Financing Options for Mixed-Use Properties

The real estate industry is composed of two property types – residential and commercial. There are key indicators to the differences of each property type. If you are looking to buy or sell property that will be used to produce income, you’re probably dealing with commercial real estate.

As a general rule of thumb, if your lender requires a commercial real estate mortgage for the property you are considering, then the property is considered commercial. A multi-family (residential apartment) building that contains 1-4 buildings is considered a residential property and would require a residential mortgage. However, the same building with five separate units or more would require a commercial mortgage and is therefore characterized as a commercial property.

A mixed-use property is referred to as a combination of both residential and commercial applications. For example, the property may include retail on the first floor in addition to an apartment on the second floor. It is used as a dwelling or place of residence in addition to producing income. However, financing options are typically limited when purchasing a mixed-use unit or building. Two of the most popular options for this type of property include conventional loans and FHA loans.

• Fannie Mae requires that no more than 20% of the effective gross income come from commercial space and no more than 20% of the net rental space of the building be commercial space. Freddie Mac does not have square footage restrictions but limits the commercial income to no more than 25% of the property’s gross income. Fannie Mae and Freddie Mac will do mixed-use as long as it is convinced that the commercial activity will enhance the residential community and is compatible with housing.
  
  
• FHA guidelines allow the purchase of property with mixed-use properties. For instance, a borrower may be interested in purchasing a home that is zoned commercial or there may be a desire for a small storefront. FHA allows this option if the purchase falls within certain guidelines; the commercial space can be up to 49% of livable space and the use must be legal or “legal nonconforming”. FHA financing may be an option for the purchase you are considering but the appraisal value is very important. The property may or may not pass an FHA appraisal depending on whether it meets the minimum requirements.

In the instance your property does not pass an FHA appraisal, you may consider a commercial loan. Primarily, local banks may disburse a commercial loan. Keep in mind, they could underwrite the project differently. The income generated from the building could be utilized toward income guidelines for qualification purposes. A common commercial loan may consist of an adjustable rate loan with a balloon payment and is typically a five (5), seven (7), or 10-year term.

To learn more about commercial loan options, talk to a trusted Advisor from Verani Realty.