A Guide To Investing In Mixed-Use Properties

Home types don’t always fit into neat little boxes. If you reside in a city or some suburbs, it’s not uncommon to live above a business or run one out of your home. An increasingly popular type of real estate investment is mixed-use property. We’ll answer, “What are examples of mixed-use commercial properties?” Rocket Mortgage^® doesn’t offer commercial financing, but we offer mixed-use home loans of a primarily residential nature.

What Is A Mixed-Use Property?

A mixed-use property has a combination of commercial, residential, and sometimes even industrial units. The mixed commercial/residential property combination allows investors to get the benefits of the different property types with a single loan.

Benefits For Investors

Mixed-use commercial property allows people to live where they work. You might have your home above a store. Even if you don’t personally work where you’re living, these are also popular because the districts tend to be walking distance from other amenities like restaurants, retail and other local businesses. Entrepreneurs will often come into these areas given the potential for higher returns on investments.

Examples Of Mixed-Use Property Developments

If investing in a mixed-use space, the possibilities are really only limited to your capital and your imagination. Here are four common types you might see.

Main Street

A “Main Street” space is typically near a town’s center. The layout of these has living spaces on the top floor with shops or restaurants below. This is the oldest form of mixed-use development.

Live/Work

A live/work space is one in which the tenants or residents live within the same space in which they work. Often, the home part is on the top floor with the commercial space being on the bottom. There can be other arrangements where people live adjacent to other co-workers and the shop itself.

Residential And Office

We’ve talked about shops so far, but you can also have mixed-use residential and office space. Most of the time, this would be done with commercial financing because there are often more than five apartments in the building while the first floor or two would be reserved for the business.

Mixed-Use Hotels

While this goes beyond a residential loan of any kind, hotels will have mixed-use spaces that include the rooms up above, but one or more floors for shopping, cinemas, fitness centers, or spas below. Restaurants are also popular attractions for these.

What Does Zoning Look Like For Mixed-Use Properties?

Mixed-use zoning or planning allows for different types of property to be integrated within one development. There are three broad categories:

• Horizontal: Horizontal developments are actually single buildings adjacent to each other, but they have complementary businesses like apartments, businesses, and retail in the same small area of a block or two.
• Vertical: As opposed to horizontal developments, vertical projects are located in the same building. Stores and other businesses are located closer to the ground level. Residences are on the upper floors.
• Walkable: Walkable developments contain a combination of both horizontal and vertical developments in close proximity.

Why Are Mixed-Use Developments In High Demand?

• Walkability: According to the National Association of REALTORS^® (NAR), many Americans (millennials in particular) look for living space within walking distance of nearby amenities like restaurants and stores.
• Change in consumer behavior: Young and old alike are moving to cities so they can either walk to their destinations or take public transit. Multiuse spaces allow them to be able to take care of basic necessities without having to go very far.
• Benefits to retailers: Mixed-use developments provide retailers with more foot traffic and greater access to customers than standalone stores.

How To Find Mixed-Use Properties For Sale

There are websites that specialize in listings of commercial real estate. If you want to do a big office space or a restaurant, this is the way to go. Sometimes you have to be adept at searching off-market listings as well. Not every owner of a building wants it publicly noted that they’re selling. This has the added benefit of allowing you to potentially avoid listing fees.

How To Finance A Mixed-Use Property

If you’re looking to finance things like retail businesses or restaurants with five or more apartments connected, that will require a commercial loan and there are different financing structures. Lenders may ask you for a higher down payment or use different loan structures like debt service coverage ratios. We’re going to focus our discussion on single-family residences.

While residential lenders, like Rocket Mortgage, loan on mixed-use property, it has to be primarily residential in nature. Generally, it must be your main home. For conventional loans, there’s no specific percentage that can be dedicated to the business, but again, it has to be a home first. It also needs to be a single unit. For FHA, the limit on commercial use is 49% of the property. VA has a 25% limit. The area must have residential zoning.

Pros And Cons Of Mixed-Use Property Developments

Like any investing strategy, mixed-use developments come with their share of pros and cons.

Pros

• Diverse tenant market: The nature of mixed-use properties makes it easier to maintain a diverse tenant pool because you’re not looking for any one thing. This makes it easier to attract tenants.
• Less risk: Because you can diversify your tenants, mixed-use developments that are managed properly have less risk associated with them. If you lose a tenant because one sector is struggling, you may have an easier time finding another tenant if this business can be profitable in another sector.
• Convenience: Businesses like to be in mixed-use developments as well. The thought is that if consumers can go to one location central to transport options to live, shop, and eat, there’s going to be more foot traffic in that area.
• Sustainable real estate: Giving people the ability to live, work, and play in the same area can lessen the ecological footprint. Because people are less spread out, more natural resources in the surrounding area can be conserved. It may also lessen pollution by cutting down on the amount of time people have to drive long distances.

Cons

• Can be more complex: Planning and constructing a development intended for so many different potential uses can be lengthy and complex. Moreover, if the layout isn’t carefully attended to, it could lead to tenant conflicts.
• Can be harder to manage: Managing a property of this type can also be a challenge because you’re dealing with different types of businesses that come with unique needs. You may choose property managers with experience in different areas.
• May involve additional upfront costs: Because you’re planning and constructing a multiuse space, there may be additional upfront costs. These could take longer to recoup, especially if you have a tough time finding initial tenants.
• Can be difficult to finance: While it’s possible to operate a small business out of your house, bigger projects tend to require a commercial loan, and these come with stricter requirements.

Mixed-Use Property FAQs

Now that you have the basics, let’s touch on some questions that may be lingering.

What's the difference between a mixed-use property and a mixed-commercial property?

Mixed-commercial property is a type of mixed-use property consisting of several commercial businesses like shops, a restaurant and a movie theater. This is in contrast to other mixed-use property that might include one shop with a residence connected.

How do I manage a mixed-use property?

This can be a challenge because you have to be familiar with local zoning laws and regulations and at the same time make sure you understand the needs of both residential and commercial tenants. Finding an experienced property manager with a background in all these areas, or hiring multiple managers, for the different businesses, could be your best bet.

Are mixed-use properties hard to insure?

It’s not that it’s hard to write the policy. But an insurer of a mixed-use property has to evaluate all of the potential risks involved. For example, if you have a restaurant on the first floor, there’s a higher risk of a fire spreading into the upstairs residences than there would be in a normal home.

The Bottom Line: Mixed-Use Properties Can Help Diversify Your Investment Portfolio

A mixed-use investment property can be a big commitment, but there are many benefits to investing in one. As an investor, it’s possible that you’ll bring in a higher ROI and help build sustainable, eco-friendly communities. If there are multiple commercial businesses, you’ll need a different type of loan offered by specialized lenders, but it’s much more doable to run a small business out of your house if the primary use is still as a home.

Are you ready to get started? We can help. Fill out an application with Rocket Mortgage today.