Multi Use

6 Replies

So, I'm a newbie, I've been looking but the numbers haven't made sense for a lot of the houses in my area, either slums or overpriced or both.

I will be looking at a a multi use building tomorrow and I wanted some feedback from the community.  It's a  2 commercial spaces and 2 1 bedroom apartments above the commercial.  It's for sale $75,000 below assessed value which makes me wonder.  My question is, what's the general feeling on buying mixed use property if you're just starting out.  I can afford it without any creative financing and the commercial tenants are well established, I just don't know.  Any thoughts from the experienced folks would be appreciated.

Insurance.  Commercial insurance is a bear.  I think it depends on the current commercial use, how much insurance is going to cost, and what they are going to require you to do to the building.  Also, the type of building may limit the uses your insurance will cover.  I've been going through this all summer... with my insurance refusing to cover certain tenants and rates doubling based on what the tenant will be doing with the space.... partly because it's a mixed use building.  So get an accurate insurance quote and go after it.

I'm sure you're aware that commercial units tent to have longer terms and longer vacancies. It's been my experience that commercial tenant can surprise you too.  They've been there 30 years, and then not.... and then you have to get the unit back up to speed.  So make sure you have the funds to cover an extended vacancy with repairs.

Yeah, that's my concern.  It's kind of an odd setup, basement is a garage/office for a rent a car place and there's a hair salon too.  Neither are always long term places.  The price is right but I'm nervous about the headaches.  Thanks.

That's just fine as long as long cash flows. What are the numbers in it?

@Tim Griffiths  In general,  mixed use buildings are terrific!  One gets the solid base from the commercial tenants and the ever-rising rents from the residential tenants.

Do not focus on one expense, like insurance, your tenants are going to help pay. Commercial tenants will have their own policy, even loss-of-income if it is required by the lease.  This shares the burden with what coverage you need, as the property owner. Talk with an insurance broker.  Brokers will guide you to who covers your type of property, at the best price.  But first, determine a current value for the property.

Skip the assessed value, you want to know what value it is today and where you can go with it over the next few years.  Commercial real estate is measured by the rentable square feet, residential by monthly market rents.  Value each portion and add them together.  Send a letter of intent and ask for the actual monthly expense reports and leases.  Base your offer on actuals.  What are you willing to pay for it and get the return that you need to make it work.

Read the current leases in the commercial units and find out who pays for repairs and maintenance. How strong are the leases, 1yr? any options?  What are the market rents for the residential?  Is there room for improvement? Talk with a commercial leasing agent.  What better tenants could be found for your 2 commercial units?  

Thanks for all the info everyone.  I looked at it and it's quite unusual, to put it mildly.  It's actually one commercial building, housing a rent a car with a 20 year lease and a hair salon run by the current owner of the building who wants to walk away.  There's also a very small house right next door with 2 one bedroom apartments.  The salon business she would basically give me and rent a chair from me, do I want to get into that?  So, it's just weird and while I think I could pull it off because the rent a car plus apartments would more than pay for it all while I got the salon up and running, I'm not loving it.  There's another small area in the back that could be another separate commercial space, so the potential to make some bucks is there, I just don't know.  Any thoughts BP?

One thing I realized though, why I've been so hesitant to pull the trigger on any deals.  I think I'd like to do commercial more than residential.  I feel so much more comfortable, and can talk the language and enjoy the possibilities much more.  So, how do I get into that is the next question.

Hello Tim, 

When you review the commercial leases, in addition to what @Kathy Henley recommended to review for, make sure that you know when the lease term ends (regardless whether there is a renewal or not). Another thing that comes to mind is whether there are is an early termination option for the rent a car business.

Regarding the salon, if you choose to let her "rent" a chair, I would be sure to include the right to terminate the arrangement at your convenience (so you can rent it to another commercial tenant in the event that you want to exit the salon business in the future). 

Good luck!

Disclaimer: The foregoing is for comment and discussion purposes only, should not be construed, and may not be used, as (a) legal advice, or (b) to abate in whole or in part any interest or penalties for, related to, or in connection with any tax or imposition by any governmental authority having or asserting jurisdiction, or (c) solicitation of retention or employment, or for the furnishing of legal or non-legal services, or (d) to create a client-attorney relationship or privilege.

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