A Guide To Investing In Mixed-Use Property

Mixed-use property is nothing new, but it has grown increasingly popular in recent years due to changes in consumer behavior. Many Americans like the idea of their favorite shops, restaurants, and even their workplace being within walking distance of home.

This provides a unique opportunity for experienced real estate investors. If you’re interested in learning more about mixed-use real estate, this article will cover everything you need to know. It’s important to note that Rocket Mortgage® does not offer financing for commercial properties.

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

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

These developments are more convenient to residents since they can reduce or even eliminate the need to own a car. And from an investment perspective, a multi-use property often generates better long-term performance and creates higher returns.

When you’re investing in a mixed-use development, there’s no limit to the types of properties you can include. But here are some of the four main property types you’ll see.

Main Street

The main street space is a blend between residential and commercial units in a town's center. This space typically includes residential units within the top floors and commercial space 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 a live/work space, 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. It could also look like business partners living adjacent to one another and their workspace.

Residential And Office

The residential and office space is a blend of office and residential units. This space is primarily a commercial building with multifamily residential units coexisting in the same building.

Mixed-Use Hotels

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

Mixed-use zoning, also referred to as mixed-use planning, has allowed for a wider integration of different property types within the same development. 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. For instance, this could look like apartments, businesses, and retail stores 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.

In recent years, there has 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 millennials to the growing demand for mixed-use properties. Increasingly, millennials prefer to live in urban areas and like to either walk or use public transit. But over the last decade, many baby boomers have traded in the suburban lifestyle for mixed-use properties.
• Rising demand for apartments: Over the last 10 years, the number of Americans renting apartments has increased by more than 10%. For those who rent by choice, mixed-use properties provide a more practical use of space.
• Benefits to retailers: There’s no question that retail stores have taken a hit over the last decade, first, from the growth of e-commerce and, most recently, due to the shutdowns from the coronavirus. Mixed-use developments provide retailers with more foot traffic and greater access to customers than standalone stores.

Now that you understand why mixed-use developments are so attractive to investors, how do you find these properties? Well, the most straightforward approach is to search through the available market listings.

However, a more strategic way to go about it may be to search for off-market listings. If you have the patience for it, this will open you up to a larger pool of real estate.

Using off-market listings can also help you cut out the middleman and avoid paying unnecessary fees. There are online sites that let you search for both on and off-market listings. 

Like any investing strategy, mixed-use developments come with their share of advantages and disadvantages. 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’s also 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 consumers.
• Sustainable real estate: Mixed-use properties benefit the environment and are 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. And the improved walkability reduces pollution since residents don’t have to use their cars as much.

Cons

• Complex: Developing a major mixed-use development including 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, this can cause conflicts between the residents and store owners.
• 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.
• Additional upfront costs: It can be more costly to invest in a mixed-use property. And if the properties are unable to draw in new tenants and customers, your profits could be limited.
• Finding appropriate financing and loan options: It can be harder to find a lender willing to finance a mixed-use development, especially if you’re operating in a smaller market.

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

Mixed-use properties refer to properties intentionally used for a variety of purposes, including commercial, residential, retail, office, or parking space. For instance, if you had an apartment complex, retail stores, and businesses located within the same area, this would be a mixed-use property.

By comparison, a mixed-commercial property uses different types of commercial properties. This could look like a mix of office, industrial and retail stores located in the same area.

What are the benefits of mixed-use properties?

There are many benefits to investing in mixed-use developments. The different types of properties often complement each other and provide more options for nearby tenants. Mixed-use properties often create a greater sense of community among the residents.

And as an investor, your returns will likely be much greater on a mixed-use property. Since these neighborhoods are in high demand, you can charge more in rent. And your commercial tenants will be highly motivated to maintain the property since their business will be affected if they don’t.

What is an example of a mixed-use property?

A good example of this would be a single building that houses different types of commercial and residential spaces. For instance, you could have restaurants, stores and office space located on the lower level. Then you may use the top levels for apartment buildings or condos.

How do you manage a mixed-use property?

Investing in and setting up the property is just the beginning. Once the property is ready, you have to do the hard work of finding tenants and managing the property.

You’ll want to invest in quality property managers who are well-versed in dealing with residential and commercial tenants. And you’ll want to know your local regulations and zoning laws inside and out to avoid problems down the road.

A mixed-use investment property can be a big commitment, but there are many benefits to investing in one. As an investor, you’ll likely enjoy higher returns and you may find higher-quality tenants who are more motivated to maintain the property.

Plus, by investing in mixed-use developments, you’re helping to build more sustainable and environmentally friendly communities. If you’re ready to take the next step, you may want to familiarize yourself with your local zoning laws.