Investing in real estate is becoming a common form of supplemental income for some and primary income for others. While rentals and flips are common, mixed-use properties are also a highly sought-out investment opportunity, offering income diversification, a convenience factor for tenants that may allow you to charge higher rent, and financial stability for the investor.

As a real estate investor, looking into mixed-use real estate can enrich your investment portfolio with rent obtained from a combination of residents and commercial tenants. Read on in this article to learn more about buying a mixed-use property and the logistics behind mixed-use real estate.

What Is a Mixed-Use Property?

A mixed-use property is a building or development that combines multiple types of uses within the same structure or complex. Typically, this means a mix of residential, commercial, and sometimes even industrial spaces. For example, you might have apartments on the upper floors, retail shops or restaurants on the ground floor, and offices in between. Mixed-use properties are designed to create vibrant, walkable communities where people can live, work, and shop all in one place, helping to reduce the need for car travel and promoting a more sustainable lifestyle.

As an investor looking into mixed-use real estate properties, there are several types of mixed-use properties to consider.

Examples of Mixed-Use Properties

Mixed-use properties can vary widely in terms of design, location, and the types of spaces they combine for residential and commercial use and can provide opportunity for investors to develop customized spaces. Some mixed-use building examples include:

Urban loft buildings serve several residential and commercial purposes. Old industrial buildings or warehouses may be converted into mixed-use loft spaces with businesses, galleries, etc. on the ground level while the upper floors are converted into loft-style apartments or condos.

Retail and Apartment Complexes have retail stores that occupy the ground level with apartments above those retail shops and businesses. These are often found in busy downtown areas and provide convenient living spaces.

Hospitality with Retail can provide a great option for tourists looking for a hotel and retail/dining in the same space. With ground level retail stores, restaurants, and businesses with hotel rooms on the upper floors,

Malls with Offices and Residential Spaces are growing in popularity, as modern day malls that fill the spaces of the diminishing traditional mall presence. These buildings can be transformed into a combination of office spaces, cafes, and apartments in the existing mall structure, providing a “work, shop, live” concept.

How to Find Mixed-Use Property

Finding a mixed-use property can be a bit more involved than searching for residential or commercial properties on their own, but with the right strategy, you can find a great investment.

Online listings are a starting point for finding mixed-use properties. Websites like Zillow, Realtor.com, CREXi, and PropertyNest provide a variety of residential and commercial properties as well as mixed-use properties. You may consider working directly with a real estate agent to discover potential mixed-use properties, as they have knowledge of pre-market opportunities, zoning laws, and more.

What are Mixed-Use Property Loan Requirements?

When applying for a loan for a mixed-use property, the requirements can vary depending on the lender, the specific property, and whether it's primarily residential or commercial in use. However, here are some general factors that most lenders will consider:

Property Classification: One thing lenders may look at is the percentage of the property used for residential vs. commercial space not only for zoning regulations but to determine the type of loan that would be most appropriate.
Down Payment: For residential mixed-use properties, lenders may require a 15 to 25 percent down payment, similar to traditional residential loans. For commercial mixed-use properties, the down payment may range from 25 to 35 percent, as commercial properties are seen as higher risk by loan officers.
Credit Score: A good credit score is usually required, typically over 650, though some lenders may have more flexible requirements depending on other factors.
Debt Service Coverage Ratio (DSCR): For commercial mixed-use properties, lenders often look at the Debt Service Coverage Ratio (DSCR), which is the ratio of the property’s income (from acquired rent, for example) to the debt payments. A DSCR of 1.2 or higher is common.
Experience with Mixed-Use Properties: Some lenders may prefer borrowers who have experience managing mixed-use or commercial properties. If you’re new to this type of property, you might need to provide additional documentation or explanations of your experience and plans.
Income and Cash Flow from Rent: Lenders will want to see that the property generates stable rental income, especially for the commercial space. If the property’s income can cover the loan payment and more, that strengthens your application.

What Type of Loan Do You Need for a Mixed-Use Property?

When financing a mixed-use property, you generally need a loan tailored to both the residential and commercial components of the property. The type of loan you'll need depends on the property’s use, the percentage of residential vs. commercial space, and your financial situation.

Can you get a residential mortgage on a mixed-use property? For smaller mixed-use properties with a residential component (typically owner-occupied or with a high percentage of residential space), a conventional residential mortgage loan may be most appropriate and would require a 10 to 20 percent down payment for a 30-year or 15-year fixed-rate loan.

For larger mixed-use properties where the commercial space makes up a significant portion of the property or if the residential space is minimal, a commercial real-estate loan that comes with shorter terms and a 20 to 30 percent down payment would be most appropriate. However, the interest rates for commercial loans tend to be higher, as these loans carry the most risk and requirements, including a higher credit score as well as show of a strong business income

Other loans such as SBA 504, FHA 203(k), and bridge loans are also options that your lender may present depending on your investment strategy, financial position, and property history.

Mixed-Use Building Insurance

The insurance costs for mixed-use properties can vary depending on a number of factors, including the size and location of the property, the specific mix of uses (residential vs. commercial), the level of coverage needed, and the insurance provider. The overall calculation takes into account the risks associated with both the residential and commercial components of the property.

Type of Coverage

Insurance for mixed-use properties typically requires multiple types of coverage to address the various risks associated with both residential and commercial spaces. The main types of insurance involved are:

Property Insurance: Covers the building itself and any associated structures (like parking garages or storage units) against damage from events like fire, storm damage, theft, or vandalism.
Liability Insurance: Protects against injuries or accidents that happen on the property. This includes slip-and-fall incidents in both the residential and commercial areas.
Loss of Income Insurance: If the property is damaged and becomes uninhabitable or the commercial areas have to close temporarily, this can cover lost rental income during repairs.
Commercial General Liability (CGL): This is often a must for mixed-use properties, especially if you have businesses or retail on-site. It covers accidents, injuries, and damages that happen within the commercial areas.
Flood and Earthquake Insurance: Depending on the location, these might be added on for additional coverage in case of natural disasters.

Cost of Mixed-Use Property Insurance

There are several factors that impact the cost of mixed-use property insurance including property location, building size and construction type, the risk profile of commercial tenants in the mixed-usep property, the amount of commercial vs. residential space to be used, building condition (and subsequently safety), claims history and more.

For small mixed-use properties, such as a two-story with ground level retail and apartments above, insurance costs may range from $1,000 to $4,000 annually for basic insurance coverage.

For larger mixed-use properties, including those with more commercial tenants and a higher number of residential spaces, costs can range anywhere from $5,000 to $20,000 annually, as the risk profile of these properties tends to be more significant.

Explore Private Lending for Mixed-Use Properties with Capstone Capital Partners

If you are looking into purchasing a mixed-use property and need the assistance of a private lender with flexible terms and competitive rates, look no further. With Capstone Capital Partners, you get the assistance of financial experts with a proven track record of providing a smooth, hassle-free loan experience for borrowers all across Texas.

To get pre-approved in as little as 24 hours or to speak with one of our team members, answer a few short questions, and we will be in touch!

Mixed-Use Properties: What They Are, Loan Requirements, & More