BLOG
Are Multifamily Properties Considered Residential or Commercial?
This is a question we often get so let’s explore the answer.
First, Multifamily properties which include units from duplexes to apartment complexes, are a unique category in the real estate sector. They are distinct in that they contain multiple, separate living units within a single building or a complex. Despite their primary function as residential spaces, multifamily properties are classified as either residential or commercial based on specific criteria.
By understanding the differences and implications of these classifications, investors and property managers can make informed decisions when navigating the multifamily property landscape.
Residential vs. Commercial
The categorization of multifamily properties as residential or commercial isn’t always straightforward. Various factors can impact whether a multifamily property is considered commercial or residential. Here are some factors that influence how a multifamily property is classified.
Residential Property Classification
Residential property is a type of real estate that is primarily used for housing people. This category includes a wide range of housing types, each designed to accommodate living spaces for individuals, families, or groups of people. Residential properties often have different financing, tax, and regulatory requirements than commercial properties, reflecting their primary role as personal living spaces.
Commercial Property Classification
Commercial properties are intended for business operations and profit generation. This category includes office buildings, retail spaces, warehouses, hotels, and multifamily properties. The management, maintenance, and legal considerations for commercial properties are typically more complex due to their business-oriented nature and larger scale.
Grey Areas
Multifamily properties introduce a unique challenge when it comes to classification as they serve a dual purpose. Multifamily properties are designed for residential living; however, they are also intended to generate a profit for the property owner or investors.
Differentiating between residential and commercial multifamily properties is commonly based on the number of units. Multifamily properties with 2-4 units are typically classified as residential. The property still has the intent of generating a profit for the property owner, however, it will be less than a commercial multifamily property.
When a multifamily property has 5 or more units, it is generally classified as commercial. These properties are deemed commercial because they are expected to have higher returns based on the higher number of units available to rent. The commercial designation is also because such properties usually require different financing, management, and maintenance approaches.
So, is multifamily considered commercial or residential based on the number of units? While the number of units in a multifamily property is an important classification factor, it’s not the only factor to be considered. Local zoning laws and the presence of commercial features like retail spaces or offices also play significant roles in determining whether a property is classified as residential or commercial.
Zoning Laws and Multifamily Property Classification
Zoning laws dictate how land and buildings can be used within specific geographical areas, and usually are designed to align property usage with the intended character of the surrounding area to promote a harmonious balance between residential and commercial spaces within the community.
This means the zoning designation of the multifamily property’s location will play a crucial role in determining its classification. If a multifamily property is situated in an area zoned exclusively for residential use, it is more likely to be classified as residential. If the property is in a commercial zone, it may lean toward a commercial classification.
The property’s classification as commercial or residential has further implications and we will discuss them in our Blog – 5 Key Implications of Multifamily Properties Categories
#LIVINGLEGACTINVESTMENTS #MULTIFAMILYPROPERTIES #GENERATIONALWEALTH #LEGACYWEALTH