Real estate is a traditionally solid investment, especially considering the supply of property is limited. In addition, you can use leverage to invest in real estate, meaning a relatively small cash outlay allows you to control a larger total investment. Cash flow and how you obtain a mortgage are just two of the differences between residential and commercial property investments.
With residential real estate, you can have the benefit of living in your investment. Your property value continues to grow, over the years, even when you do not think about it. If you live in a single-family home, your investment provides no cash flow to you. Commercial real estate provides the same capital appreciation as residential, but also can provide additional cash flow with rental income. You can rent out a single-family home, or a portion of your own home, and generate cash flow on a limited basis compared with a commercial, multi-unit building.
With residential real estate financing, you can obtain mortgage insurance for your own home that will allow you to finance a larger amount of the purchase price than a bank will be willing to finance without the extra protection that mortgage insurance provides, allowing you to make a smaller down payment. With a Veterans Administration guarantee, you can obtain a mortgage with no down payment at all, provided you are living in the home. With commercial lending, mortgage insurance is not available. The lack of insurance, in addition to underwriting requirements for the larger loans, means that a larger down payment will be required on a commercial loan.
Commercial real estate loans have more stringent credit requirements than residential loans. With a commercial loan, if your credit score is below 740, your interest rate will be higher, if you can get the loan at all. This is due to the higher risk of commercial real estate. With residential loans, you can often obtain financing using Federal Housing Authority insurance with credit scores as low as 500.
Owner financing is available with both residential and commercial real estate. Due to the higher down payment requirements for commercial loans, a buyer may turn to seller-assisted financing to help offset these requirements, or, in some cases, eliminating the down payment requirement completely. With residential real estate, which is typically in higher demand, seller-assisted financing is more common with distressed properties, to provide an added incentive for buyers.
If you are new to commercial property investing, staying with smaller, local banks where you can make a personal case for why the bank should make your loan will make the process easier. Local banks may have more of an interest in investing in your local community, and the economic development that local commercial investment brings.
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