Need advices. Is Mix Use less attractive?

Question

Hi all, I am looking at a property which currently has 3 residential units on a 7,200 sq ft lot. The updated zoning allows it to have MUCH higher density and it is right on the main street. The requirement is that the front side needs to have commercial component like a retail store.

My question is that would it be hard to sell if it becomes a mix use? Will people avoid mix use? From my personal experience, mix use will need 40~50% down which makes it hard to find the buyer.

I would love to hear your opinions.

Very appreciate.

Andy Chen · Answer

@John Warren Thank you. The prospective property is located in URBANIZED PLANNED DISTRICT and just within .5 mile to main highway and surrounded by restaurants and stores. So I think it shouldn't be too bad. really appreciate for your replies and patience.

John Warren · Answer

@Andy Chen I know mixed use is a little harder to finance, but I would think 65-70% LTV would be pretty easy to find. 50% LTV should get you very attractive rates and terms. I do agree that mixed use comes with a few more risks as commercial spaces are a lot riskier in these types of buildings unless you are in a thriving urban core.

Andy Chen · Answer

@John Warren I put down 50% for my commercial mixed-use few years ago and it is at not-so-great location. Maybe it was because of the location. But I was able to refin it at 65% LTV recently. I don't have experience with pure commercial deal.

I heard the down payment for mixed-use is higher. Do you know if this is true?

John Warren · Answer

@Andy Chen I am not sure what you are putting down on your residential stuff, but I only ever put down 20-25% to buy my commercial deals. In the multifamily space, it is very easy to find lenders that will do 75% LTV. It isn't that hard to find 80% LTV either. My lender in Forest Park does 80% LTV deals as one of their main products.

Jameson Sullivan · Answer

I would say, from a leasing perspective, unless you're in a downtown core type area, the retail space is harder to lease. It will likely go to a mom and pop or small franchisee if you're in a suburban market. I rarely see national, credit tenants take space of this type outside of an urban core... I would underwrite extremely conservatively for the retail space.

Andy Chen · Answer

@John Warren @Pat L. @Ian Walsh

Thank you all for your replies and valuable opinions. My observation is the same. From renting's perspective, it is the same as multi-family.

Because we already have one mixed use in a decent location, my wife wants to diversify the investment property type. So the next property can sell faster than the mixed use in case we really need the emergency money. We want to be able to sell quick. We think because commercial property requires much more down payment, it will be harder to find the buyers. This is also something we want to avoid when refinancing. (3 units --> commercial = more down payment)

So the take away from this conversation is that the location is the most important factor for mix use. If the location is right, I can sell or rent it quickly.

% of down payment is a different topic though. Should I go above 4+ units or mixed use and pay higher down as opposed to residential multi-family with lower down.

The same money, I can hold on 2 residential MFs versus 1 commercial property.

I don't have the answer. :)   I am sure each has its pros and cons.

Ian Walsh · Answer

In many areas mixed use is roughly the same value as the multi family properties with a similar amount of SQFT and units.  General observation and that can vary.

Pat L. · Answer

We have owned mixed use commercials for 12-15 years. Never had a problem filling them & all have been paid off by NNN tenants. Several in 'sketchy, I won't go there' areas, others in B+ areas.

Just got this early AM email from one of them...

“...Hey Pat, don’t worry Im good for the rent for many months during this hot mess.  I'll be applying for the Government loan and will need a copy of our lease and the monthly payment  at some point.  Is that something you can send over?  I'm not sure where my copy went….”

Gotta love REI !!!

John Warren · Answer

@Andy Chen mixed use will be fine if you are in a desirable location like a down town area. If you are in a less dense area they can be a tougher sell. Here in the Chicago market we have a ton of mixed use properties, and unfortunately, they don't seem to appreciate much compared to the rest of the real estate market as a whole.