Real estate investors look through many properties to find great investment opportunities. Some real estate investors focus on residential properties, while others focus on commercial real estate. However, a few real estate investors target mixed-use properties. These assets give real estate investors greater income diversification and fewer competitors because of the high barrier of entry. This guide will walk you through how mixed-use property investing works.
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 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, restaurant and other options. Those 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 real estate agents charge commissions, they 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 multiple types of tenants. You don’t have to commit to either commercial or residential tenants when you can have both.
Convenience and Lifestyle Amenities
Mixed-use properties put more units within the same location. It’s more convenient to visit a mixed-use property with 50 units than to visit 50 units scattered across different locations. Mixed-use properties can also provide tenants with amenities that give them more reasons to stick around or return.
Increased Property Value
Mixed-use properties aren’t as common as purely residential or commercial properties. The rarity combined with regular real estate appreciation can help these properties command higher valuations in the future.
Potential for Higher Rental Income
You can earn higher rental income if you have multiple tenants in the same property. You can also raise rent since you are offering more amenities.
Diversified Income
Having numerous tenants leads to more income streams. Diversified income streams reduce your risk and make it easier to navigate economic downturns.
Things to Consider When 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 have higher down payment commitments than buying your first rental property. You may have to raise over $1 million just for the down payment, depending on the property’s price. Single-family rentals and duplexes have much lower down payment requirements.
Market Volatility and Risks
Market volatility can impact your property’s value and your tenants’ ability to cover rent payments. You should consider how many vacancies your property can afford to have and how to fill them quickly when they happen.
Increased Complexity and Management Requirements
Mixed-use properties are more complex to maintain and manage than other types of real estate. If you are up for the challenge, mixed-use properties can be for you. However, it may make more sense to pick simpler properties if you are close to your financial goals.
Regulatory Challenges
Zoning laws limit where you can set up mixed-use properties. If you are already purchasing a mixed-use property, you will have fewer regulatory challenges. However, if you want to convert a residential or commercial property into a mixed-use property, you can face legal hurdles along the way.
Potential for Conflicts
Mixed-use properties can bring conflicts. Business operations from a commercial tenant can keep your tenants up at night or make them wake up earlier than they would like. Loud tenants in the upstairs housing units can also create a less pleasant experience for the commercial tenant. A mixed-use property investor has to navigate and manage conflicts between residential and commercial occupants.
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
What is mixed-use zoning?
Mixed-use zoning is when sections of land receive approval for mixed-use properties.
How can you assess the potential profitability of a mixed-use property investment?
You can assess the potential profitability of a mixed-use property investment by comparing rental rates in the area. You can see changes to residential and commercial rental rates and use those metrics as a gauge for your mixed-use property’s profitability potential.
How can you find trustworthy tenants for your mixed-use property?
You can find trustworthy tenants for your mixed-use property by getting a real estate agent’s help, running ads and screening potential tenants.
About Marc Guberti
Marc Guberti is an investing writer passionate about helping people learn more about money management, investing and finance. He has more than 10 years of writing experience focused on finance and digital marketing. His work has been published in U.S. News & World Report, USA Today, InvestorPlace and other publications.