A guide to investing in mixed-use properties

Investing in a mixed-use building – such as a residential apartment with commercial retail space below – is an increasingly popular type of real estate investment.

Read on to learn more about this asset type and how to invest in it, including with a mixed-use home loan from Rocket Mortgage.

What is a mixed-use property?

A mixed-use property is a type of investment property that combines commercial, residential, and sometimes even industrial units. This combination of units allows investors to take advantage of different property types in a single investment.

Mixed-use developments often contain complementary properties, like a hotel that also houses retail stores and a gym. It could also include an apartment complex that’s within walking distance of restaurants and local businesses.

These developments are often more desirable for residents because shops and amenities are within a convenient distance from the complex. From an investment perspective, a multiuse property often generates better long-term returns.

Types of mixed-use property developments

When you’re investing in a mixed-use development, there’s no limit to the types of properties you can include. Below, we walk through the four main property types you’ll see.

Main Street

Main Street mixed-used properties are a blend between residential and commercial units in a town’s center. This space typically includes residential units within the top floors and commercial spaces on the ground floor. The main street model is one of the oldest and longest-lasting examples of mixed-use real estate.

Live/work

In live/work mixed-used properties, tenants live and work in the same building. This could look like a business on the ground floor of the building, with apartments located on the top floors. A live/work environment could also include business partners who live adjacent to one another and their workspace.

Residential and office

The residential and office mixed-use property is a blend of office and residential units. This space is primarily a commercial building with multifamily residential units coexisting in the same building. However, unlike Main Street, the commercial space is offices, not retail stores.

Mixed-use hotels

A mixed-use hotel typically includes a hotel, fitness center, retail area, cafe or restaurant, and an entertainment space. Taking advantage of a mixed-use property in the hotel industry can help increase foot traffic and the hotel's profitability.

What does zoning look like for mixed-use properties?

Zoning for mixed-used properties lets you put a cafe, a dry cleaner, a therapist’s office, and other commercial units beneath apartments on the same block. These zoning developments usually fall into one of three categories:

• Horizontal: Horizontal developments typically include a variety of single-use properties that offer complementary functions. A horizontal development might have apartments, businesses, and retail stores all located within the same block.
• Vertical: Vertical developments contain different types of properties within a single building. For instance, retail stores may be located on the lowest level of the building, with apartments on the top floors.
• Walkable: Walkable developments contain a combination of both horizontal and vertical developments.

Why are mixed-use developments in high demand?

In recent years, there’s been a growing demand for mixed-use developments. Here are a few reasons why that’s the case:

• Walkability: One of the biggest benefits of mixed-use developments is walkability. According to the National Association of REALTORS^® (NAR), many Americans prefer living in neighborhoods within walking distance of nearby amenities. In particular, millennials prefer living in neighborhoods where they can walk to nearby restaurants and stores.
• Change in consumer behavior: Many people attribute the growing demand for mixed-use properties to millennials, many of which live in urban areas and prefer to walk or use public transportation when getting from one place to another. Over the last decade, many baby boomers have also traded in the suburban lifestyle for mixed-use properties.
• Rising demand for apartments: A National Association of Home Builders report finds that in 39 states and the District of Columbia, more than 65% of households are unable to afford the median-priced new home. As a result, many resort to renting instead, putting upward pressure on demand for apartments.
• Benefits to retailers: Mixed-use developments provide retailers with more foot traffic and greater access to customers than standalone stores.

How to find mixed-use properties for sale

To find mixed-use properties for sale, explore available market listings by working with a real estate agent.

Alternatively, search for off-market properties. These are properties not listed for sale but whose owners may accept the right offer. Since these deals involve fewer middlemen, you may also save on transaction fees.

Do your research and explore websites that let you search for both on- and off-market listings.

How to finance a mixed-use property

Financing a mixed-use property can be done through a conventional loan, primarily a residential or commercial loan.

While residential lenders, like Rocket Mortgage, loan on mixed-use property, it has to be primarily residential in nature. Generally, it must be your main home. For conventional loans, there’s no specific percentage that can be dedicated to the business, but again, it has to be a home first. It also needs to be a single unit. For FHA, the limit on commercial use is 49% of the property. VA has a 25% limit. The area must also have residential zoning.

If you’re looking to finance things like retail businesses or restaurants with five or more apartments connected, that will require a commercial loan, which have different financing structures. Lenders may ask you for a higher down payment or use different loan structures like debt service coverage ratios.

Pros and cons of mixed-use property developments

Like any investing strategy, mixed-use developments come with their share of advantages and disadvantages for property investors. Let’s look at some of the biggest pros and cons you should consider.

Pros

• Diverse tenant market: When you invest in mixed-use property, you’ll often find a more diverse array of tenants. This can lead to more vibrant, interesting communities, which improves the property value of the whole neighborhood.
• Less risk: Thanks to the high demand for mixed-use properties, it tends to be a less risky investment. It can also be considered a safer investment because you’re diversifying your investment across multiple types of properties. By not putting all your eggs in one basket, you won’t lose out on as much income if you lose a tenant.
• Convenience: Because of the easy access to public transportation, shops, work and restaurants, mixed-use properties tend to be more convenient for residents, consumers and investors.
• Sustainable real estate: Mixed-use properties can benefit the environment and are often a more sustainable way to live and work overall. Because the developments are compacted within a denser area, land and other natural resources can be conserved. Plus, the improved walkability reduces pollution since residents likely won’t have to drive as often as they would in places like the suburbs.

Cons

• Can be more complex: Building a mixed-use development that includes shopping, hotels, offices, and apartment buildings could be a far more complicated process that takes a year or longer to complete. And if the property is poorly thought out, it could lead to conflicts between the residents and store owners.
• Can be harder to manage: Planning this type of project is more complex, but managing one can be even more challenging. You may need multiple property managers to oversee a single property.
• May involve additional up-front costs: It can be more costly to invest in a mixed-use property. If the properties are unable to draw in new tenants and customers, your profits could be limited.
• Can be difficult to finance: It can be harder to find a lender willing to finance a mixed-use development, especially if you’re operating in a smaller market.

Mixed-use property FAQ

As a real estate investor, you may have more questions about buying mixed-use property developments. Let’s go over some frequently asked questions.

What's the difference between a mixed-use property and a mixed-commercial property?

Mixed-use properties may contain residential and commercial units, while mixed-commercial properties contain only a mix of commercial units.

For instance, a mixed-use property development could be a combination of an apartment complex, retail stores, and businesses located within the same area. Meanwhile, a mixed-commercial property could be a mix of office, industrial, and retail stores in the same area.

What’s an example of a mixed-use property?

An example of a mixed-use property development is a single building that houses different types of commercial and residential spaces. For instance, the complex could contain restaurants, stores, and office spaces located on the lower level. The top levels could then be used as apartments or condos.

How do I manage a mixed-use property?

You can manage a mixed-use property by hiring an experienced property manager who is well-versed in dealing with both residential and commercial tenants. You’ll also want to know your local regulations and zoning laws to avoid issues with the property down the road.

The bottom line: Mixed-use properties can help diversify your investment portfolio

A mixed-use investment property can be a big commitment, but there are many benefits to investing in one. For example, you could earn a high return. Plus, you’re helping to build more sustainable and environmentally friendly communities.

Whether you’re a new or experienced real estate investor, Rocket Mortgage can help you on your home buying journey. While we don’t currently offer financing on commercial real estate, we can provide guidance if you’re interested in single-family, multifamily, and other types of investment properties.

Ready to get started? Fill out an application with Rocket Mortgage today.

This article is for informational purposes only and is not intended to provide financial, investment, or tax advice. You should consult a qualified financial or tax professional before making decisions regarding your retirement funds or mortgage.

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