These are hybrid properties with Residential units and with one or more commercial units. We see these kinds of properties very often in cities where we have commercial stores on the ground floor and residential units higher up.
HOW BANKS LOOK AT SEMI-COMMERCIAL PROPERTIES?
Why do we care what banks think about commercial properties? Because we need banks for financing.
Most of the semi-commercial properties fall under the commercial category for banks. They consider any property with over 1/3 commercial units as commercial.
Duplex, Triplex or Fourplex having 2-3 floors with ground floor commercial and First floor Residential is considered Commercial. So, even Fourplex (2-3 floors) is considered commercial because it is not about the number of units, it is about the number of floors. 1 floor out of 3 is commercial which is around 33% and it makes the property commercial.
Commercial properties mean higher risks for Banks, so it makes it difficult to secure the property and interest rates are much higher.
WHY IT IS NOT A GOOD IDEA TO BUY SEMI-COMMERCIAL?
1. HIGH INTEREST RATES FOR MORTGAGE WHICH DRASTICALLY REDUCE YOUR PROFITS
Interest rate and real estate investment profits go hand in hand. It is impossible to make good returns if someone is paying a much higher interest rate on their real estate investment.
Most of the semi-commercial properties are considered commercial by banks for mortgage approval which means much higher interest rates compared to residential properties. You may be paying a 3-7% higher interest rate which is too much to lose over time. Just an increase of 1% has a drastic impact on investment and we are talking much higher rates here. Semi-commercial property needs to make much higher returns to compensate for the interest rate difference and I haven’t seen such a case yet.
2. HIGH PROPERTY TAXES
There is a huge difference in city property taxes between Residential property and Semi-commercial property. Why would someone want to buy such property and pay high interest and higher taxes? And those stores at ground level are not that huge of an income to offset the difference.
It is possible for ground level stores to make a lot of money in some very high-end areas, but you pay a huge price to buy such properties. I bet Residential properties in the same area can produce better returns over time.
3. HIGH PROPERTY INSURANCE
Insurance is getting crazy for just residential properties, imagine how bad it will be for semi-commercial property. So, basically you bought half of the residential property, but you are paying everything at the rate of commercial rent but not getting commercial rents for the whole property.
4. COMMERCIAL SECTION DOES NOT CONSIDERABLY GENERATE HIGH INCOME IN THESE KIND OF PROPERTIES
Most of the semi-commercial properties have small mom and pop stores at the ground floor, these stores are not generating considerably high income to offset the money leaking from high taxes and interest rates.
I was looking for semi-commercial property to buy at some point, I guess I did not know any better. I looked at 100’s of properties and couldn’t find even a single property which has a considerably high income from commercial units.
5. LOWER CLASS TENANTS, PEOPLE DO NOT WANT TO LIVE ON TOP OF RESTAURANT OR BARBER SHOPS
Imagine living on top of a grocery store, barber shop, Pub, or restaurant. That is not a place to raise a family. These are really congested places and it will be difficult to find a good tenant to live in such an environment. At such places, you will find very young people who like to party and are going to have a very high turnover rate.
Maybe you can find some weird tenants who enjoy the restaurant’s food smell.
6. DIFFICULT TO RENT COMMERCIAL PART
Commercial properties are known for taking a lot more time than residential to get rented. Tenants stay longer when it is rented but it can take a very long time as well when it goes empty and sometimes it happens during economic downturns and makes it a nightmare to rent it again.
Things are even more difficult for properties which are not in high walking score neighborhoods.
On the other hand, finding tenants for residential properties is much easier, just little paint and few upgrades can get you a new tenant.
Residential properties perform well in both good and bad economic times, lots of people move into the city in good times and many sell or lose their houses in bad times and they need a place to stay in both situations.
7. DIFFICULT TO SELL
Anything sells in a hot market; the real test is when properties can be sold in any kind of market. I believe Semi-commercial properties may have a bit of a hard time finding buyers. Banks do not fancy semi-commercial buildings as much as they do Residential properties which makes deals difficult.
Who wants to pay high interest rates and taxes for average returns?
8. POSSIBLY HIGHER DOWN PAYMENT TO BUY
Income properties down payment is calculated based on the income, expenses, and the interest rates at the time. As we know already, buyers will be buying this property with the similar interest rates as commercial properties which lowers the returns and possibly the buyer must pay a higher down payment to compensate for that.
Buyer will be paying a much lower interest rate for residential property which increases their chances to buy bigger property for the same down payment.
It is a personal choice, there are some benefits owning commercial properties like lower management and maintenance costs for commercial units. You may have a tenant who will stay there for 10-20 years while tenants do not stay that long in residential properties which increase the management costs. In most cases, commercial units are maintained by the tenant as well, so nothing to worry about leaky faucets.
Personally, I prefer to invest in property which is either 100% commercial, or it should be 100% residential. In semi-commercial properties you pay interest rates and Taxes as it is entirely commercial property but rents you receive is equivalent to residential property, which makes this very unfavorable to investors. But there are still people out there buying semi-commercial properties otherwise they will not exist at all.
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