Around the country, often in cities or nearby suburbs there are properties built in the past containing a store front type commercial or retail space and perhaps behind or above, apartments. These are usually known as Mixed Use buildings. My parents in Chicago owned one while I was growing up. Today these may also be known as live/work spaces in some cities. The idea behind them is there can be a mix of retail and residential spaces all contained in one building. The building owner might run some sort of business or retail shop in the commercial part like a barbershop or chiropractic office and then live upstairs or behind that space in a separate apartment. I have seen these properties are popular again in Chicago and other cities due to the benefits they can provide economically. Meaning not only can new housing be built in older, dense neighborhoods by building up, but a sort of bonus retail space occupies the first floor that provides tax dollars to the local government or draws more people into the area. In my neighborhood I have seen these built recently as 4 story walk-up structures where there may be a wine shop or other retail business on the first floor and 3 stories of new apartments above.
I have a client who bought a one story 2 unit mixed-use building in Chicago for him and his wife to run a retail business in the front commercial/retail part and reside in the rear apartment portion with their children. But often the challenge can be how to secure mortgage financing for these properties. That’s where FHA 203k may be an answer whether you own the property now and seek funds to update the residential spaces or are in process of purchasing a mixed-use property. In the last few years clients have come to me as a renovation Loan Officer to ask about the FHA 203k for mixed-use as an alternative to what commercial lenders were offering them.
FHA 203k for mixed-use is a mortgage that provides funds to purchase and/or rehab the residential parts and common areas ( hallways, staircases, roof, porch, etc.) in mixed-use buildings from 2 to 4 units. Or if you own the building already it can be used to pay off any current mortgage(s) with added funds in one mortgage to renovate the residential and common areas rather than using a regular construction loan or commercial loan that may be at less favorable terms.
More specifically FHA 203k mixed-use includes funds to rehab the residential portion(s) of the building but not for the commercial space(s). None of the funds can be used for commercial space rehab. The focus of FHA 203k mixed-use is on improvement of residential spaces only. There is a formula FHA uses based on total square footage as a guide to evaluate whether a mixed-use property can have FHA 203k financing- that is 51% residential space and 49% commercial space across any 2 to 4 unit mixed-use structures. This applies whether the structure contains one commercial space or more with one residential space or more. Certainly, most mixed-use properties would have at least one front or side entrance to the residential space separate from the commercial space or perhaps a staircase to upper floors with an attached foyer or hallway. These public area portions of the building will not count toward the 49% commercial space square footage limit.
One of the benefits of using an FHA 203k mixed-use mortgage is the terms of the loan may be more appropriate for those will occupy the residential space versus a commercial loan. A requirements of any FHA loan is the borrower must occupy the property at least for the first 12 months of the loan term before converting the space to tenant occupancy. Clients have told me when reviewing terms of commercial loan alternatives, they often found FHA 203K mixed-use mortgage more appropriate for their needs. This may have been for the security of a 30 year fixed rate mortgage for example.
Not long ago I had a client come to me after reviewing commercial loan terms when purchasing a mixed-use property with one commercial space on the first floor and one apartment above. While the property had just been totally renovated he elected to use FHA 203k mixed use and add in some $5000 for fresh paint in the apartment. Given that FHA 203k is a loan to provide renovation funds, there must be at least a token amount of renovation done, such as fresh paint. The reason why he chose FHA 203k mixed-use was he liked the 30 year fixed residential rate over a higher rate on a commercial loan for a shorter term he had been offered. In the past year I have had other clients select FHA 203k mixed-use for purchases of similar properties needing extensive renovation as well.
This loan is great if you already own a mixed-use property and seek funds to renovate or update and plan to live there for at least the first 12 months of the loan term. Also if you see a mixed-use property to purchase and it does or does not need renovations, an FHA 203k mixed use mortgage can be an answer for you over other types of financing. There just must be some small amount of updating done as part of the loan, even just a fresh coat of paint.
Mixed-use properties I think are often overlooked by first time buyers. Perhaps the reason why is the desire not to live with tenants or lack of clarity on mortgages available. But if there is one commercial or retail space and one residential space it may be the business is closed after a certain time, leaving no noise or other distraction for the owners who occupy the residential portion at night for example. Plus the rent generated by the commercial space is added to borrower income at 75% of gross to add extra income to qualify for the mortgage. Meaning if a commercial space leases for $2000 a month, 75% of that or $1500 is added to borrowers qualifying income for mortgage approval.
I hope this post has been helpful and encouraging to those that may have thought a Renovation project was too complex or beyond their ability to manage. My intent is always to inform, educate, and generate discussion. Please call me or email me directly or visit my website for more information on renovation loans. I welcome your comments and questions!