Chicago investing - Retail space in multifamily - Yes or No?

Question

Hi,

I am looking for my 3rd deal. While looking for multi family, I am coming across a few buildings with retail space along with residential units. I am looking for someone to give me post covid perspective on risk that comes with a retail space.

Swetha

Michael K. · Answer

I think it is easy for everyone to downvote retail space right now because of covid, but obviously there are still a lot of brick-and-mortar businesses operating out there. I think in this situation you need to bring your own qualitative analysis into the equation. Take a look around, is the property on a street with dozens of other closed-up storefronts? What's the condition of the retail unit in the building? Is it better or poorer than nearby spaces? How much will it cost to rehab? What type of businesses are in the vicinity? Is there a lot of foot/car traffic?

It could be a deal or it could not be. If it can cash flow with a high vacancy rate factored into your profitability analysis it might be a buy. You might try testing the water and seeing what kind of demand for retail space is out there. Call nearby retail spaces for rent, ask what kind of interest they are getting, do your due diligence, and best of luck!

Reach out if you need someone to bounce ideas off of.

Jonathan Klemm · Answer

Hey @Swetha Solipuram - 3rd deal that's super impressive! Are they all in Chicago? What neighborhood?

The way we analyze any retail deals is just don't count them into the cash flow. That is obviously super conservative, but retail is so tough right now that it's not worth the risk for us. You could always underwrite at 50% vacancy or something like that if you wanted to be a little less conservative.

Probably should have been my first question but is the retail unit vacant?

John Warren · Answer

@Swetha Solipuram mixed use is something a lot of us multifamily investors think about. At the end of the day, you will be dealing with only one or maybe a few commercial tenants and you will need to screen them to see if their business is viable. You also would need to potentially help with a buildout cost, etc. I personally chose to stick to traditional multifamily as I felt it was best to stay in my lane.

At the same time, mixed use has some added benefits (especially smaller ones). If you have 4 units or less, an FHA buyer can take them down. This is actually one of my primary strategies when I list mixed use properties. I find that the highest purchase prices are almost always FHA buyers which works well for my sellers.

Matthew Crivelli · Answer

I can give you some guidance on the lending end of things. With mixed use properties you will need to have a full commercial narrative report preformed, the leverage will be lower 70% - 75% max, and it could take 45 - 60 days to actually close. This is because mixed use is always considered a commercial property. You will also run into minimum purchase price requirements. Anywhere from 250k to 500k minimum PP.

Chicago investing - Retail space in multifamily - Yes or No?

Chicago investing - Retail space in multifamily - Yes or No?

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