Buying Commercial Real Estate: A Guide

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.

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.

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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.

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.

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.

Multifamily financing has different rules than residential — book a free strategy call with LendCity and we’ll show you exactly what you qualify for under CMHC or conventional programs.

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.

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. Explore commercial mortgage financing to start the 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.

Apartment buildings require a different lending approach — schedule a free strategy session with us to understand your options before making an offer.

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.

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Frequently Asked Questions

What's the minimum investment for commercial real estate?

Varies widely. Small multifamily (5-10 units) might require $200,000-500,000. Larger properties require more. Some investors start through syndication with smaller minimums.

Should I start with multifamily?

Usually yes. It's the most natural transition from residential. You understand housing, and the tenant dynamics are familiar even though financing and valuation are commercial.

What cap rate should I target?

Cap rates vary by market, property type, and quality. Research prevailing rates in your target market. Higher cap rates mean higher yields but often higher risk or more management intensity.

How does commercial financing differ from residential?

Shorter terms, balloon payments, DSCR emphasis, often personal guarantees. Commercial loans require different planning than 30-year residential mortgages.

How long does a commercial real estate transaction take?

Commercial transactions typically take 60-120 days from offer to closing, longer than residential due to more extensive due diligence and financing processes.

What is a Phase I environmental assessment and why is it required?

A Phase I environmental assessment 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, so this assessment protects you from acquiring hidden environmental liabilities.

How does commercial property valuation differ from residential?

Commercial properties are valued primarily on income using the formula: Value equals Net Operating Income divided by Cap Rate. This means increasing rents or reducing expenses directly increases property value. Residential properties rely mostly on comparable sales, giving you less control over valuation.

What is a debt service coverage ratio and why does it matter?

Debt service coverage ratio measures whether a property's net operating income can cover loan payments with a cushion. Lenders typically want 1.2 to 1.25 times coverage. A property earning 120,000 dollars in NOI with 100,000 dollars in annual debt payments has a 1.2 DSCR. This ratio is the primary qualification metric for commercial loans.

How do I find off-market commercial property deals?

Build relationships with commercial brokers who specialize in your target property type, as the best deals often trade quietly. Direct outreach to property owners can surface opportunities before they hit the market. Networking through investor groups and industry associations also creates deal flow that public searching cannot match.

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: LendCity Mortgages is a licensed mortgage brokerage, and our team includes experienced real estate investors. While we are qualified to provide mortgage-related guidance, the broader financial, tax, and legal information in this article is provided for educational purposes only and does not constitute financial planning, tax, or legal advice. For matters outside mortgage financing, we recommend consulting a Chartered Professional Accountant (CPA), licensed financial planner, or qualified legal advisor.

Written by

LendCity

Published

January 30, 2026

Reading Time

7 min read

Buying Commercial Real Estate: Making the Jump from Residential