Multi-Family Rentals with Business Running Below. Good Idea?

[David Lowe]

I've just seen a multi-family rental opportunity with a daycare on the ground floor below the regular rental units. Has anyone experienced this? Pros and Cons?

[Jeff Kehl]

@David Lowe without seeing specific numbers, let me just say I love it! I have many apartments and 2 daycare facilities although none in the same building so that would be right up my alley.

If you're fairly new to real estate investing and it's not a great deal, there may be some complexity involved so you may want to pass. Mainly I say this because the thing with multi-use is you really need to evaluate each one completely differently and combine the two to see what the property is really worth.

But let me also say a few things about daycare specifically. As you point out, what a great off-time use on multi-family. The kids are there and making noise while your apartment tenants are hopefully at work. You see bars and restaurants in the same spots a lot of times and then you have noise and odor problems. Kids are noisy and smelly but not when the tenants are there :)

I specifically like daycare because of a few factors. 1) It is internet resistant - you can't put your kid on the internet so you won't lose tenants to that in the same way you could lose a retail or office tenant to the internet. 2) It's always a need that will be there 3) A lot of times these days daycares are supported in some way with government funding.

One thing to pay careful attention to, as mentioned above, is the lease. In commercial the lease is everything. A few specific concerns would be the length of the lease, the credit strength of whoever signs it, the strength of the tenant's business, and any rehab or Tenant Improvements (TI) discussed in the lease. 

Make sure to read the entire lease and to the extent you don't understand it get help from commercial brokers and/or attorneys.