Apartments above a storefront can diversify the source of rent while creating a property with two different leasing, legal, and operating systems. This hypothetical building has six apartments and one commercial tenant. The investment is evaluated as a mixed-use property with separate income schedules, not as residential rent plus a free storefront.
The thesis is a supported commercial lease and documented apartment operations after a defined capital program. Shared building systems and landlord obligations must be funded even when one income stream is temporarily vacant.
All properties, tenants, leases, prices, costs, rates, and outcomes in this case are hypothetical. They are teaching assumptions, not market comparables, actual lender offers, or Jaken-funded transactions.
Acquisition assumptions and balanced funding
| Initial use | Amount |
|---|---|
| Purchase | $1,800,000 |
| Closing and financing costs | $60,000 |
| Physical work | $150,000 |
| Leasing capital | $100,000 |
| Opening operating liquidity | $100,000 |
| Contingency | $50,000 |
| Total uses | $2,260,000 |
| Initial selected debt | $1,300,000 |
| Required equity | $960,000 |
Build two revenue schedules and one reconciled expense budget
For the first year, assume six apartments at $1,500 monthly scheduled rent, or $108,000 annually. A stipulated 5% apartment vacancy and collection allowance leaves $102,600. Add $90,000 storefront rent, $15,000 commercial recoveries, and $3,000 other income for $210,600 effective revenue. Operating expense of $70,600 produces $140,000 NOI.
These are hypothetical rents, losses, recoveries, and costs. They are not Chicago market comparables or evidence that a buyer may increase any particular lease. Verify current residential and commercial agreements, collections, obligations, and applicable rules independently.
The projection rises to $190,000 NOI by year five. For a separate terminal-year revenue illustration, $123,120 apartment collections plus $132,000 storefront rent, $18,000 recoveries, and $3,500 other income totals $276,620. Expenses of $86,620 leave $190,000. Every increase must be supported by actual contracts or an explicitly conditional, lawful future leasing assumption in a real acquisition.
Fannie Mae’s multifamily income framework separately identifies commercial income within its program. That is a primary reference for separating streams, not proof that this building qualifies for agency financing. Fannie Mae valuation and income
Two financing structures
The selected illustration is $1,300,000 at 7.0%, with monthly payments, 25-year amortization and a five-year maturity. Monthly payment is $9,188; annual debt service is $110,258. Modeled principal after 60 payments is $1,185,108. The full commitment is assumed funded at closing; any restricted capital is tracked separately.
The alternative is $1,600,000 at 9.0% interest-only for 2 years, with $144,000 annual interest and $660,000 initial equity against the same uses. Principal remains $1,600,000 at its stipulated maturity without paydowns. The closing-cost allowance is held equal only to isolate structure; real proposals need their own fees, reserves, conditions, and approval.
The larger alternative reduces initial equity by $300,000 but increases interest and creates a two-year balloon. It should be sized against the property’s condition and income achieved at that time, rather than the year-five target.
The selected five-year loan uses less debt and amortizes principal. Actual eligibility depends on the lender’s treatment of commercial income, space, uses, leases, borrower, reserves, and property condition. A five-plus-unit residential count does not settle mixed-use product eligibility by itself.
The OCC handbook provides primary commercial repayment and structure context. Show both rent schedules and the shared-cost reconciliation so accepted income can be traced rather than summarized as one unexplained average. OCC CRE handbook
Five-year cash and funding model
| Year | NOI | Debt service | Recurring replacements | Raw operating cash | Opening reserve used | Cash available before owner allocation |
|---|---|---|---|---|---|---|
| 1 | $140,000 | ($110,258) | ($12,000) | $17,742 | $0 | $17,742 |
| 2 | $160,000 | ($110,258) | ($12,000) | $37,742 | $0 | $37,742 |
| 3 | $180,000 | ($110,258) | ($12,000) | $57,742 | $0 | $57,742 |
| 4 | $185,000 | ($110,258) | ($12,000) | $62,742 | $0 | $62,742 |
| 5 | $190,000 | ($110,258) | ($12,000) | $67,742 | $0 | $67,742 |
The $150,000 physical and $100,000 leasing accounts are funded in initial uses and spent during the first two years. Do not deduct those same amounts again from the operating cash table. Annual recurring replacement funding is assumed spent in the same year.
Identify costs attributable to apartments, the commercial premises, and shared systems. Then apply actual commercial recovery clauses and avoid charging residential tenants an invented share. A storefront described as NNN does not establish that every roof, structural, utility, or shared cost is reimbursable.
Cash available in the table is assumed released at year-end only for the return model. Real loan restrictions and ownership approval can retain it. Remaining operating and contingency cash returns at sale only if unused.
Additional operating downside
A separate stress assumes $65,000 NOI and $100,000 additional unbudgeted capital in one stressed year. Cash after selected debt, recurring replacements, and that extra capital is ($157,258). Against the full opening operating/contingency balance of $150,000, the model uses $150,000 and requires $7,258 additional equity. This is a separate stress, not a claim that the same reserve remains intact after base-case draws.
The separate stress assumes a weaker storefront and additional unbudgeted work. Apartment income can provide cash during a commercial vacancy, but it does not necessarily cover the entire building, debt, and delivery cost. The combined model shows the actual deficit.
A restaurant or other intensive use can affect shared utilities, systems, access, insurance, waste, noise, and resident experience. Investigate the intended commercial use and lease responsibilities before pricing. Do not assume the two streams are operationally independent because they appear on separate lines.
For an address in the City of Chicago, review actual residential-law applicability, notices, leases, and operating duties with appropriate advice. The city’s tenant-and-landlord information is an official starting point, not a substitute for applying current rules to this property. Chicago residential rental information
Concrete five-year exit and returns
Assume end-of-year-five sale with forward NOI of $190,000 and 2.0% selling costs. The scheduled-maturity model assumes no additional prepayment charge; actual payoff, taxes, and fees need confirmation.
| Exit calculation | Base cap | Higher-cap sensitivity |
|---|---|---|
| Exit cap | 7.5% | 8.5% |
| Gross price | $2,533,333 | $2,235,294 |
| Selling costs | $50,667 | $44,706 |
| Loan balloon | $1,185,108 | $1,185,108 |
| Net equity sale proceeds before reserve return | $1,297,559 | $1,005,480 |
| Remaining reserve returned | $150,000 | $150,000 |
| Total positive equity cash over hold | $1,691,271 | $1,399,192 |
| Total contributed equity | $960,000 | $960,000 |
| Equity multiple | 1.762× | 1.457× |
| Annual model IRR | 12.65% | 8.32% |
The five-year sale assumes both income streams support the stipulated forward NOI. The higher-cap sensitivity changes pricing only. If the storefront remains vacant or apartment collections weaken, the income and capital forecast must change too.
The equity basis includes the whole acquisition and capital program. Modeled returns are before income taxes, investor-specific fees, and negotiated member allocation. Positive cash is not automatically a distribution, and unused reserves are not new rent when returned.
Confirm a buyer’s likely financing and diligence needs for the actual income mix. A building cannot be valued by simply assigning an apartment cap rate to every dollar while ignoring commercial rollover and shared capital. The illustrative cap rates are assumptions rather than current market evidence.
Diligence and investment decision
Before the inspection deadline, verify apartment count and lawful use, the complete storefront lease, residential agreements, collections, deposits, service contracts, insurance, tax circumstances, and major systems. Investigate discrepancies between marketed and documented space or unit count.
Prepare a shared-expense allocation and commercial recovery schedule with supporting clauses. Obtain scope for roof, facade, mechanical, electrical, plumbing, and any commercial delivery. Identify which costs preserve existing income and which are intended to create additional income.
Research apartment and storefront comparables separately. A desirable residential location does not automatically establish tenant demand for a particular commercial layout, and a successful storefront does not validate apartment conditions or collections. The subject alternatives and agreements matter.
Approve only if the price, funded work, actual leases, and lender treatment produce an acceptable complete return. Require committed support for the separate stress and a realistic monthly payment schedule. Reprice or decline if success depends on undisclosed recovery income, an assumed legal unit count, or rent changes that have not been evaluated properly.
After closing, report each income stream, shared costs, recoveries, capital, reserves, and loan tests. A mixed-use property becomes understandable when both businesses reconcile to the same building cash and obligations, rather than when their risks are averaged away.
A practical shared-cost check
If a $24,000 annual service contract covers the entire building, first establish its actual service area and lease treatment. An illustrative 40% commercial allocation would be $9,600, but that arithmetic alone does not create a recovery right. Verify the denominator, exclusions, caps, and payment history. Keep the remaining $14,400 in the property expense reconciliation and identify whether any separately lawful residential charge exists rather than assuming one. The allocation must reconcile to the original invoice without double recovery.