Picture a coffee shop on the ground floor with apartments above it, or a row of townhomes where each owner runs a studio or small office from the front room. Those are mixed-use and live-work properties, and you'll find them in historic downtown blocks as well as newer planned developments.

For investors, these buildings can offer more than one income stream from a single address. They also bring more moving parts than a standard rental. Here's an overview of what to look at before you buy.

What Counts as Mixed-Use?

A mixed-use property combines two or more types of use, most often commercial and residential. Common formats include:

  • Vertical mixed-use: retail, restaurant or office space at street level, with apartments or condos on the floors above.
  • Horizontal mixed-use: separate buildings with different uses sharing one site or development.
  • Live-work units: a single unit designed so the occupant can live in one part and operate a business from another, often with its own storefront or client entrance.

Start With Zoning and Permitted Uses

Zoning determines what you can legally do with a property, so confirm it before you get attached to a building. Questions to ask the city's planning or zoning department include:

  • Which zoning district the property is in, and which uses are allowed outright versus only with a special permit.
  • Whether the current uses are legally established or "nonconforming," and what happens if a space sits vacant or needs to be rebuilt.
  • What a new business tenant needs before opening, such as a certificate of occupancy.
  • Parking, signage and occupancy requirements tied to each use.

Outside city limits, Texas counties generally have limited zoning authority, but deed restrictions, subdivision rules and utility capacity can still control what you can build or operate. Tarrant County and Ellis County both include incorporated cities and unincorporated areas, so the answer always depends on the exact address.

Financing Works Differently

How a mixed-use property is financed often depends on how much of it is residential. Some residential loan programs allow a limited amount of business space when the property is primarily a home -- think of a small shop attached to an owner-occupied residence. Once the commercial share is significant, or the building has more units, lenders typically treat it as a commercial loan.

Commercial financing usually focuses on the property's income and its ability to cover the debt, and it often involves larger down payments, shorter terms and different prepayment provisions than a typical home loan. Some lenders specialize in mixed-use properties while others avoid them, so it pays to shop around. With his background as a loan officer and mortgage broker, Tarus can help you set realistic expectations early, but always confirm terms directly with your lender.

Leasing to Two Kinds of Tenants

Residential and commercial leases are very different documents. Residential leases are usually shorter and are shaped by landlord-tenant laws designed to protect residents. Commercial leases tend to run longer, are more heavily negotiated, and may pass costs such as taxes, insurance and common-area maintenance through to the tenant.

Each side carries its own vacancy risk. A ground-floor commercial space can take longer to fill than an apartment, and the business you choose can affect how appealing the units upstairs are -- a quiet office and a late-night restaurant make very different neighbors. Have a real estate attorney prepare or review your commercial lease forms.

Insurance

A standard homeowners or landlord policy may not fit a building that houses businesses. Mixed-use owners often need a commercial package policy that addresses the residential units and the commercial space together, including liability for customers on the property. Ask commercial tenants to carry their own coverage and, where appropriate, to name you as an additional insured. An insurance agent who writes commercial policies can help you match coverage to the specific uses in your building.

Due Diligence Checklist

  • Environmental: Past uses such as dry cleaning, auto repair or fuel sales can leave contamination behind. Commercial lenders commonly require a Phase I Environmental Site Assessment.
  • Accessibility: Commercial space open to the public generally must meet Americans with Disabilities Act requirements, and some newer multifamily buildings have accessibility requirements under federal fair housing law.
  • Parking: Each use may carry its own parking requirement, and shared parking can create friction between residents and customers.
  • Building systems: Look at separate utility metering, fire separation between uses, grease traps for food service, and HVAC capacity.
  • Leases and financials: Review rent rolls, lease terms, tenant estoppel certificates and the property's operating history.

Experience on Both Sides of the Building

Tarus works with clients on residential and commercial real estate, including multifamily, office, retail, investment, mixed-use and hospitality properties. He has also helped on a large mixed-use and hospitality transaction, so he understands how many pieces have to come together on deals like these. As with any investment, review your plans with a CPA, attorney and financial advisor.

If you're new to investing, start with our overview of the benefits and risks of investing in real estate. When you're ready to evaluate a specific property, contact Tarus to talk through zoning, financing and leasing one step at a time.