Mixed-use properties are buildings that functionally and physically integrate a variety of different spaces, including residential and commercial. They can also include entertainment and even cultural spaces.
These types of properties are most common in urban areas where space is at a premium, and because there are so many opportunities for rental potential, mixed-use real estate is becoming increasingly popular among investors. However, there are some common mistakes people make when investing in these types of properties. Today we’re going to talk about what they are and how to avoid them.
1. Not Looking into the Rental Potential Closely Enough
Commercial and residential real estate investments wouldn’t exist without tenants to fill vacant homes and spaces, so it’s of the utmost importance that you choose a multi-use property that has a great potential for rental income. Location is an important part of that (more on this later), but you should also ask to see past leases, the rent roll, information on vacancies, current rent for residential and commercial tenants, operating statements, and more.
Moreover, when you seek out mixed-use commercial real estate loans, the lender will want to know that you're making a sound investment, and part of your job will be demonstrating that the property has enough income potential to cover your expenses.
2. Not Researching the Location Thoroughly
Although the idea of multi-use property may sound promising, it doesn’t necessarily mean this type of property will be successful in every area. There are many factors about the location that you should consider, and this can be complicated slightly by the fact that you're dealing with both residential and commercial property. For residential tenants, common location concerns include a safe and secure neighborhood, good job prospects, and nearby amenities, such as:
- Doctors and hospitals
- Recreational facilities
- Parks and green spaces
On the other hand, commercial tenants will be looking for a location that will bring potential customers to them. For instance, if the commercial portion of the property was a coffee shop, then prospective tenants would want a location that’s close to workplaces or in an area with plenty of foot traffic. The location concerns of your potential tenants should play a large role in your decision to buy or not buy a property.
3. Not Being Financially Prepared for Unexpected Circumstances
Purchasing any property doesn’t just require the capital and the investment property loans to close the deal, but also a budget for maintenance, repairs, and other unexpected expenses, such as the loss of a high-paying tenant. One way to prepare for these expenses is to have the building thoroughly inspected by a professional prior to the purchase. This will give you a good idea of the condition of the building and help you plan for future upgrades and renovations that might be required. However, it’s still important to have some money in reserve in case something unforeseen does happen, as that way you'll be able to address the problem while also covering all your expenses.
Mixed-use properties can be a great real estate investment opportunity, but there are common pitfalls to be mindful of when you're planning your purchase. Along with vetting the property and the location thoroughly, you should also make sure you have money in reserve for emergencies.
Mixed-use commercial real estate financing can sometimes be tricky to secure because you're dealing with both residential and non-residential property all in one space. When you decide on a mixed-use property to add to your investment portfolio, contact our team to talk about financing options.