Investing in a Mixed-Use Property: Complete Guide

Mixed-use properties typically combine residential, commercial, and sometimes even retail spaces within the same building or development. By investing in mixed-use properties, investors can tap into multiple revenue streams and spread out their risk across different market sectors.

One of the key benefits of investing in a mixed-use property is the potential for higher rental income. With a variety of tenants occupying the different spaces, you can generate a steady cash flow that is less susceptible to market fluctuations compared to a single-use property.

Continue reading to learn more about mixed-use properties and how to invest in them.

What is a Mixed-Use Property?

A mixed-use property is a real estate investment that has commercial and residential units. These properties cater to a wider range of potential customers and have more flexibility with income. A commercial tenant can occupy an entire floor, while housing units may be directly above them. Some mixed-use properties also have industrial units.

Different Types of Mixed-Use Properties

Investors can choose from several types of mixed-use properties. Here are some of the options:

Main Street Residential Commercial

A main street residential commercial property is located in a bustling town square. This property has housing units and commercial space for a business to set up shop. The commercial property is typically on the first floor, while residential units are on the upper levels.

Live + Work

Some people live where they work. Mixed-use properties enable this setup. The commercial unit is on the first floor while the housing units are above it. Some Live + Work properties feature a commercial unit and a residential unit on the same floor, separated by a wall. This arrangement is more suitable for a business owner who wants to live near their shop.

Commercial Mixed Use Office Space + Residential

Commercial mixed-use office space + residential properties have many office spaces that corporations and self-employed workers can rent. Some people renting office space may also live in residential units within the building.

Mixed-Use Hotels

A mixed-use hotel features hotel units and the usual amenities along with stores and entertainment. For instance, a mixed-use hotel may have a Starbucks Coffee Shop, a restaurant and other options. These commercial attractions can attract more people to the hotel and increase the revenue landlords make from each guest.

Compact Office Space with Amenities

Some mixed-use properties incorporate compact office spaces with many amenities. The amenities can make the space more attractive and increase the rental income your property generates.

How to Invest in a Mixed-Use Property

Investing in a mixed-use property is a bit more complicated than buying a residential unit. Understanding the basics can make your experience with mixed-use property investing more seamless.

Define Your Investment Goals

Know what you want from a mixed-use property before you commit capital to the project. Investors may set cap rate requirements and other parameters to determine if a property is acceptable for their goals. You should also consider your long-term financial goals and determine if the property will help you or serve as a distraction.

Research the Real Estate Market

Changes to the real estate market impact property prices and future demand. Staying on top of trends can help you decide which locations and property types look more promising.

Assess Your Finances

A mixed-use property is a big investment. You will have to make a significant down payment and then keep up with high monthly mortgage payments. Reviewing your finances reveals how much you can afford.

Partner with a Real Estate Agent

A real estate agent can search for properties that match your criteria. Although they charge commissions, real estate agents save you a lot of time and can help you find hidden gems.

Conduct Due Diligence

Every investor should do their due diligence before buying an asset, especially a capital-intensive asset like a mixed-use property. Hire an inspector to look over the property and stay up to date on changes to the area’s population and rent prices.

Determine Your Financing Options

The majority of real estate investors borrow money to acquire assets. You will have to take out a loan to get a mixed-use property. Reaching out to multiple financial institutions can help you get multiple loan offers. You can then compare terms and interest rates to determine the best option.

Develop a Business Plan

A business plan helps you secure tenants, explore new revenue opportunities, identify threats and monitor the competition. Business plans cover a lot of ground, and creating one for your mixed-use property can help you fill vacancies and grow your revenue at a faster pace.

Manage the Property Effectively

A mixed-use property is a lot to handle. Hiring a trustworthy property management team can give tenants a great experience, which will improve retention rates. An effectively managed property also has fewer problems in the future.

Advantages of Investing in a Mixed-Use Property

Investing in mixed-use properties offers several advantages for investors. These are some of the perks you can expect.

• Flexible Use and Adaptability: Mixed-use properties can accommodate both commercial and residential tenants, offering greater flexibility in leasing options.
• Convenience and Lifestyle Amenities: Having multiple units in one location is more convenient for management, and additional amenities can attract and retain tenants.
• Increased Property Value: The rarity of mixed-use properties, combined with real estate appreciation, can result in higher future valuations.
• Potential for Higher Rental Income: Multiple tenants and enhanced amenities provide opportunities to charge higher rents.
• Diversified Income: A diverse tenant base generates multiple income streams, reducing risk and improving resilience during economic downturns.

Disadvantages of Investing in a Mixed-Use Property

While investing in mixed-use properties offers several advantages, there are a few disadvantages with these assets. Here are some things to consider before you get started.

• Higher Upfront Costs: Mixed-use properties often require larger down payments, sometimes exceeding $1 million, making them more expensive compared to single-family rentals or duplexes.
• Market Volatility and Risks: Fluctuations in the market can affect property values and tenants' ability to pay rent, increasing the risk of vacancies.
• Increased Complexity and Management Requirements: Managing and maintaining mixed-use properties is more challenging compared to simpler property types, which may be a drawback for some investors.
• Regulatory Challenges: Zoning laws can restrict the development of mixed-use properties, and converting an existing property to mixed-use may involve legal hurdles.
• Potential for Conflicts: Conflicts can arise between commercial and residential tenants, such as noise or operational disturbances, requiring careful management to maintain tenant satisfaction.

Building Your Real Estate Portfolio

A real estate portfolio gives investors cash flow, property appreciation and tax advantages. While many investors stick with commercial or residential investments, some investors opt for mixed-use properties. These properties involve higher down payments but can be rewarding in the long run. Investors should conduct due diligence and assess their financial goals before buying mixed-use properties.

Frequently Asked Questions