Residential vs Commercial Loans (What’s the difference?)


Are you thinking about investing in real estate but on the fence whether to go commercial or residential? This one’s for you!


Typically, you may have some capital saved up for your investment but you still need a loan to cover the rest. In this post, we will break down the main differences between residential and commercial loans.


Let’s start off with the basics -- a residential loan. This is the loan typically used when you purchase your home. However, it is usually only 3% down for your primary residence vs 25% when it is a loan being used for an investment property.


There are either 15-year or 30-year loans. With a 30-year loan, you have more flexibility. You may pay it off sooner if you wish, but there is no obligation to. On the other hand, with a 15-year mortgage, there are no extensions -- you must pay it off within those 15 years.


Like most other loans, how much you qualify for is based on your finances. You will need to provide your paystubs, tax returns, along with other financial documents.


Now what about commercial loans?

Commercial loans can be used for ANY type of rental property -- yes, even for a family home. Now why use it over residential?


Commercial loans are needed if you are investing into a property that has over 5 units while residential loans can only be used for homes with 1-4 units.


You may also decide to use a commercial loan for a smaller property if you are considering putting it under your business, rather than your name. If you are thinking of going this route, keep in mind commercial loans typically have higher interest rates and shorter terms.


Another major difference is the limit of loans you can take out. You have a maximum of 10 residential loans as an individual but if you go above this number, you must take out commercial loans.



Depending on what you’re looking for, one of these financing options might be a better fit for you.



Frequently Asked Questions (FAQs)

What are some examples of residential/commercial properties?


Common residential properties include;

  • Single-family homes

  • Townhomes

  • Condominiums

  • Duplex-Fourplex


Some types of commercial properties can include;

  • Office buildings

  • Storage units

  • Multi-family housing (5+ units)

  • Land investments


Which investment yields a better ROI?


According to Jasper.io, residential properties yield about 1-5% per year while commercial properties will yield about 5-8% per year (on average.) Therefore, commercial properties might be a better investment if you're strictly looking for a higher return on investment (ROI).


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