We get this question all the time. Let’s jump into it!
A property in which people live is by definition Residential in its usage. The simplest example of this is a single family house.
A property that generates income is Commercial in its usage. The most common examples of these are offices, retail stores, warehouses, and so on.
What about a house that is rented out to tenants by the owner? It fulfills the Residential and Commercial usage definitions since people live in it and it also generates income.
That’s where banks (or more broadly, lenders) get to influence the real estate market by offering residential or commercial loans based on their classification of objectives and value/risk.
A single family house (or a residential property with “few” dwelling units) fulfills the objective of house ownership and its value/risk is correlated with the market activity in home sales. Such properties have primary Residential characteristics and providing them for rental leasing is an incidental usage.
On the other hand, a residential property with a large number of dwelling units fulfills the objective of housing availability (not ownership) and its value/risk is correlated with the income generated by the property. These properties have primary Commercial characteristics where rental leasing is the only logical usage.
What’s the threshold of “few” dwelling units under the first case? Lenders, and therefore the real estate industry, have decided the magic number is four.
So, residential properties with one unit (single family) are always classified Residential and those with 2 units (duplex), 3 units (triplex), or 4 units (quadplex) are classified as Residential Multifamily.
Following that thread, residential properties with 5 or more units are classified as Commercial Multifamily.