Many commercial real estate investors have a couple of mixed-use assets in their portfolio, usually financed with mixed-use property loans. If you’re interested in this niche, it’s important to understand first of all what a “mixed-use” property means, and how you can get financing for such investments.
What are Mixed-use Properties?
Mixed-use real estate is what its name implies. It has several different uses—residential, retail, hotel, offices, etc.—and all these separate uses compliment each other. These properties come in all sizes and shapes in sizes, from single buildings or entire neighborhoods. An increasing number of investors are putting their money in these types of property to enjoy unique benefits.
What are the benefits of investing in mixed-use real estate?
Investing in mixed-use real estate offers several distinct benefits that you may not get from other kinds of commercial properties. Despite many retail businesses closing their physical shops in favor of online selling, mixed-use properties with residential and retail components remain great investments because their very nature attracts multiple market segments, giving investors a greater ROI.
Many buyers and renters prefer mixed-use developments for convenience. Most people want to live close to key shopping and amenities. A study by the Delaware State Housing Authority shows that over 50% of Americans would prefer to bike or walk more if their neighborhood allowed them to do that. Mixed-use properties provide this opportunity.
Many other studies show a direct connection between a town’s economic viability and walkability.
These types of properties let you give residents and visitors more of what they want. The result? They stay in the property longer, spend money there, and even invest in the community. The different uses all complement each other together. For example, hotel guests and office workers can eat the restaurants and shop at the retail stores during their meal times and breaks. Shoppers can quickly see a movie and grab a bite to eat after.
Mixed-use real estate is often resilient to economic downturns. For example, although retail stores are moving online, many other businesses thrive in mixed-use settings—such as hair salons, dentists’ and doctors’ offices, coffee shops, clothing and stores, movie theaters, and more.
Rent also tends to be higher, so investors can get a greater return on their investment. Commercial leases range from 6% to 12% of the property’s purchase price, while residential leases, in general, can set rent from 1% to 4% percent.
Another great thing about mixed-use properties is that they tend to attract a desirable market segment. Millennials—a large buyer group—prefer these types of developments believing that they are more environmentally sustainable, with opportunities to use cars less and instead walk/bike to work or their favorite coffee shops. Many mixed-use assets also repurpose older buildings so as not to add to the problem of overbuilding. This appeals to younger buyers who support the idea of sustainability.
Senior citizens who have good nest eggs also like mixed-use real estate because they want to downsize to a smaller living space while being within walking distance of the shops and restaurants they love. Both millennial and senior citizens’ markets are large, with a lot of buying/renting potential, and you can rely on them to make your mixed-use property successful.
What’s more, mixed-use promotes a strong sense of community. Many of your commercial tenants will be more inclined to help keep the property meticulously maintained because they want to attract the public. Residential tenants are also likelier to do what they can to keep the neighborhood looking great. After all, it’s where they live and work.
Are there any challenges to developing and maintain a mixed-use property?
Like any other type of real estate investment, mixed-use has its share of challenges. First of all, it’s harder to get mixed-use property loans because of these developments’ complexity. But don’t worry—a good CRE financing consultant can help you in this regard.
A mixed-use development needs to meet many regulatory requirements—particularly in zoning—for all types of use. The regulations and standards change as the building of the community ages. It’s important to work with property managers and city planners to lessen the snags.
How are mixed-use property loans categorized?
The answer depends on how the lender defines the property. Not all mixed-use assets are the same.
In general, mixed-use buildings have commercial spaces (office or retail) on the ground floor and five or more residential units above. Lenders generally want that most of the building or development’s square footage and income come from the multifamily/residential side. Why? Because it generally takes more than four months to find another tenant for commercial spaces—and sometimes longer if major tenant improvements are required. Apartment units, on the other hand, can be rented out in a few days.
You also have to note that a mixed purpose property doesn’t always fall under “commercial” lending. In many cases, mixed rural and residential properties can be financed with a residential home loan with lower rates and longer terms than commercial loans. But most banks and lenders will categorize properties with commercial elements like office space, retail, manufacturing, or industrial as “commercial” real estate, so they are financed with commercial mixed-use property loans.
As you can see, getting mixed-use property loans is not as straightforward as taking out other types of real estate loans. It’s best to talk to a CRE financing specialist to know your options and find the right solution for you.
What do lenders assess when reviewing applications for mixed-use property loans?
Banks typically look at several factors to determine a borrower’s eligibility for a commercial mixed-use loan:
- The property’s location
- The borrower’s financial position and income
- The tenant and the length of the current lease
- The cap rate and yield
How much can you borrow from mixed-use property loans?
Government-backed mixed-use loans let borrowers get up to $14 million. Terms range from five to 30 years, with interest rates falling from 4.5% to 10%. These loans include SBA 504, SBA 7(a), and USDA Rural Development business loans and can be used to finance renovations and constructions. They require the building to be 51% owner-occupied.
- Commercial mixed-use lenders can grant up to $20 million. Terms range from 15 to 30 years. These standard loans are issued by banks and other traditional sources that require the property to be in good condition, though it doesn’t have to be owner-occupied. Interest rates range between 5% and 7%.
- Short-term mixed-use loans grant borrowers up to $20 million. Terms range from six months to six years. They come in different varieties, including commercial hard money loans and bridge loans. Interest rates can be anywhere from 7% to 16%.
- These loans are used by investors to compete with cash buyers. They also make sense for those who need immediate financing before switching to a permanent loan. Investors who don’t meet the personal requirements to qualify for permanent mixed-use loans from banks and traditional lenders may also benefit from this type of financing. It’s likewise suitable for those who want to buy and renovate a property in poor condition.
There’s certainly some serious money to be made in mixed-use real estate. However, this asset class can also pose challenging situations even for seasoned real estate investors, so it’s important to get help to ensure that you’re making wise, informed decisions along the way. We at Capital Investors Direct can help you get started on seeking the right mixed-use property loans for your project. Apply for a loan Now!