Flipper/Rehabber · MD · Member since 2020 · 24 posts · 7 votes
Anyone have experience with mixed use properties? I spotted a building with a leased first floor retail operation, and two empty apartments (wonder why) above.
What are some of the advantages, and disadvantages with this type of investment?
@Andre M. keep in mind that you can use an FHA 3.5% down loan to finance mixed use as long as the residential part is more than 50%. If the commercial space is 50% or more then you have to put down 20-25% to do a commercial loan.
I have several mixed use buildings that I am listing this season here in Chicago, and I am making sure to advertise the one that can be financed using FHA very specifically to drive this type of buyer to the building.
@Andre M. I won a mix used commercial. Not much disadvantage unless you cant find a tenant for the Commercial space. in general Commercial is harder to lease then residential, but often has longer leases and even Triple Net lessees (NNN) where the tenants is a business that pays for all outgoings like Insurance, Taxes etc.
You will need to make sure with the City that all the units are legal and that there is demand from tenants in this location. not everyone wants to live above a Store or Pizza place.
@Andre M. as @Hadar Orkibi mentions, some of the disadvantages are dealing with commercial tenants/space. Retail store can be fairly straight forward, but since you are into commercial property, versus say a 4 family apartment, your permitting will be much more challenging if you want to make any changes, particularly to the retail area. (We have a new pizza restaurant coming in to space formerly a hair salon, and they had their permits held up for 9 months, and this is a restaurant with other stores in my city, so they have been through city permitting before).
Additionally, as mentioned, there is a balance between having uses in the first floor that people want, and uses that people want to live above.
Finally, I would only be interested in this type of property in an urban or town square type setting. Retail thrives around other retail. A convenience store will work in a highly walkable neighborhood on its own, but generally bars, restaurants, retail stores need other retail next door to survive.
Advantages, you have a diverse income stream. Demographics have generally been moving to urban or town square type areas that are walkable. Again, retail leases are typically NNN, but not always.
@Andre M. all of the above posts are correct, but I would also mention that they can be a bit more challenging to sell as well. The Chicago market has quite a few mixed use properties along main streets. Back in the 1950's it was common for shop owners to live above the shop, so they are often times set up with 1-3 apartments upstairs and a commercial space downstairs. The challenge with these buildings is that they don't have as broad an audience today, and this is especially true in the C class areas where the commercial spaces are not in as high of demand in comparison to the urban centers.
I personally think they can be a cool investment if you have a business that needs the commercial space. The apartments can help you pay most of the cost of the commercial space, which keeps your overhead low. You just need to keep in mind the tough/slow exit.
Thanks for the replies @John Warren, @Evan Polaski, and @Hadar Orkibi. The first floor is a long standing tattoo shop and is close to other retail in a family oriented neighborhood. My city is tough on business and tattoo parlors aren’t really that rare, so they probably have decent competition. Especially now with COVID, I will probably keep an eye on things to see where we are in about a month. I just spoke to a hard money lender who said she’s not doing anything for at least a month, or until the stay home order is lifted.
Anyone have experience with mixed use properties? I spotted a building with a leased first floor retail operation, and two empty apartments (wonder why) above.
What are some of the advantages, and disadvantages with this type of investment?
It's all about location, location, location. When first moving back to Chicago we had a condo in a mixed-used building along a corridor called Motor Row. The first floor was retail & the condo apartments above were all a minimum of 1500 square feet; 20-foot ceilings, some with loft areas, elevators in the building, indoor parking for residents,..... Some of the condos were rentals, others were owner-occupants. 100% occupied.
There's an advantage if the location of the mix used is attractive & has updated apartments with great amenities in or around the building. This sounds like brilliant grasp of the obvious but I imagine the building you saw with leased retail below and empty apartments above were apartments that were originally meant for the retailers below to live in & the apartments are dated and dysfunctional.
It's all about location. Being surrounded by other retail or being on a busy street corner and in a good area will benefit you greatly.
Financing can be more limited as well. With a traditional 3 or 4 unit, you can get a loan in your personal name or a commercial loan. With a mixed use you're limited to the commercial loan.
@Andre M. keep in mind that you can use an FHA 3.5% down loan to finance mixed use as long as the residential part is more than 50%. If the commercial space is 50% or more then you have to put down 20-25% to do a commercial loan.
I have several mixed use buildings that I am listing this season here in Chicago, and I am making sure to advertise the one that can be financed using FHA very specifically to drive this type of buyer to the building.
We own mixed-use and I think it depends on the location of the property and the type of commercial unit this property has. Is it an office or a liquor store/bar? Why this matters? If it is a loud/busy commercial unit with people hanging outside, are you going to be able to rent the apartments then? What are the parking requirements? If it is an off-street property, are you going to be able to rent this if the unit is for retail? What is the zoning and permitting previously for this unit? One property we own has a small office as the commercial unit and that works out great because it is a quiet tenant without the large requirement for parking.
@Andre M. it is calculated by square footage, so if you are 50/50 then FHA won't fly. I had one of my lenders tell me he got a deal done once where they built a "storage room" for the upstairs apartments and that put them over the edge of 51% used for residential to do the FHA. It is all about having the right team in this business.