Is Multifamily Considered Commercial Property?

SVVRE | A better kind of brokerage.

October 3, 2022

Various clothes and white ac units attached on a light brown colored apartment building

It is a common error in the real estate market to assume that “commercial property” refers to only business-oriented properties. The “commercial” term further aggregates this assumption, and there might be some confusion as to whether other types like multifamily qualify. So, is multifamily considered commercial property? 

Is Multifamily Considered Commercial Property?

Yes, multifamily properties are considered commercial properties. Commercial multifamily property is a rental property containing more than five housing units to accommodate multiple occupants. Any property regardless of size and function, that generates income for its owner is a commercial property.

Blue, yellow and brown concrete building near a swimming pool adorned with glass displays on top

In the world of real estate, multifamily properties are considered a property class that possesses both residential and commercial characteristics. The truth is that while most multifamily count as commercial properties, certain ones are considered residential properties. 

In reality, a multifamily unit comprises multiple, separate legal housing units in a single structure. Hence, properties such as condominiums and townhouses do not qualify as multifamily units.

Commercial Multifamily Vs. Residential Family

It is essential for every investor considering financing the acquisition or improvement of multifamily real estate to analyze a commercial property investment and understand the differences between residential and commercial multifamily properties. 

The major difference between both types of multifamily properties is that residential multifamily properties consist of more than one housing unit and less than five, such as duplexes and triplexes. In contrast, commercial multifamily properties consist of five or more housing units, such as:

  • Garden apartments
  • Mid-rise apartments, and 
  • High-rise apartments.

So, if you want to invest in a commercial multifamily property, the idea is to target a building containing no less than five housing units. 

Why Should You Invest in Commercial Multifamily Properties?

If you are looking to invest in a commercial multifamily property, it may initially seem like a risky venture because of the capital requirement. However, like all other commercial properties, investing in multifamily has some benefits. Some of them include:

  • Steady cash flow
  • Potential value appreciation
  • Tax benefits
  • Portfolio diversification
  • Protection against inflation
Two residential buildings with hanging balconies and clear white lined window panels

Steady Cash Flow

The potential to make steady and passive income is perhaps the main advantage of investing in commercial multifamily properties. This is mainly because of the constant rental income these properties provide and their high possibility to appreciate over time, especially in excellent locations where tenancy thrives.

Potential Value Appreciation 

Multifamily units provide several avenues for value appreciation. One significant way a building’s value appreciates is for it to have an excellent financial history that convinces buyers that it is a good investment. That is to say, it has been involved in several transactions and generates income regularly. 

Also, when compared to other smaller units, commercial multifamily properties can achieve value appreciation at a faster rate because they provide the opportunity to actively increase property value by making improvements to the property that can allow you to increase rental rates and attract more tenants.

Tax Benefits 

Investing in commercial multifamily properties offers investors several impressive tax benefits. For example, investing in multifamily units allows you to deduct certain accessory costs like maintenance and operation costs, property management fees, insurance premiums, etc. Other benefits include further allowances for depreciation of the property you own over time and capital gains taxes deferment.

Portfolio Diversification 

Investing in commercial multifamily units is a great avenue to quickly build and expand your investment portfolio. Instead of waiting several years to acquire multiple single-family properties, you can efficiently acquire multiple properties in one go.

In addition, with the higher return on commercial property investments attributed to commercial multifamily units, investors have more access to capital to acquire even more properties, successfully diversifying their portfolio at a lesser risk.

Protection Against Inflation 

One of the advantages of commercial multifamily investments is the ability of such properties to appreciate directly with inflation. These properties are generally more resilient to economic downturns over time, as their owners can increase rental prices following the trends during inflation, thus compensating for any loss they may incur from the increased maintenance cost.

Tips to Consider When Investing in Commercial Multifamily Property 

While commercial multifamily units are promising avenues to make stable profits annually, some factors can influence how these commercial properties can earn money. Some of these factors to consider include: 

  1. Location
  2. Financing
  3. Working with a real estate agent 
Various clothes and white ac units attached on a light brown colored apartment building

Location

The siting of a property significantly determines the market value of a commercial property, and this holds especially true when it comes to multifamily. Important factors include:

  • The safety of the area
  • Ease of movement
  • Proximity to basic amenities, and 
  • Potential for development 

These factors influence tenants’ willingness to pay substantial rent prices, and tenants naturally prefer to rent in safe areas that have easy accessibility to schools, hospitals, and shopping centers. So, when acquiring a property, pay attention to high-yield and high-growth areas where properties are usually in high demand.

Financing 

Funding is an essential aspect of every commercial real estate investment as it strongly influences how successful an investment becomes. Before purchasing a property, ensure to draw up a budget by estimating the expenses you are likely to pay throughout acquiring the property.

Working With a Real Estate Agent

Although hiring a real estate agent when looking to buy commercial real estate is not compulsory, it is highly advisable because the help and guidance they provide can not be overemphasized. 

Working with professional agents like Si Vales Valeo Real Estate, who have an extensive network and understanding of the local market in Cincinnati-Northern Kentucky, will help you to make informed decisions when acquiring your property and eventually ensure that you achieve your investment goals and have the best experience while doing so.

Related Questions 

How Much Do You Need to Put Down for a Multifamily?

Depending on the property, the minimum down payment you must put down is between 15- 20%. To buy a duplex, you must pay about 15% of the total cost of the property, while for triplexes and four-unit properties, you must pay up to 20%.

Is It a Good Time to Buy a Multifamily Property?

Although there is no one-answer-fits-all to this question, investing in a multifamily unit could be an excellent investment. They are promising avenues to invest your capital because they provide a stable monthly/yearly income and also protect you against inflation in the long run.

Conclusion 

Commercial multifamily investment is an increasingly popular way for investors to efficiently invest in real estate and diversify their portfolios. However, to utilize this opportunity, it is necessary to evaluate the market and seek professional advice from an experienced agent regarding what to do. 

Share on facebook
Share on twitter
Share on linkedin
Share on email
Share on facebook
Share on twitter
Share on linkedin
Share on email

More News

Two-story white brick residential house

What Is a 1031 Exchange?

Taxes are typically unavoidable fees in any financial transaction. However, in the real estate world, there are few avenues through which investors can avoid paying

Read More »
Person in black long sleeve shirt holding a calculator and writing down the numbers in a white ledger

What Is Mezzanine Debt?

Companies in the small and medium size range generally have difficulty being approved for debt funding. As federal constraints on conventional lending have tightened, these

Read More »

You May Also Like

Lounge zone in office with couch near tables with chairs
Property News

What Is CAM in Real Estate?

When discussing the financials of a commercial real estate lease, CAM charges are a common topic of conversation. They play a major role in determining

Read More »

Client’s Bill of Rights

based on ORC 4735.62

As your partner, you can expect from us the following fiduciary duties:

  • Accounting: We will account for all funds entrusted to us by you, the client, and not commingle your funds with personal and/or business funds.
  • Care: We will use all of our skills to the best of our ability on behalf of you, the client.
  • Confidentiality: We will keep confidential any information provided by you, the client, especially information that may be damaging to you in a negotiation.
  • Disclosure: We will disclose to you, the client, any information received that may benefit your position in a negotiation.
  • Loyalty: We owe undivided loyalty to you, the client, and put your interests above our own.
    Obedience: We will obey all lawful orders given by you, the client.