Investing in Mixed Use Commercial Property

What is Mixed-Use Property?

There is some confusion amongst beginning commercial real estate investors as to what a mixed use property is and how to evaluate the relative drawbacks and advantages of investing in mixed use properties. Very simply, a mixed use property is any real estate that has a combination of both residential and commercial units.

Financing Mixed-Use Property

Many people don’t realize that they will need a commercial loan to buy a mixed use property even if the majority of the income produced is from the residential section of the property. As long as the property has some component of commercially zoned property then the buyer who uses financing will have to apply for and qualify for a commercial loan. If the property is a small, free standing building, then the buyer may have difficulty finding a lender or broker to work with him or her. The reason for this is the fact that preparing a commercial loan requires more hours and work then a residential loan and most commercial loan brokers only charge about 1 to 2 points of interest in compensation. The time spent working on a small mixed use property that is priced at $125,000.00 is not worth small amount of compensation that a broker would earn working on the deal. This is very important for new commercial real estate investors to keep in mind when shopping for property.

Evaluating these Properties

Another issue to watch very closely is the strength of your commercial tenants. For example, let’s assume, were looking to purchase a mixed use in property in downtown Philadelphia that consists of a commercial storefront downstairs and a 2 bedroom and 1 bath unit upstairs. In our hypothetical property, the downstairs unit is 2,500 square feet and occupied on a 3 year lease, which expires in 6 months with an option to renew. The tenant is a privately owned retail store that sells vinyl records and posters. Meanwhile, the upstairs tenant just moved out and left the place a mess. The tenant was a college student at a local university. The price for the mixed use building is below the listed value of similar properties in nearby neighborhoods.

The above scenario should give the astute investor some pause for serious thought and consideration. First of all, the strength of the commercial tenant is not at all strong. The lease is soon to expire and the business is not a national chain who are seen as more reliable. Furthermore, the tenant is in a business that is not exactly a growth industry. Demand for vinyl records is not booming. Nowadays, the owner of commercial property has to consider what kind of competition their tenant will be facing from similar internet businesses who sell their products and services online. In this case, the potential internet competition would be high. Another red flag thrown up by this potential investment property is the fact that the top unit is not rented at all. Renting out this space could take time and cost money.

All of these considerations do not mean that the investor should not purchase the property but they are just a few of the things that should have an impact on his property analysis. These considerations should help the investor make a better offer if he or she does decide to purchase the property.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.