March 25, 2014
Did you know there are big differences between commercial apartment properties and residential investment properties? In some ways it’s like two different planets. The differences are vast.
It's important for you to know the differences. Investors new to commercial apartment properties (also known as multifamily properties) or any kind of commercial properties need to become familiar with the differences between residential investment properties. It's very important to do so before moving into the arena of owning commercial properties.
Before we go into some of the differences, know that a commercial apartment property — again, also known as a multifamily property — is defined as a property having five or more apartment units.
When it comes to loans, one major difference between multifamily financing and residential investment financing is that loan rates for commercial apartment properties pretty much work opposite to residential investment properties. For example, a 30-year fixed rate for a commercial apartment property is a high rate, whereas for a residential investment property you are going to get a low rate for 30 years fixed.
A second major difference is that multifamily rates are about a percent higher than for residential investment properties. Also, when you purchase a multifamily loan, you are likely to get a loan for 3, 5, 7, or 10 years; whereas if you purchase a residential investment property, you will tend to get a 15- or 30-year fixed loan rate.
Fourth, it’s much tougher to qualify for a commercial apartment loan than for a residential investment property loan. You generally need more money to be involved. And current ownership of commercial apartment property is an important factor, especially if you wish to purchase an apartment building with lots of units. Also you may need to have quite a bit of money in reserves to qualify for a commercial loan. The multifamily loan source wants to make sure you have a big enough fund set aside for problems that might arise. Suddenly being hit with a $30,000 roof repair bill, say, or a $40,000 plumbing emergency bill.
We recommend that you study and become familiar with multifamily financing.
Bruce Painter, Director of Marketing