When people think about real estate, they often imagine a long-term contract with a tenant who pays rent. While that summarizes the equation, it’s nowhere near comprehensive enough to cover the industry. We should consider real estate as an umbrella term that covers multiple rental arrangements. In this article, we’ll focus on a sect of this complex sector called mixed-use real estate.
Investors looking to leverage less traditional models ask, ‘what is mixed-use real estate, and is it the right investment?’ If you’re a landlord that doesn’t understand the hype, you’re at the right place.
Categories of Mixed-Use Real Estate
Main street is perhaps one of the most common examples of mixed-use real estate. This arrangement dates back to the Victorian era and is still quite popular today. It is a model that incorporates residential and commercial units in the same building, with the former usually on the top floors. This model guarantees more stability for property owners, as they can earn more from businesses and secure longer leases. Thus, it allows landlords to leverage some of the proven ways to make money in real estate.
Another category of mixed-use real estate that’s gaining a lot of traction is the live-work model. This model operates similarly to the main street one. However, the ‘work’ usually refers to businesses with less foot traffic. Thus, you can conveniently install them above or alongside residential spaces. Since more people now work remotely, it has become a highly sought-after living arrangement.
Walkable Shopping Mall
Despite the rise in online stores and transactions, physical shopping malls aren’t dead. On the contrary, those within walking distance from residential neighborhoods are thriving. After all, they present the perfect solution to cramming multiple businesses under one roof. They’re a massive attraction to several renters that want the peace and quiet of a cole-de-sac without compromising on the convenience of running errands.
Why is Mixed-use a Good Investment?
Increased Rental Rates
One of the most significant benefits of investing in a mixed-use model is that you can charge higher rent, especially on commercial properties. To many investors, profit is everything, and when you can charge up to 10% more on your business units, this model looks like a gold mine. However, it can get tricky to determine the fair rate for each space when everything blends. Thus, it’s highly advisable to invest in quality property managers to help maximize the potential of your mixed-use investment.
Larger Tenant Pool
Another reason investors are looking toward mixed-use real estate is the larger tenant pool. You can attract residential and commercial tenants per square foot as a property owner. This broad appeal increases your chances of selecting high-quality renters that can make your business more profitable and stable.
As a result of the access to a larger tenant pool, landlords can also enjoy lower vacancies. Mixed-use real estate is a prime location for both residents and businesses. The former because of the added convenience, and the latter because they can reach more customers. Thus, most renters will be willing to sign on for a long-term tenancy. Also, you can easily find a replacement if they have to move.
What is Driving High Demand?
Proximity to Business
Like all investments, the high demand for mixed-use real estate is profit-driven. Business owners are often willing to pay more for a blended community because it increases foot traffic. In other words, they make more money by being closer to their target audience. As a result, they can save costs on online and offline marketing.
With blended property usage, communities can enjoy more tenant diversity. For instance, tenants can enjoy more social interaction because they have more access to commercial spaces like restaurants, bars, and malls.
Mixed-use real estate provides many conveniences for its tenants, both residential and commercial. For the former, it increases their access to amenities such as laundromats, gyms, and restaurants. That means they can save more time and money with such things within proximity. Consequently, the businesses close to them will also thrive because their customers are right next door.
Owning mixed-use real estate offers investors more stability. On the same property, you can host residential and commercial tenants, allowing you to diversify your income stream quickly. As experts recommend, diversifying your portfolio can help you navigate economic downturns and make more money. Thus, mixed-use real estate seems like a better financial alternative than its traditional counterparts.
Drawbacks to Consider
Despite all the pros of mixed-use properties, it isn’t all rosy. On the contrary, it has unique problems that residential or commercial neighborhoods don’t have. One of which is opposing interests. For the most part, the hustle and bustle of retail space will clash with the need for serenity by residential tenants.
Limited Profits for Business Owners
Although businesses in a mixed-use model have the added advantage of being close to their customers, sometimes it’s not enough. In other words, if they’re unable to draw traffic from neighboring areas, the business can suffer. When that happens, turnover rates will increase, causing even the landlord to lose out.
Parking is often challenging on mixed-use properties since commercial businesses increase traffic. As a result, residential tenants and customers could suffer more inconveniences and conflicts.
Finally, financing can also be an issue for investors. As we’ve highlighted in this article, mixed-use real estate is still upcoming and has a considerably smaller market than its traditional counterpart. Thus, a developer might find it challenging to get loans from institutions that would instead stick with more proven methods.
Like every other rental type, mixed-use real estate has pros and cons. On the one hand, investors can charge higher rent while selecting a large pool of tenants. However, blending commercial and residential properties can make financing and a harmonious life more difficult. Thus, in the question of mixed-use real estate, the right investment depends on each investor.
Nevertheless, mixed-use real estate seems like a trend here to stay, thanks to its added convenience for tenants and improved stability for landlords. Successfully managing such a business model depends on your knowledge and skills. So you should feel free to reach out to an expert property management company that can help.