Buying a house that’s rented out to businesses

[William Walker]

There is a house for sale that is rented out to a few separate small businesses (hair dressers, etc). Initial numbers look good. I've been in the SFH long term rental game and I'm familiar with how to analyze, but not in the situation. What should I look for that's different? Is financing the same as buying a rental house?

[Frank Chin]

@William Walker

The main issue for me is if the property, a house, is zoned commercial. This is important for insurance purposes.

I had a triplex, rented to a couple. They had a home based business and its kind of iffy when it's operating in a residential zone. But originally it was only husband and wife involved and the business involved with no customers coming and going, so I left it alone. Later on, their business expanded, had employees, rented the unit below in addition, and I was advised that if you have a business, the property is zoned residential, a customer or employee had an accident, it is not covered under a residential insurance policy. A hairdresser would be a problem as they'll have customers.

As to zoning, my dad had a mixed used property in a residential zone, a zone with properties before zoning laws went into effect, and commercial use is grandfathered for him. In his case, he had a barber shop as tenant, legally allowed, and insurance is covered.

As to insurance rates, an office tenant is the lowest, bodega stores much higher, 3 times higher based on risks. A bodega is higher risk because they customers coming and going all day. So he rents mainly to tenants with little or no traffic, just needing office space.

You'll probably have trouble getting residential mortgages but check around.