Commercial real estate, a first look
You have done a few residential deals, the math feels familiar, and now a six unit building or a small plaza has caught your eye. Commercial can be a great next step, but it plays by different rules. This is an honest first look, so you walk in knowing what changes and who you need beside you.
1. What counts as commercial
Commercial is a broad word. Here is the plain version of what falls under it.
- Multifamily, 5 or more units. Still housing, and usually the most natural first step from residential. But once a building has five or more units, it is financed and valued like commercial, not like a house.
- Retail. Storefronts and plazas, where your tenants are businesses selling to the public.
- Office. Space leased to businesses to work in.
- Industrial. Warehouses, workshops, and logistics space. Often the quiet workhorse of a portfolio.
- Mixed use. One building that combines uses, such as shops on the ground floor with apartments above.
- Land. Raw or serviced land held for development or future use.
2. The big mental shift: income, not comps
In residential, a home is worth what similar homes nearby have sold for. Commercial flips that. A commercial building is worth what its income can justify. The number that drives everything is net operating income, or NOI: the rent it collects, minus vacancy and operating costs, before the mortgage. Appraisers and lenders take that NOI and apply a cap rate to arrive at a value.
If that sounds familiar, it is. It is the same cap rate idea you already use to size up a rental, just promoted from a sanity check to the main event.
Cap rate is net operating income divided by price, written as a percent. It is the lens both you and the lender use to judge what a building is worth. You can play with it on the tools below.
3. Financing is a different game
This is where residential investors get the biggest surprise, so take it slowly.
The down payment is bigger
Conventional commercial financing typically asks for 25 to 35 percent down, which is a loan of 65 to 75 percent of value. If you are new to commercial, or the property type is riskier, expect to be asked for more, not less.
The term is shorter, and it may be personal
The term is often shorter than a residential mortgage, commonly somewhere between one and ten years, with a five year term the most common. The amortization can still stretch up to 25 years. Lenders also commonly ask you to personally guarantee the loan, especially early on. Strong, experienced borrowers can sometimes negotiate that down.
Rates run a little higher
Conventional commercial rates in 2026 typically run around 5 to 6.5 percent, though they move with bond yields, so treat any number as a snapshot rather than a promise.
DSCR is the number the lender cares about most
Debt service coverage ratio is your net operating income divided by your annual mortgage payments. It tells the lender whether the building comfortably pays its own loan. Most lenders want about 1.20 times or better. The big banks usually want 1.25 to 1.30 times, and they stress test at a rate above your contract rate.
Say a building produces $91,800 of net operating income in a year, and its mortgage costs $72,000 a year to service. Divide one by the other: 91,800 divided by 72,000 is 1.275. That is a healthy 1.275 times, comfortably above the 1.20 floor, so a lender would likely be satisfied on this measure.
4. The due diligence pile
When you buy commercial, you are really buying an income stream and the paperwork that proves it. Here is what you actually review, and you do not do it alone.
- The rent roll. The list of tenants, what each pays, and when their leases end.
- Every lease. In commercial, the lease is the asset. Read them all.
- Two to three years of operating statements. To see what the building really earns and spends.
- A property condition assessment. The building's physical health.
- A Phase 1 environmental site assessment. A check for contamination risk, especially on older or industrial sites.
- Zoning. Confirmation that the use you plan is actually allowed.
- A survey. The legal boundaries.
- Estoppel certificates. Signed confirmations from tenants that the lease terms are what the seller says they are.
Triple net (NNN): the tenant pays property taxes, insurance, and maintenance on top of the rent. Gross: the landlord pays those out of the rent. The same rent number means very different things under each, so always check which one you are reading.
5. There is no tenant safety net
If you are used to residential, this one matters. Commercial tenancies are not covered by the Residential Tenancies Act. There is no Landlord and Tenant Board standing behind a commercial lease. The contract you sign governs almost everything, which means more freedom and more risk, on both sides. A commercial lawyer reads every line before you commit, because the lease is where the deal is really won or lost.
6. The honest headline: it is a team sport
Here is the honest headline. You do not evaluate one of these on your own. Before you sign anything, you want an accountant on the numbers and the tax, a lawyer who knows commercial on the lease and the closing, a commercial mortgage broker on the financing, and an agent who works this space. Assembling that team is most of the job, and it is the part that protects you.
Where this leaves you
Say you own a duplex, and a nearby six unit building comes up. On the residential side you were used to 20 percent down. On the conventional commercial side, that same building might ask for closer to 30 percent. But because it has five or more units, it may qualify for CMHC's MLI Select, which for a strong enough project can bring the down payment nearer to 15 percent. Same building, a very different amount of cash at the door, which is exactly why you bring in a commercial broker before you fall in love with it.
None of this is meant to talk you out of commercial. It is meant to get you in with your eyes open. If a building has caught your eye and you want a second read before you go further, that is exactly the kind of thing to message me about. I can help you think it through and point you to the right people to build your team.
Have a question while you read? I am one message away.
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