Making the most out of investment starts with choosing the right type of property for your strategy and the amount of capital you’ve raised. Two of the more profitable ventures are multi-family homes and commercial properties.
While they sound similar, commercial and residential distinctions are important. The number of units determines how a lending institution will classify the building:
- Multi-family residential buildings have one- to four-units. Lenders and the Canada Mortgage and Housing Corporation (CMHC) use the term “small rental properties” to describe them.
- Multi-family commercial buildings have five or more units.
For those new to property investing, which is better?
Multi-Family Commercial Buildings Are Lower Risks
From a lending institution’s perspective, multi-family commercial properties are lower risks. This is often because the higher upfront demands mean the investors behind them are less likely to default on their mortgages. But in another way, commercial buildings are better because of the number of units: the lower the vacancy rates, the lower the chances of not making a profit.
Multi-Family Residential Buildings Have Lower Upfront Costs
To get funding for multi-family commercial buildings, the investor needs a greater amount of capital upfront. Generally, the lending institution will need a down payment of at least 25 to 30 percent (or more), both to cover the larger down payment and acquisition costs and give more confidence.
Raising enough capital is a lot harder for a commercial property than a smaller multi-family residential building. But as we mentioned in our first point, lenders see commercial buildings as more secure investments!
Multi-Family Commercial Buildings Generate More Income
It can be easier for investors to increase their money with bigger buildings than with smaller residential-class properties. This is because the amount of income the property generates determines the value of the property.
Multi-Family Commercial Buildings Have Lower Operating Costs
Commercial properties offer investors a better economy of scale. This is a proportionate saving in costs generated by a higher level of production. For our purposes, this means the larger the building, the cheaper it is to operate. The operating expenses are lower, meaning more profits are ending up in your pockets rather than in the building.
Multi-Family Commercial Buildings Can Be Better Investments, But Plan Wisely!
As you can see, the commercial class of multi-family buildings is a better investment than the residential – if you can raise the capital, that is. Regardless of the type you choose, there is less of a margin for error with any multi-family property. Investors need to know what they are doing because of the complexity of buying large apartment buildings. The higher cash flow can give them the flexibility to hire a team to manage the property.
One of the great things about real estate investing is that there is more than one successful strategy! If you’re just starting your investment journey and want to get involved at a slower pace, try using an investment property company that specializes in multi-family properties.