So you’ve done residential. Maybe a few single-family rentals, a duplex or two. Now you’re looking at commercial real estate and wondering if you should make the jump. Understanding whether to start with single-family vs duplex investments helps set the foundation before scaling to commercial.
Here’s what you need to know: commercial is a different game. Different valuation methods. Different lease structures. Different financing. Different tenant relationships. It’s not necessarily harder—it’s just different. And for investors who learn the rules, commercial can generate returns that residential struggles to match.
Let me break down what you’re getting into.
The Types of Commercial Property
Commercial real estate covers a lot of ground. Each type has its own dynamics.
| Property Type | Key Characteristics |
|---|---|
| Multifamily (5+ units) | Residential tenants, consistent demand, often the first step for residential investors |
| Office | Business tenants, longer leases, sensitive to employment cycles |
| Retail | Consumer-facing, foot traffic matters, e-commerce disruption ongoing |
| Industrial | Warehouses, distribution, manufacturing. E-commerce driving demand |
Multifamily is where most residential investors start their commercial journey. It still involves housing—something you understand—but gets valued like commercial property. Buildings with 5+ units fall into this category.
Office means business tenants with professional operations. Leases tend to be longer (3-7 years common). But office is sensitive to business cycles and remote work trends. Location matters intensely. For detailed guidance on office building financing including tenant analysis and NNN lease structures, see our complete Canadian investors guide.
Retail serves consumer-facing businesses. E-commerce has hit this sector hard, but well-located retail with the right tenant mix still performs. Understanding foot traffic patterns and tenant synergy matters here. For an in-depth look, see our guide to retail property investment for beginners. When you’re ready to finance retail properties, our complete guide on retail property financing for Canadian investors explains anchor tenants, CAM charges, and lender requirements.
Industrial is the hot sector right now. E-commerce needs warehouses. Distribution centers. Last-mile delivery facilities. Tenant stability tends to be strong with longer leases.
Owner-Occupied vs Income Properties
Before diving into valuation and financing, understand the two main paths into commercial ownership.
Owner-occupied properties are commercial spaces you’ll use for your own business—offices, clinics, warehouses, or retail storefronts. Owner-occupied purchases often qualify for better financing terms, lower down payments (10-25% vs 20-35%), and programs like zero down payment commercial financing for qualified business owners.
Income properties are purchased purely for investment returns. Tenant quality drives success, with lease terms, creditworthiness, and tenant mix all factoring into your analysis. For retail and commercial centers, anchor tenants—major businesses that draw traffic and establish credibility—provide income stability and attract smaller tenants. However, dependency on a single anchor tenant carries its own risk.
Mixed-use properties combine both—you occupy part of the building while leasing the rest. This hybrid approach lets you build equity in your business space while generating rental income.
If you’re making the jump from residential duplexes to a 5+ unit commercial building, the financing is a whole different conversation — book a free strategy call with LendCity and we’ll walk you through what changes.
How Commercial Valuation Works
Here’s the fundamental difference from residential: commercial properties are valued primarily on income, not comparables.
The formula is simple: Value = Net Operating Income ÷ Cap Rate
Net Operating Income (NOI) is income after operating expenses but before debt service. Cap rate is the market rate of return for similar properties. Understanding net operating income for loan approval is essential before entering the commercial space.
If a property generates $100,000 NOI and the market cap rate is 6%, the value is roughly $1.67 million ($100,000 ÷ 0.06).
This matters enormously. Because if you can increase the NOI—through rent increases, expense reduction, or adding income—you directly increase the property’s value. In residential, you’re mostly at the mercy of comparable sales. In commercial, you have more control. This is similar to how you can force appreciation in multifamily properties.
For multifamily properties in Canada, our free CMHC MLI Max Loan Calculator helps you determine the maximum CMHC insured financing available based on your property’s value and location.
Building Your Commercial Team
Commercial real estate requires specialized professionals. Your residential network won’t cut it.
Commercial broker. You need an agent who specializes in commercial transactions. They understand different lease structures, know how to value income properties, and have access to commercial deal flow that residential agents never see.
Commercial lender. Commercial loans work differently—shorter terms (5-10 years typical), balloon payments, emphasis on debt service coverage ratio (DSCR), often personal guarantees required. Find lenders who understand commercial. If you need help securing commercial mortgage financing for your purchase, working with an experienced broker can streamline the entire process.
Commercial attorney. Lease reviews, entity structuring, transaction documentation—commercial legal work differs from residential. Get someone experienced.
Commercial appraiser. Income approach valuation requires appraisers with commercial training.
Understanding key differences in commercial vs residential mortgage qualification helps you prepare your application correctly. Commercial lenders want to see a DSCR of at least 1.2x before they’ll approve your deal — book a free strategy call with us and we’ll help you understand exactly where you stand.
Finding Commercial Properties
Commercial deal flow works differently than residential.
Commercial brokers list properties, but the best deals often trade quietly. Build relationships with brokers who specialize in your target property type.
Direct outreach to property owners can surface opportunities before they hit the market. Many commercial properties trade off-market through relationships.
Networking in commercial real estate circles—investor groups, industry associations, professional organizations—creates deal flow that cold searching can’t match.
Online platforms like LoopNet, CoStar, and others list commercial properties. Good for research, but competitive properties often sell before reaching public listings.
Commercial Financing Reality
Commercial loans differ significantly from residential mortgages. Understanding how commercial mortgages differ from residential prepares you for the process.
Shorter terms. Typically 5-10 years, not 30. You’ll refinance multiple times during ownership.
Balloon payments. The loan balance comes due at term end. You refinance or sell.
DSCR focus. Lenders care about debt service coverage ratio—can the property’s income cover loan payments with cushion? Typically want 1.2-1.25x coverage.
Recourse considerations. Personal guarantees are often required, especially for newer investors. Your personal assets back the loan.
Property performance matters. Lenders evaluate the property’s income history, tenant quality, and lease terms heavily. Strong properties with stable tenants get better terms.
Making the Transition
If you’re coming from residential, here’s my advice.
Start with multifamily. A 6-unit or 12-unit building still involves housing but teaches you commercial valuation and financing. It’s the gentlest transition.
Understand the income approach thoroughly. Commercial investing is fundamentally about NOI and cap rates. Master these concepts before buying.
Get pre-qualified before shopping. Commercial financing takes longer. Know what you can access before pursuing properties.
Expect longer timelines. Commercial transactions typically take longer than residential. Due diligence periods are extended. Financing takes longer. Patience required.
Start smaller than you think. Your first commercial deal should be manageable. Learn the rhythms before scaling up.
Consider REITs as a learning tool. Real Estate Investment Trusts give you commercial exposure without direct ownership. They’re liquid, accessible with less capital, and help you understand commercial dynamics before committing to a direct purchase.
Due Diligence for Commercial Properties
Commercial due diligence goes beyond what you’re used to in residential.
Phase I Environmental Assessment. This reviews the property’s history for potential contamination from previous uses such as gas stations, dry cleaners, or industrial operations. Lenders typically require it before financing commercial properties. If contamination is found, remediation costs can be enormous—this assessment protects you from acquiring hidden environmental liabilities.
Tenant and lease review. Tenant quality is critical because commercial leases run years, not months. A creditworthy national chain on a long-term lease provides far more income stability than a local business on a short-term arrangement. Review tenant financials, lease terms, and lease expirations carefully.
Property condition assessment. A thorough physical inspection covering structure, mechanical systems, roof condition, parking surfaces, and code compliance issues.
Financial verification. Confirm actual income and expenses against the seller’s representations. Request tax returns, utility bills, and management records for at least two years.
Use our free CMHC MLI max loan calculator to estimate your financing on multifamily properties with CMHC insurance.
Frequently Asked Questions
What's the minimum investment for commercial real estate?
Should I start with multifamily?
What cap rate should I target?
How does commercial financing differ from residential?
How long does a commercial real estate transaction take?
What is a Phase I environmental assessment and why is it required?
How does commercial property valuation differ from residential?
What is a debt service coverage ratio and why does it matter?
How do I find off-market commercial property deals?
The Bottom Line
Commercial real estate opens opportunities that residential can’t match—larger deals, more value-creation control, different return profiles.
But it requires learning new rules. Valuation works differently. Financing works differently. Tenant relationships work differently.
The transition is worth it for many investors. Just understand that you’re not just buying bigger properties—you’re entering a different investment category with its own logic.
Build the right team. Start with property types you can understand. Master the income approach. Then scale.
That’s how you successfully make the jump to commercial.
Disclaimer: This article is for informational purposes only and does not constitute financial advice. Consult a licensed mortgage professional before making any financing decisions.
Written by
LendCity
Published
January 30, 2026
Reading time
8 min read
Cap Rate
Capitalization Rate - the ratio of a property's net operating income (NOI) to its current market value or purchase price. A 6% cap rate means the property generates $60,000 NOI annually on a $1,000,000 value. Used to compare investment properties regardless of financing.
NOI
Net Operating Income - the total income a property generates minus all operating expenses, but before mortgage payments and income taxes. Calculated as gross rental income minus vacancies, property taxes, insurance, maintenance, and property management fees.
DSCR
Debt Service Coverage Ratio - a metric that compares a property's net operating income to its mortgage payments. A DSCR of 1.25 means the property generates 25% more income than needed to cover the debt. Lenders typically require a minimum DSCR of 1.0 to 1.25 for investment property loans.
Commercial Mortgage
Financing for commercial properties like retail, office, or multifamily buildings with 5+ units, with different qualification criteria than residential mortgages.
Due Diligence
The comprehensive investigation and analysis of a property before purchase, including financial review, physical inspection, title search, and market analysis.
Down Payment
The upfront cash payment when purchasing a property. For 1-4 unit investment properties, minimum 20% down is required. 5+ unit multifamily can use CMHC MLI Select with lower down payments, and house hackers can put as little as 5% down on owner-occupied 2-4 plexes.
Coverage Ratio
A measure of a property's ability to cover its debt payments, typically referring to DSCR. Commercial lenders often require a minimum of 1.2, meaning the property's net operating income exceeds debt payments by at least 20%.
Commercial Lending
Financing for commercial real estate or business purposes, typically qualified based on property income (NOI) rather than personal income. Includes mortgages for multifamily buildings (5+ units), retail, office, and industrial properties.
Appreciation
The increase in a property's value over time, which builds equity and wealth for the owner through market growth or forced improvements.
Equity
The difference between a property's current market value and the remaining mortgage balance. If your home is worth $500,000 and you owe $300,000, you have $200,000 in equity. Equity builds through mortgage payments, appreciation, and property improvements.
Syndication
Pooling capital from multiple investors to purchase larger properties, typically structured with general partners (operators) and limited partners (investors).
Multifamily
Properties with multiple dwelling units, from duplexes to large apartment buildings. Often offer better cash flow and economies of scale.
Single Family
A detached home designed for one household, the most common property type for beginner real estate investors.
Refinance
Replacing an existing mortgage with a new one, typically to access equity, get a better rate, or change terms. Investors commonly refinance to pull out capital for purchasing additional properties (cash-out refinance) while retaining ownership of the original property.
Market Rent
The rental rate that a property could reasonably command in the current market based on comparable properties, location, and condition. Understanding market rent is essential to maximize income while maintaining competitive positioning and minimizing vacancy.
Rental Income
Revenue generated from tenants paying rent on an investment property. Gross rental income is the total collected before expenses, while net rental income subtracts operating costs to show actual profitability.
Duplex
A residential property containing two separate dwelling units, either side-by-side or stacked. Duplexes are popular among beginner investors because they can house-hack by living in one unit while renting the other to offset mortgage costs.
HVAC
Heating, Ventilation, and Air Conditioning systems that control temperature and air quality in buildings. HVAC is often one of the largest energy expenses in rental properties, and upgrading to high-efficiency systems can significantly reduce operating costs and increase NOI.
Operating Expenses
The ongoing costs of running a rental property, including property taxes, insurance, maintenance, property management fees, utilities, and repairs. Subtracting operating expenses from gross rental income yields the net operating income.
Comparable Properties
Similar properties in the same market area used to establish fair market value or rental rates through comparison of features, location, condition, and recent sale or rental prices. Analyzing comps is essential when determining offer prices and setting competitive rents.
Mixed-Use Property
A building that combines residential and commercial uses, such as retail on the ground floor with apartments above. Mixed-use properties can diversify income streams and may qualify for commercial financing terms.
Environmental Assessment
A professional evaluation of a property's environmental condition, typically required by commercial lenders. Phase I reviews historical records for contamination risk. Phase II involves soil and water testing. Essential for commercial and industrial property purchases.
Forced Appreciation
An increase in property value driven by the owner's actions rather than general market conditions. Strategies include renovations, increasing rents, reducing vacancies, or cutting operating expenses. In commercial real estate, raising NOI directly increases the property's income-based appraised value.
Anchor Tenant
A major tenant in a commercial property, typically a well-known retailer or business, that draws customers and other tenants to the location. Anchor tenants provide stability and are a key factor in commercial property valuation.
100% Financing
A mortgage structure where no down payment is required from the borrower's personal funds. In Canada, this is available for owner-occupied commercial properties through CMHC programs and for residential purchases using gifted down payments, borrowed down payments (where permitted), or vendor take-back mortgages combined with a first mortgage.
Hover over terms to see definitions. View the full glossary for all terms.