Among those who wish to purchase a multifamily property, there has always been confusion about whether these properties are considered commercial real estate or residential real estate. As an investor, this is a critical piece of information to know as it will determine the purchase price and complexity of purchasing the property.
In this blog, we will be discussing the nuances of multifamily real estate to get a more concrete definition of what a multifamily property is. Is Multifamily commercial or residential real estate? Let’s find out.
About Multifamily Properties
A multifamily property is any building or structure that has the capacity to hold more than one unit, meaning more than one household can reside within its walls. The number of units can range anywhere between two to twenty or more, and this is where the main difference between these multifamily properties lies.
To answer the question directly, multifamily real estate is not restricted to either commercial or residential real estate. They can actually be a part of both categories. It simply comes down to a few key differences.
Residential Real Estate
At the base level, multifamily properties are definitely residential properties. Its primary function is to serve as a place of residence, offering living spaces for individuals and families. Each unit within the property functions as a private residence with its own entrance, functionalities, and even garden areas. This is an exact description of what a residential property is, thereby making multifamily residential. However, for most residential multifamily properties, the number of units is generally considered to be 4 or less. Some examples include duplexes and triplexes.
Commercial Real Estate
On the other hand, multifamily real estate also plays a hand in commercial real estate. This is when the property is looked at from an investment perspective. These properties are purchased by investors, businesses, or entities to generate rental income. This is what commercial real estate generally alludes to. Some examples include high-rise apartments and suburban office buildings.
Additionally, there are also multi-family properties that combine both commercial and residential features. Some buildings have shared amenities and spaces, shopping centers, swimming pools, and other features built-in or around the residential space. Therefore, trying to provide a clear distinction between commercial and residential real estate in multifamily investing becomes complicated.
What Makes a Property Commercial Real Estate?
- When it is purchased as an investment
Many people purchase multifamily properties as income-generating investments. Owners will treat them as rental properties and lease individual units to tenants, both short and long-term. This makes it a business transaction as the owner will be receiving rental income.
- Property management is a commercial practice
The management of multifamily housing is the responsibility of the investor, and these practices often align with commercial practices. Property management needs to oversee the leasing aspect, maintenance of the shared spaces and outside units, and even manage the relationships between tenants. These are akin to the practices you would find at a traditional commercial property.
- Shared amenities is a commercial feature
When we look at commercial properties, we understand that different features are marketed as a means of bringing in more customers. With multifamily properties, the communal amenities and shared facilities add to the commercial atmosphere as it is a means of attracting new tenants.
- The economic benefits to the local community
Multifamily properties have a decent amount of economic influence on local communities. They attract new people to the area, generate tax revenue, and contribute to the community by fostering and accommodating people from different backgrounds. These are similar in benefits to what you would expect of commercial properties or businesses.
What Makes a Property Residential Real Estate?
- What is the primary function of the property and its scale?
If the primary purpose of the multifamily property is to provide homes for individuals and families, then it can be considered residential real estate. Its core function should center around residential living, building communities within its walls. And as mentioned earlier, as long as the number of units is below 4, it can still be considered residential even if the property owner receives rental income.
- Who are the residents of the property?
In a purely commercial space, accommodations are not made for diversity. Senior citizens or differently-abled people may not find the necessary facilities for them there. But, in residential multifamily housing, there is generally effort taken to attract a diverse range of residents. There are even some properties that are built specifically to cater to a group of individuals.
- Does each unit have privacy?
Finally, the main functionality of multifamily housing is being able to provide individual living units, each offering a private and personal space for residents. Private living accommodations are not common in purely commercial properties, so this is another way to distinguish between the two.
As we can see, there is no clear answer to whether multifamily properties are considered commercial real estate or residential. They are either or, or a combination of the two. As real estate agents, it is your job to do your research into each property and identify its unique properties.
Commercial multifamily properties are more difficult to acquire and require more financing but would generate more rental income. Residential multifamily properties may generate less income but are easy to manage and purchase. There are benefits and issues with each, but they are both worthy investments under the right circumstances. Do your due diligence to ensure the best profitability.