Mixed use property: Everything you need to know

Bridging the gap between commercial and residential buildings, mixed use properties have long been a popular investment for real estate moguls. But what exactly are mixed use properties, and what does it take to sell them?

What is a mixed use property?

As the name suggests, a mixed use property is a building that’s used for several different purposes, primarily both commercial and residential. In other words, a mixed use property caters to people who both work and live there.

What constitutes mixed use?

If a property has both a domestic, residential and commercial uses across different areas or floors then it would be considered as mixed use. A good example of a mixed use property is a semi-commercial property with a salon on the ground floor, and a studio apartment upstairs.

If the owner of this property (the freehold owner) decides to rent their property out, they’ll likely have two separate rent agreements - one with the residential tenants of the studio apartment, and one with the commercial tenant of the salon.

In legal terms, there isn’t a difference between the terms ‘leaseholder’ and ‘tenant’. However, we tend to describe those renting residential property as ‘tenants’ and those renting commercial properties as ‘leaseholders’. The main difference between residential and commercial rent agreements, is that residential agreements are short-term and commercial agreements are long-term.

As a result, the freehold owner of the mixed use property generates two sources of income. One from the Assured Tenancy Agreement with the tenants upstairs, the other from the Lease Agreement with the commercial unit downstairs.

How to sell a mixed use property

In terms of tax treatment, mixed use properties are classed as commercial. As a result, they are sold in a similar way to non-residential property - except for a few key differences.

Six key steps for selling mixed use property

1. Preparing your mixed use property for sale

Like purely residential property, commercial property must look attractive to potential buyers. That means rubbish, debris and clutter needs to be cleared away so that the property looks appealing.

Reconsider mixed use status

One option available to mixed use property owners is to reconsider the status of their property. Selling property is no easy thing, and while there are many investors keen to purchase mixed use properties, it may prove simpler to redevelop and remarket your property with a single proposed usage.

2. Valuing your mixed use property

Annoyingly, mixed property is one of the more complex areas of property valuation. To get an accurate figure, you need to:

• Work out the property’s rental income.
• Find comparable yields to apply to the revenue.
• You should also examine the value of the individual lots within the building to see what they are worth individually.

Together, these will start to paint a picture of what the total value of the freehold should look like. There is, however, a lot more to consider.

For instance, the covenant strength of the commercial tenant will also impact the total value of the freehold. Are they a limited company or a sole trader? What’s their turnover? How long have they been trading? Commercial space is valued very differently to residential property. Rental amount and years left on the lease all contribute to the total value.

Another key component is the required yield of investors in similar properties under similar lease terms. If the shop downstairs returns £14,000, and an investor is looking for a 10% return, the shop could be worth £140,000.

3. Instructing a commercial estate agent

You must instruct a commercial estate agent to market your property, one who is a member of an official trade body like the Royal Institution of Chartered Surveyors (RICS). They will provide you with their own detailed valuation report to ensure your property is marketed at an appropriate price.

As your property is mixed use, you need to tell the agent exactly how you want it to be marketed. Its description will directly affect its number of interested buyers. Provide as much information about the property’s history as you can - anything that can support your vision.

That said, it’s also really important to listen to your agent. With years of marketing and selling commercial real estate behind them, these agents have a great notion for what sells and what doesn’t.

4. Instructing a conveyancer

Conveyancing solicitors are a huge part of property sales - in both residential and commercial applications. They handle all the legal components of your property sale, from the exchange of contracts, all the way to completion.

A lot hinges on the quality of your conveyancer. The speed of your transaction and its ultimate success rest partly on their laurels. Though the aptitude of buyers is out of your control, your conveyancer will make certain everything is perfect on your end, ensuring all paperwork is completed on time and in full.

That’s why it’s imperative that you choose a conveyancer you’re comfortable with. Compare quotes carefully and don’t be afraid to ask some of the big questions upfront.

5. Accepting an offer

Your commercial agent will relay all offers to you, unless instructed otherwise. Though agents can advise on which offer looks promising, the decision of which offer to accept rests solely with you.

Choosing the right offer can be difficult, but choosing a stable offer is easy. Any offer you accept should come from a buyer who:

• Comes from a secure financial position
• Has a mortgage in place OR has cash ready to purchase

6. Exchanging contracts and completing

Once you’ve accepted an offer, your conveyancer will arrange a date for an exchange of contracts with the buyer’s conveyancer. During this exchange, a date for completion will be set. The buyer will also send their deposit over to your conveyancer.

Once contracts have been exchanged, there’s no turning back on the sale without incurring financial penalties. The transaction must proceed to its conclusion.

On completion day, the sale is officially completed. The mortgage lender (or cash buyer) releases all the remaining funds to your conveyancer, who, after paying your estate agent, transfers them into your account.

In the weeks following, you will receive an invoice from your conveyancer for disbursements (Stamp Duty) and fees.

Can I sell my mixed use property with tenants?

Yes, it’s possible to sell a mixed use property with tenants. However, you must be mindful of your tenant’s rights. Always inform them that you’re intending to sell before putting your property on the market, and explain your reasons for doing so. You can read more about tenant rights on the Gov.UK website.

Can I use a regular estate agent to sell a mixed use property?

No - despite the fact a mixed use property contains residential accommodation, it must be treated as a commercial property. As such, it must be sold by a commercial estate agent.

Are mixed use properties hard to sell?

Mixed use properties can be sold just like any other property. However, there are more ways a sale can be faltered due to the number of different types of tenancy at play within the building. Discrepancies over tenancy agreements can prevent a property from being marketed and sold in the ideal timeframe.

Mixed use property selling costs

Commercial agent fees

Commercial estate agents generally charge between 1.5 - 3% of the property’s final sale price, which is generally higher than the commission for residential estate agents. If you’re looking for more information on residential agents fees, check our estate agent fees page.

Conveyancer costs

Commercial solicitors can cost from 0.3% to 1.25% of the property’s final sale price, but this completely depends on the solicitor. Each solicitor has a tiered system that reflects the value of the property sold. If your property is less than £1 million pounds, you may only have to pay 0.3%. If your property is £2 million, you might have to pay considerably more.

If you’re looking to buy or sell residential property, check out our guide ‘How much do conveyancing fees cost?’ for more information.

Capital Gains on mixed use property

While straightforward for owners of standard properties, Capital Gains Tax can be a little complicated for mixed property owners. At its most basic level, you need to pay tax on any assets that have increased in value since acquiring ownership of them. So how does this work with a mixed use property?

The general idea is that you’re liable for Capital Gains on any part of the property that’s generating an income. So for instance, if you rent out 50% of your property to a masseuse and 50% to a tenant, you will pay Capital Gains on 100% of those profits. However, if you own a commercial use premises, but live in the residential element above, you only have to pay Capital Gains on 50% of the property.

When do you pay Capital Gains Tax on mixed use property?

You must pay capital gains tax on anything above the current thresholds. Check the Gov.UK website for more information on your income and situation. It then needs to be paid within 30 days of selling your mixed use property (the date of completion). Before you make the payment, you’re required to provide a bit of information about the property you sold, namely:

• Address of the property
• Date of acquisition
• Date of exchange of contracts and date of completion
• How much you bought the property for and how much you sold it for

You must also provide evidence of:

• Costs that came with developing the property
• Any tax relief or costs when selling the property (Estate agent fees)

Considerations when buying a mixed use property

Can you get a mortgage on mixed use property?

Yes, you can get a mortgage on a mixed use property but your mortgage choices are limited. You can't, for example, get a buy to let mortgage or a residential mortgage. You have to get a commercial mortgage.

How do commercial mortgages work with mixed use properties?

When you request a commercial mortgage, the lender will calculate the total rental income of both the commercial and the buy-to-let elements of the property to decide how much borrowing capital you have. As interest rates for commercial mortgages are higher than buy to let mortgages, the amount of money you get might be different.

If the buy to let aspect of your mixed use property consists of over half of the freehold value, and the rental income meets monthly mortgage repayments, some lenders will be willing to ignore the non-residential elements, and offer a package based on just the residential component. The advantage of an arrangement like this is that you’ll have access to a reduced rate of interest.

Stamp Duty on mixed use property

When you buy a mixed use property in England, you’ll have to pay Stamp Duty Land Tax (SDLT) like any other property purchase. Luckily, mixed property purchases benefit from non-residential rates.

What is multiple dwelling relief?

Multiple dwelling relief is a form of tax relief from Stamp Duty Land Tax. While you can still expect to pay some SDLT, the amount you owe is greatly reduced.

How do I qualify for multiple dwellings relief?

To qualify for multiple dwelling relief, your property purchase must include more than one dwelling where a transaction (or a number of linked transactions) includes freehold or leasehold interests.

If you claim the relief, you can work out the rate of SDLT charge by:

1. Dividing the total amount paid for the properties by the number of dwellings
2. Working out the tax due on this figure
3. Multiplying this amount of tax by the number of dwellings

Commercial EPC

If you’re planning to rent out or sell your mixed use property, you will need to get a commercial Energy Performance Certificate. Like residential EPCs, commercial EPCs measure how energy efficient your property is using grades from A to G (‘A’ being good, ‘G’ being poor).

Unlike with a residential EPC, you must display your commercial EPC by fixing it to your property if:

• The property is frequently visited by the public.
• The total useful area is over 500 metres.
• The EPC has already been produced for the property’s sale, construction or rental agreement.

Summary: Are mixed use properties a good investment?

Mixed use properties are a good choice for investors who are looking to diversify their income, and can wait for long-term gains rather than short-term. Over time, the dual or triple income you receive from your mixed use property will begin to make meaningful dividends - having financial stability makes this easier.