Mixed Use Commercial Property is a very productive investment and are becoming more popular with city planners. In this video, you'll discover how to buy mixed use commercial real estate, what pitfalls to avoid and what makes mixed use properties such a great commercial asset. Plus, you'll see a real world example of a Mixed Use deal recently purchased by one of my Proteges.
Benefits of Mixed Use Commercial Property
Diverse Income Streams: The best mixed use commercial properties foster a sense of community. They create spaces for people to live, work, shop and eat. That means as an investor you have the advantage of both residential and retail income, generating more predictable cashflow and better long-term performance. With mixed use developments you have the scalability of apartments and the benefits of residential tenants, as well as the stability of retail tenants with five-year leases. So, by combining these two property types you reduce your risk.
Lower Tenant Turnover: A more diverse tenant base means lower tenant turnover overall. The commercial/retail tenants will be locked into five-year leases or longer. Even if you have turnover in your apartment units, the commercial tenants who are locked in will cover your losses.
Convenience: Multi use properties create a sense of community and are convenient, catering to the live-work-play mentality.
3 Mixed Use Properties
Residential/Office: Apartments up top and offices on the ground level.
Mixed Use Hotel: These properties are very popular in downtown areas and have hotels along with restaurants, fitness centers, and other businesses that support one another.
Main Street: These mixed use developments have residential units above and retail and restaurants below. They are in pedestrian friendly areas and are on a main street, which is important to attract business for your commercial tenants. With growing urban areas and increased demand for apartments, main street mixed use properties are the most profitable to invest in right now. Located in high traffic, pedestrian-friendly areas, main street properties have high visibility and can be extremely profitable.
Out of State Mixed Use Commercial Deal
Solomon and Bethlehem are protégé students here at Commercial Property Advisors. With three young children and both working in the health sector, they are a busy family. When I asked them why they chose commercial real estate, their answer was decisive – scalability.
“We love the scaling aspect of commercial property. Rather than buying 20 homes, we can buy one 20-unit building, raise rents, increase the NOI, and end up scaling a lot quicker than residential properties.”
Property: A 16,000 square foot mixed use property located in Downtown Elgin, Illinois. A beautiful class B plus to A minus location. It has a total of 12 units - five retail, seven residential. Solomon and Bethlehem immediately saw the upside potential in a four-story building in the back that's been vacant for 10 plus years. Their plan is to utilize that space and increase the residential footprint in the property.
Asking Price: $1.2 million
Purchase Price: $1,140,000 - Solomon and Bethlehem were already getting the property a bit below market value, so they knew they needed to strategize to get the price down. They were able to negotiate the price by leveraging the findings in the inspection report, bringing the price down $60,000.
Broker Price Opinion: Rather than an appraisal, their lenders only required a Broker's Price Opinion. To get a BPO they needed to hire a commercial real estate agent to give their opinion on what the property is worth today as is, and then what the after-repair value will be once the four-story vacant property is developed. That report came back wrong. So, I suggested they reach out to the realtor and see if it could be corrected and fortunately, they were eventually able to get all the misunderstandings cleared up. However, they needed multiple deal extensions, which the seller granted. This is one of the reasons having a great relationship with the seller is so important. It enables you to negotiate through the challenges.
Financing was one of the most challenging aspects of this deal due to it being a mixed use property. Solomon and Bethlehem called 25 to 30 lenders and most of them turned them down. For mixed-use properties, many lenders require between 25-30% retail, and the rest of the units residential, especially in the current economy. That was their stumbling block.
On one of our coaching calls, I recommended a financing company that I had worked with and knew was creative when lending on these deals. Solomon reached out to them and within a couple days they had three options on the table. Bethlehem and Solomon selected the one that best worked for them, and they were able to close on the deal.
Bridge Loan: The deal was financed with a bridge loan through a commercial bridge lender. Bridge lenders can take situations that aren’t ideal for traditional banks and lend you the acquisition money and the renovation money. After twelve months and once the renovations are complete, it rolls over into a long-term loan.
One of the things Solomon and Bethlehem like about the property is the uniqueness of the four-story vacant building in the back. It’s a loft style, open concept with brick inside. They can really see the potential of turning it into downtown apartments and getting significantly higher rents.
The building is 5,000 square feet. They plan to put in five apartment units up above and retail/commercial on the first floor. They are still brainstorming what can go in that space that would benefit both the residents and the community. The total cost of the project is around $600,000. With a purchase price of $1.14 million, and renovation costs of $600,000, the after-repair value is estimated to be $2.5 – 3 million.
In addition to the vacant building, there is a lot of unused space - storage areas and basements – so they can potentially monetize those spaces as well. Also, because it is located downtown, they have air rights. With a four-story building in the back and the rest of the property being two stories, they can potentially raise it up a couple more floors to utilize that airspace. For now, they are focusing on renovating the four-story building, then they will look at maximizing the unused space and explore the possibly of building up.
Why Mixed Use?
With the popularity of a multifamily, why mixed use? Solomon and Bethlehem were always focused on apartments. But when this opportunity came up, they realized that the retail side of mixed use properties are an amenity that provides you income. An example Solomon gave was, rather than having a gym in an apartment, there is a juice bar downstairs that increases the overall value of the property. They are excited about the potential in mixed use properties.
Location, Location, Location
One of the most important factors when investing in mixed-use properties is the location. It is fairly easy to rent out the residential units, but more difficult to get commercial tenants. You must be in a great location and Solomon and Bethlehem were able to find a property in the perfect location. The city is investing in the downtown area and have plans to make a more vibrant community there. City planners want an increase in mixed use properties to create an active, vibrant feel within the Downtown area, so Solomon and Bethlehem are aligning their plan with the city's.
Investing Out of State
Investing out of state can be difficult, but Soloman and Bethlehem have steps in place to overcome any challenges.
- Boots on the Ground Team: They thoroughly vet those who will be part of their boots on the ground team - asking the right questions when interviewing property management companies and making sure they have a strong team in place.
- Connecting with the Team: Traveling to the property and connecting with the team in person, so they know that Solomon and Bethlehem are invested in every sense of the word.
- Utilizing Internet Resources: Especially in the beginning when trying to feel out the space and using Google maps to assess the area.
- Referrals: Solomon believes that people will refer you to someone that's high on their list. So, they use every opportunity to ask. For example, if they contact a property manager that doesn’t manage that area, they take that as an opportunity to ask for a referral.
- Active Investors: Investing out of state takes additional time and effort. Bethlehem says, “property managers, the team, the contractors, all know that we may be remote, but we are there and active.” They have monthly calls with their property managers, with agenda items. This might be more frequent in the beginning with the transition and setting a precedence early.
Solomon and Bethlehem’s Investing Tips
Creativity: “Be creative. Creativity is key in this market. Not all deals are the same. Not all deals are found the same. There are other options rather than just going on the MLS or LoopNet and trying to find deals. So, you must think creatively and just think outside the box. And that's very key in the commercial world.”
Resourcefulness: “Another piece that we think is important is resourcefulness. Utilizing all the resources that exist, whether it's electronic or people or whatever it is to really help you.”
Action: “You need to take action. You can do all those things, but without the action it's just going to be ideas and not come to fruition.
Goals: “Solomon and I, how we keep ourselves accountable and our goals accountable is we have what we call a BAM or a biannual meeting, we utilize that time to goal set…we're keeping ourselves, our spiritual goals, our financial goals, our family goals, all of that, and centering ourselves and making sure that we have that goal at the center of that and writing them down. And that's what led us to this program.”
Why We Love this Deal:
- It is the ugliest property in the best neighborhood. They purchased a class B and C property in an A location. That is ideal.
- It's an off-market deal. At Commercial Property Advisors we teach our students to go direct to the property owner and get the off-market deals.
- Huge Upside. The renovations to the vacant four-story building in the back will increase the cash flow two-fold – if not more. And the APV is $2.5-$3 million.
- Development potential. They have air rights for the two-story apartment building so they can potentially build up two more levels.
- Their plans are in line with the city planners of Elgin, Illinois to enrich the local community and economy.
Commercial Property Advisors Protégé Program
After purchasing a couple residentials and fix and flips, Solomon and Bethlehem were getting distracted from their goals. That’s when they decided to call CPA and get focused. They have executed the program to a T, including how they found the deal. We spend a lot of time and resources teaching our Protégé Students how to find a deal because it’s one of the hardest parts of this business. And they did exceptional. They are phenomenal with sellers, and they persevered as I coached them through lender scenarios, getting a rejection each time and coming back until they found the right lender. That's the kind of focus needed to acquire trophy commercial assets.