

I am not aware that there is any law that specifically answers these questions.  I suspect that it more of an interpretation by the local building departments as opposed to specific sections of the law.  My local building department will allow just about anyone that identifies themself as the "owner" to do the work on 1-3 unit buildings.  I list the LLC as the owner and do the work myself, which has never been a problem.  They do not require any documentation and it is not a big deal.  That could certainly vary from one building department to another.

Mike

Account Closed · Answer

Mike,

Great point. I would never have expected a 4 unit building falling under the commercial building code.

While we are on the topic of repairs.

What is the law in OH for work on a building you do not own? Can your LLC own a building (1-3 units) and you can still do work without a license? Does it matter how many people are members of the LLC? Does the person doing work need to own more than a trivial amount of the LLC?

John Corey

Michael Rossi · Answer

Another consideration in the residential vs. commercial is the building code.  In Ohio, 1-3 unit buildings are residential, 4 and over are commercial.   That can make a huge difference in maintenance expense.  For example, an owner can work on the electric in a 1-3 unit building.  In a 4 unit building, any major electrical work requires a state certified electrician.  In addition, upgrading an electrical service would require plans to be drawn and approved for the commercial building.  That's a bunch of extra money just because you've triggered the commercial building code with 4 or more units!

Mike

Account Closed · Answer

Mike,

Now you know a bit more about what your agent does not know about their chosen field. Maybe time to find an agent that at least know what they are dealing with.

Be very careful about taking investing advice from people who do not invest or do not invest in similar types of property.

To get a license to practice RE has very little to do with investing. Agents commonly assume they know the laws, the practices and what will work. Rarely are they correct if they focus on owner occupants.

John Corey

N/A N/A · Answer

Thank you for the quick response.  Actually, it was the loan purpose I was interested in.  Thank you for the insight.

Mike

When does Residential become Commercial?

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