Should I buy for commercial or residential resale?

Question

Hello.  I am new to BP and will be purchasing property with a SDIRA.  I am looking to buy a property between 8K to 12K lot size in the Oak Forest / nearby area that will be rented to someone I already know.  They will have a small amount of landscaping equipment on the property.  I need the property to have a small house and am targeting to sell it in 4 years.  What kind of professional would you ask the question "Should I buy for commercial or residential resale and what would be your variables for either kind?" Please feel free to share your own opinion.  For instance, "I would ask (this kind of person)" or "I recommend targeting a residential resale because...".  Thanks for your help!

Michele Broderick · Answer

Thank you Jeff, Bill and William for your posts.  Very helpful and my apologies for the delay in responding.  I was out of town in an area with limited internet connections.  My lesson from your posts is to pay attention to the zoning rules for the property.  I also think it will be good to partner up with folks who are more experienced in this kind of a transaction.  I appreciate your advice and will let this group know how it goes via PM.

William SaintAmour · Answer

Any agriculturally zoned areas outside of town? If you are dealing with equipment and need a barn, this may better fit your needs.

Bill Gulley · Answer

Zoning is key as Jeff mentioned, but legally most often you are allowed to have a more restricted use in a less restricted zoning, residential, single family (R-1) is the most restrictive use and you could have a house on a commercially zoned parcel. But, you cannot have it the other way around, unless you obtain consent or a variance from the zoning requirement.

While I said most often, you need to use the property in a manner that is usual and customary for that area. In your area, there are houses in residential areas with business concerns, these are generally in fringe areas, or zoning buffer areas and they have obtained a variance.

A variance cannot be passed on with title to a new buyer, but they may obtain the variance prior to closing to  continue a business enterprise.

The key to future financing is the property zoning and use, it is possible to obtain a secondary market home loan on a home that is in a commercially zoned area, but not a property used commercially to the public, there are minor exceptions for in-home type businesses like an insurance office that has very low or no public traffic. If you have a commercially zoned lot and public business activities then you will be restricted to commercial financing, generally higher rates, shorter loan terms and different loan requirements.

It sounds to me like you want a lot then a house to run a lawn type service from.  That may not be an issue simply being a private storage area. Unlikely any HOA would go along with this, but in an unrestricted residential area this may be allowed.

The difference is really the price, I doubt you'd find a commercially zoned parcel in your area for 12-15K.  More like ten times that. So, you're probably looking for a residential area as I described above, perhaps with a variance that you might get from planning and zoning.

The professional to talk to will be an appraiser, they are more familiar with zoning, use of property, business uses, location and financing requirements.

There is a section on planning and zoning, mixed use as well as variances at my site, it is free without any sales job, you might study that.  Good luck :)

Jeff Copeland · Answer

The zoning for the property will dictate how it can be used. So I assume you're asking "should I buy a commercial lot and build a commercial property, or buy a residential lot and build a house?".

If you indeed want it to have "a small house", or intend to build one, then you'll most likely be limited properties that are zoned residential, which would have been my vote anyway.

Residential properties usually have simpler, quicker, and more plentiful exit strategies anyway (you can sell it to an investor for cash, sell it to a retail home buyer with conventional/FHA/VA financing, or anything in between), whereas commercial properties have a completely different buyer pool and financing options.

Michele Broderick · Answer

Thank you @Vijaianand Thirnageswaram.  I appreciate your help and may PM you as our search progresses.

Vijaianand Thirunageswaram · Answer

@Michele Broderick SDIRA I assume Self Directed IRA.  Anyway, lots can go either way. Most residential lots or Residential sale which cannot be used for Mixed use like strip center or warehouse. Whereas Commericial lots can be used for mixed use. If you are planning on putting warehouse to store things, you might be looking for commercial lots. Residential lots have restriction from city and HOA. Hope this help. PM if you need help.