Duplex (both 2BR) on a corner lot in upscale neighborhood with frontage on main commercial road in town. The property includes two outbuildings. One has a popular pizza restaurant in a long term lease. The third building has a take out restaurant (currently on 1 year lease) and a 2BR apartment attached. So there is a total of 5 units (the two family house, apartment, and 2 businesses).
When leased up it should cash flow slightly, but potential big upside for appreciation based on location.
The duplex is vacant and could be converted to commercial space (lawyer, medical, insurance, etc.)
How would you analyze? Residential or commercial analysis? How would a bank look at for loan purposes?
I would think the zoning would dictate how this project would be developed and financed. It sounds like a mixed-use project which are many times difficult to finance. With an existing commercial use and the vacancies, you may want to convert the entire project to commercial use. This may result in higher rents since it sounds like there is good road frontage and this is probably the "highest and best use" of the property.
Analyze it like any other property (with adjustments when necessary, such as different vacancy factors for commercial vs residential in your area).
However, mixed-use = commercial to a lender. So no normal real estate loans from your local "big box" bank. You have to get commercial financing, which is easy for some people and impossible for others. Note, it does NOT matter if it's being used completely as a residential property, the fact that it is simply ZONED mixed use means a lender will consider it a commercial property.
I like the idea of converting to commercial as "highest and best use". Getting a commercial loan may be a little difficult but that is a good thing because if they are willing to loan on it, then it is most likely a good deal (minimum DCR of 1.25).
@Dan Wallace @Max Gradowitz , @Rob Beardsley Thanks for the replies. I checked the land records, and the property is zoned commercial, so shouldn't be a problem with a conversion in the future. Thanks for the heads up looking for commercial lending. Looks like I have some more homework to do.
Are property taxes calculated any differently?
With multiple buildings and uses on the parcel you need to pay close attention to Insurance. If possible, you want one company on all the Liability. That could be one company issuing multiple policies or a single policy. It could also be one company insuring one of the buildings but covering all the Liability and others insuring just buildings. You may have to do that on a temporary basis for the Vacant Building.
The two exposures, restaurants & Apartments are not ones that all Insurance companies like. Especially, the apartments connected to the Restaurant can be a problem. I would suggest getting quotes so you know what your costs will be. The best sources will be Independent agents that insure Restaurants and who represent multiple Insurance companies.
If you want clarification on the above or need any additional info please PM me. Good luck on the project
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