Residential and commercial real estate present distinct challenges for investors. Learn how they're defined, how financing and agents differ, & much more.

Real estate in Texas falls under several broad categories. The two most well-known categories are “residential” and “commercial.” Each type of real estate presents distinct advantages and challenges. Residential investors tend to stay in that lane, because commercial property is a different game. Investment in residential property tends to be an easier market to enter — you can become a residential real estate investor by buying a house and renting it to an individual or family. Commercial real estate covers a much wider range of properties and potential tenants, including businesses.

As far as the time commitment between commercial vs. residential properties, residential real estate is often more “hands on” for an investor. Your responsibilities to your tenants tend to be similar to issues you might face as a homeowner, such as keeping appliances in good working order. At the minimum, you’ll consult with a property management company.

The type of property will also affect the financing process. Some lenders might only lend money for one type of property. Lenders that are willing to lend money for both residential and commercial projects will have different requirements and terms for each.

Your first step is to understand how the two types of property are different.

How does the investing world define residential and commercial real estate?

The difference between residential and commercial property in the investing world is not quite the same as the conversational meanings of the two words. Some properties that primarily serve as people’s residences are actually commercial properties in this context.

Defining residential property

Residential property, for investors, consists of properties zoned or otherwise intended for explicit use as living quarters with a maximum of four units. This includes the following:

Single-family homes, in which only one home occupies a lot
Condominiums
Townhouses
Duplexes, triplexes, and quadruplexes (all considered “multifamily”)

Defining commercial property

Commercial property includes both “business” properties and properties with numerous residential units. A property with its sole purpose being to house one-to-four units as living quarters is never considered commercial property. Commercial property includes one or more of the following characteristics:

Properties zoned or otherwise designated exclusively for business use
Mixed-use properties that combine commercial and residential, such as buildings with retail stores on the first floor and apartments on the upper floors
Multifamily properties with five or more units, such as apartment buildings or complexes, are considered commercial in the eyes of your lender. Multifamily properties with four or fewer units are considered residential.

What’s the difference between commercial and residential real estate agents?

Licenses & Certifications

Both residential and commercial real estate agents in Texas must have a license from the Texas Real Estate Commission (TREC). The state offers two types of licenses for real estate sales: sales agents and brokers. A sales agent must work under a broker, and can apply for a broker license once they have at least four years of experience.

TREC does not require separate licenses for residential and commercial real estate. Most brokers, however, focus on one type of real estate, and they can obtain certification from private organizations showing that they have experience and expertise in specific areas of real estate. The Texas Accredited Commercial Specialist (TACS) certification, for example, requires experience as a license real estate agent and completion of coursework in areas like commercial real estate finance, development, and marketing.

Knowledge base

Each type of real estate requires specialized knowledge and experience. Prospective buyers of each type of property tend to have different concerns. Finding an agent with relevant experience and certification can help investors make informed decisions about potential properties. If their project involves leasing space to individuals, families, or businesses, they will need a real estate agent who understands their type of property.

A residential real estate agent might need to become familiar with issues like:

Residential mortgage financing, including government programs like FHA or VA loans
Schools in the area
Nearby amenities like parks
Homeowner’s association (HOA) restrictions, if any

Commercial real estate agents might need to be aware of factors like:

Commercial financing
Traffic flow, parking, and related transportation issues that may affect customers
Nearby competing businesses
Zoning restrictions
Permitting processes
Organizing paperwork for multiple parties in a sale

How are loans different for commercial and residential properties?

Some lenders will only provide financing for one type of property. Big box mortgage lenders, for instance, might not provide mortgages for commercial property, or they might not offer the best terms.

Banks and many private lenders offer loans for both types of property, but the terms may vary rather widely. Hard money lenders will provide funding for investment projects involving both residential and commercial properties. You can get more information by contacting a hard money lender directly.

Commercial loans and residential loans differ in numerous important ways:

Interest rates: Commercial loans tend to have higher interest rates than residential mortgages.
Eligible buyers: Lenders often prefer to make commercial loans to business entities, such as corporations, limited partnerships, or limited liability companies (LLCs), rather than individuals.
Loan terms: Loan terms tend to be shorter than residential mortgages. They may be as short as 2 years or as long as 20 years.
Amortization: The amortization period on a commercial loan can be longer than the loan term. For a 10-year loan with a 30-year amortization period, for example, a borrower would make monthly payments of principal and interest based on a 30-year amortization schedule. At the end of the 10-year period, they would make a large “balloon payment” to pay off the remainder of the principal.
LTV: Loan-to-value ratios (LTVs) tend to be lower for commercial real estate loans. Some residential mortgage programs will allow LTVs of 90% or higher. For commercial loans, most lenders will not go higher than 80%.
DSCR: Commercial lenders look at a borrower’s debt-service coverage ratio (DSCR), which is somewhat similar to the debt-to-income ratio in residential mortgage lending, but in reverse. A business’ DSCR is its annual net rental income divided by the amount it will spend to service mortgage debt each year. A DSCR of less than 1 indicates negative cash flow. Your commercial lender will want ample evidence of a healthy DSCR so that you can continue to make payments to them.

What's considered a “fixture” in commercial real estate?

Fixtures can be a difficult issue in residential real estate. It can become even trickier in commercial sales and leases.

Does a real estate developer need insurance?

Real estate developers may be involved in planning developments, preparing the land, and renovating existing structures or building new ones. They face a wide range of potential risks. The following types of insurance coverage can help them mitigate those risks:

General liability: Protects against premises liability claims from clients, subcontractors, and others.
Builders risk: Protects against damage to construction equipment, building materials, and structures, including weather and criminal acts like vandalism.
Professional liability: Protects against claims that may arise on the “business” end of the development process, such as project management.
Errors and omissions (E&O) insurance: Protects against claims arising from clerical errors and other mistakes in matters like obtaining building permits.
Environmental liability: Protects against liability for certain claims in areas deemed to be environmentally hazardous.

What is a fixture?

A fixture is an item of personal property that has been attached to real property to the point that it is part of the property. The more difficult it would be to remove the item without damaging or significantly altering the property, the more likely it is to be considered a fixture. A central A/C system installed in a home, for example, is likely to be a fixture since removing it would cause damage and potentially render the home uninhabitable.

What counts as a fixture in a commercial property?

Since certain industries require machinery and rooms for specific purposes, there is a wider view of what constitutes a fixture in commercial real estate deals. For instance, a bar in a restaurant should be considered a fixture, especially if the property is being sold as a restaurant. The same may apply to a dedicated paint booth or room if the property is being advertised as a body shop. However, there are no laws in place that force sellers to recognize anything as a fixture.

Disputes may arise between buyers and sellers over whether specialized commercial equipment constitutes a fixture. A manufacturing company that is selling its current location, for example, might own complex machinery that it intends to take when it vacates the premises, while the buyer wants to include it in the deal. Conversely, a buyer may want certain fixtures removed upon the sale, while the seller doesn’t want to spend the money to have that done.

All of these issues should be considered before signing an agreement. An experienced private lender will leave no stone unturned. Capstone Capital Partners is here to finance and ensure the success of your next investment, whether residential or commercial.

Why do fixtures matter to a buyer?

Buyers need to know exactly which fixtures are and are not included with the property. This affects the total cost of the property as well as the buyer’s business needs. If an investor is buying a multifamily property with the intent to continue renting it to residents, they need to know if the seller does not intend to leave critical equipment in place.

Determining what counts as a fixture is an important part of the due diligence process. Texas law and TREC regulations require disclosure of many details regarding fixtures. Investors should not rely solely on sellers’ disclosures, however, and should seek information about anything that is uncertain.

Learn more about hard money financing for commercial and residential real estate investing

Capstone Capital Partners offers fast and flexible financing for both residential and commercial real estate projects in Texas. The Capstone team is familiar with the Texas real estate market and has experience with a wide variety of investment projects: from simple fix and flips to storefronts. Skip the bank’s red tape and team up with experienced fellow investors with your best interests in mind. Applying is easy: get started on your pre-approval now!

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What's Considered Commercial vs Residential Real Estate?