Hey community, I was just curious if anyone has applied the house hacking strategy to their business with commercial real estate. Are there any BP podcasts where this is explored? Thanks!
House hacking doesn't work the same way with commercial real estate because they don't offer the low down payment loans like FHA and conventional do for residential.
To some degree yes. I know many investors that got their start buying real estate for their business operations and then leasing out other spaces in the building. One of my clients bought a medical office where rent was lower than what they were paying and took on many other medical tenants. The tenants who moved in also benefited because they all referred business to each other so in a way the doctor was able to leverage this to get tenants. The doctor can basically retire whenever they want from many other successful real estate investments but this got their feet wet. This happens all the time but not called house hacking but just owner occupied real estate as in the primary business of borrower is conducted at property
My GC owns a warehouse in the north suburbs of Chicago where he runs his business. Back in the '90s, he was able to rezone a portion of the property and build a side-by-side 3-flat. (highly doubt you would be able to do this nowadays in cook county) He rents out the apartments to his workers and always jokes about how he never had anyone skip out on rent or come into work late.
I guess depends on what is "house hacking" when applied to commercial. You don't get the sec121 exclusion.. But, if you have your own business, its common to buy a commercial property and put your business in one section and rent out the rest. There is small strip mall buy me which does that. The owner has one unit for this gc/landscaping business office and the other units are rented out.
Then there is mixed use. A storefront on the bottom and apartments on top... There is a small breakfast/diner place where the owner/family started there. Now they rent out the two/three (kinda forgot) residential units above and behind it.
Like I said, "house hacking" seems to have a few different meanings/techniques, so there are different ways to apply it. Good luck.
@Joseph Coppus you really can house hack a business, especially if you buy a mixed use property with an FHA loan. A lot of investors don't even realize that this can be done, but if the property qualifies then you can use a low down payment loan to pick up a space for your business!
Hi all, agreed with the above that the general concept of "house-hacking" could be applied to commercial real estate where there is an owner-occupied business sharing space with other businesses or residential tenants (in the case of mixed-use). In the case of a mixed use building up to 4units, the majority of the square footage needs to be residential and then it can be considered for FHA financing (residential) with as little as 3.5% down.
@Jonathan Klemm As of right now, I'm not set on a location. I just wanted to put some feelers out there to see how plausible it is and if there are any educational resources I could invest some time in before deciding to pursue this as an option. I've gotten my feet wet with residential real estate investing, and have had success with typical House Hacking, so would love to be able to apply this strategy to a potential business one day to help manage monthly overhead.
I had never considered the potential of the mixed space and the 3.5% FHA. So, that's a great idea that wasn't even on my radar.
Word of "wisdom.." I think FHA is oversold... Conventional loans can be 5% down and generally cheaper because of the lack of the upfront mortgage fee and the mortgage insurance can come off a conventional loan. Either way, both required owner occupation unless you are doing an 'investment' conventional mortgage where you are back to 20% down.
Generally, your credit score and some of your financial situation will govern whether you qualify for the conventional. Basically, you need to be a stronger candidate.
@Joseph Coppus most any smart business owner I have met usually owns the property personally and rents it back to the business. In many cases the building has extra units that they rent to other people. I have known several people who sold businesses and told me the real estate they occupied ended up having greater value than the business when they went to sell. Some rented the space back to the new business owner for years.
Keep in mind "house hacking" is just a new term for something people have been doing for over 100 years. My aunt and uncle lived in one side of a duplex and rented the other in the 1970's. Dating back to the early 1900's people rented rooms in boarding houses which were just rent by the room owner occupied homes. Nothing new has been invented.
Back to your point about a business renting "house hacking", yes it is common for a business to do this. Just buy an office or retail building that has extra space and rent it out. No podcast necessary.
@Michael Facchini - With buying the mixed-use building does it need to be the person taking out the FHA loan or the business? Also, do you have to live in one of the units or can you occupy the business space?
I'm pretty sure it has to be the person. Legal entities are not eligible for conforming residential loans. Also, the person has to be living there. Meanwhile, at least 51% of the building must be for residential as I recall.
@Jonathan Klemm , great question! On FHA mixed-use, the borrower/buyer must occupy one of the residential units. Solely ccupying the commercial/retail space for their business (and not the apartment above) isn't enough. And the person will be the borrower/guarantor on the loan, not the LLC/business. This is a big difference compared to most commercial financing which requires there to be an LLC and the LLC is often the named borrower.
@Michael Facchini - Two more questions, what about the self-sufficiency test? Does that apply but commercial space can be taken into account? Could you also do FHA 203k?
@Jonathan Klemm , another great question bud! So, the income from the commercial space DOES count towards the self-sufficiency calc, fortunately. However, the rental income from the commercial space does not count for DTI qualification. Therefore the buyer's/borrower's income needs to help make up the difference. As for 203k rehab, you can indeed use on mixed-use but cannot include improvements on items that are for "commercial use".