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A major distinction between the residential and commercial real estate business sectors are in the markets and methods of financing. The use of buildings as collateral to borrow money is what drives both industries.
But just to keep it on a conversational level: what are the biggest differences between the two?
Terminology And Contexts
Residential practitioners use a wide range of financial terms that have no parallel in commercial real estate. There’s no such thing as a commercial HELOC, nor “stated-income” loans. But a look at terminologies between commercial and residential shows that residential’s particular jargon is very limited in comparison to that in commercial. This is because residential real estate is very narrowly defined, and commercial spans everything residential doesn’t. If it’s not residential, it’s commercial. Land, industrial, income-producing, non-income-producing, retail, office, you name it. There are hundreds of different types of commercial property.
Commercial presents a far greater degree of specialization in capital sources than residential. For as many kinds of commercial property that exist, there exist lenders and terms tailored to that type of property.
Take retail. Consider how many significantly different shades of retail spaces exist: there are strip centers (not anchored by a grocery), neighborhood shopping centers, big-box power centers, shadowed anchored centers, high-end specialty, and more.
Capital sources for each type of retail present different financing propositions, because the cash flows that the properties create are all different and all critical to the lender’s profitability on the loan. Interest rates tend to be lower for anchored properties, higher for strip-type shopping centers. Compared to residential, commercial property lending goes for depth rather than breadth: hardly a bank is in business the doesn’t do home loans, but many lenders just don’t have the background to do some kinds of commercial loans.
Marie J Fleming -Lender/ Blogger/ Entrepreneur Mailing address: PO Box 241 Roseville, CA. 95661
I am not bound to win, but I am bound to be true. I am not bound to succeed, but I am bound to live by the light that I have. I must stand with anybody that stands right, and stand with him while he is right, and part with him when he goes wrong.
Marie Fleming is an author and enjoys to write on her spare time. At times motivational or articles involving the field of sales or Real Estate.