If you ever drive down a street in Montreal, you will see buildings which have a shop front and above it an small apartment block. This is what is referred to as a combined duplex with both residential and commercial space.
When well selected, plexes which are split between commercial and residential space can help in diversifying a real estate portfolio while mitigating against fluctuations in the residential and commercial rental market.
Can i afford this type of investment?
While there are advantages, these types of buildings are commercially zoned and require a commercial loan which brings with it larger down payments (minimum 20%) and higher interest rates. If you can't afford the large down payment or ongoing monthly interest repayments, then this might not be the best place for you to leverage your free cash.
Why it can be a good investment
Rather than just having a building with all residential tenants, commercial tenants renting shop space can be seen as more stable than residential tenants who might be moving their life every 12 months. If buying into an established plex, there will already be a commercial tenant renting the shop space downstairs. If that same tenant has owned the shop for the last 20 years, it's very unlikely they will move anytime soon. Worst case the shop closes down, you still have your residential tenants living above paying their rent while you find the next commercial tenant.
Pros of commercial tenants
- Established business with historic track record are less likely to re-locate
- New commercial tenants are trying to establish their business and will work hard to succeed. They will make an effort to pay their rent first so they can continue to build their business.
- You know they are working to generate cash flow to pay the rental cheque each month, unlike a tenant who you can't visibly see how they derive an income.
- Established tenants know the property well and rarely complain about conditions in the building. Depending on the business they may have their own industry code to follow
- Rental price is stable (depending on location)
- They take care of the property. This is their business, they need to ensure it's up to code and looking good for their customers.
Location is everything
Like any real estate, location is a key factor to the properties success. This becomes more important when you have commercial real estate combined with your residential real estate. Buying in the wrong location could spell trouble if your commercial tenant moves out and you are in a location with slow economic growth. If you are already working with a broker to find a plex, they will look at the area and it's growth potential to ensure you're buying into a location which can sustain a plex.