While your first concern as an investor should be the ability to provide a consistent return from your properties, there are additional layers of benefits that should be considered as lower priority, but capable of producing tremendous rewards in the right circumstances.
One such additional consideration is the zoning your property falls under in your municipality’s zoning ordinance. This longer term strategy is best used under the covered land structure, which we detailed in a separate article. There are several things to keep in mind when you analyze the long term favorability of a parcel when performing a zoning analysis.
1. Use Regulations:
If you’ve found a market to invest in that you feel is in the early stages of long-term economic growth, pay close attention to the different potential uses for that parcel, were the economic situation to change during the life of your ownership.
For example, your analysis may suggest that an economically depressed neighborhood in your target market is beginning to see signs of economic development that you feel has legs and will lead to continued growth. You anticipate that over the course of your ownership, the economic drivers in the area will boost the annual population growth rate.
This will lead to a need for higher-density residential housing.
You may have identified a tiny retail property on a parcel that allows for multi-family housing. The retail property can provide income to offset your carrying costs while the property values appreciate. Once it’s economically viable, you could raze the existing structure to make way for a higher density residential structure, perhaps with a first floor mixed-use retail component.
2. Dimensional Regulations:
Maybe you’ve identified a parcel in an area where new construction development doesn’t currently make sense, but the existing property is far smaller than what is theoretically allowed by zoning code. While bigger isn’t always better, generally speaking density in real estate produces economies of scale that generate the largest returns. This has to be done in an intelligent way, however.
For example, if you found an undersized property for its zone, you shouldn’t celebrate too quickly. Even if the zoning allows for a property 3 times the size of what currently exists, you have to factor in the use regulations in point 1 of this article before you can really understand what that means for you.
If your property is located within a zone only allowing for single family development, perhaps your hypothetical maximum building size is larger than the market demands for houses in your area, leading to your rental or sale income for the house to be low on a per square foot basis.
3. Economic Development / Smart Growth / Development Incentive Areas:
Most municipalities will have targeted zones or zoning overlays that are meant to encourage investment and development. The political will in the area is that these areas should be redeveloped for increased density, so right off the bat you have a good idea that this is a good sign for a long term development.
Assuming the incentives provided are convincing enough, if you invest in a property in these areas early on, ideally the program works and more dollars are put in the community, increasing the value of your land. If you’re patient enough and have long term vision you could ride the rising wave despite getting in for a lower acquisition price.
4. Upcoming Zoning Changes or New Initiatives:
If you’re hoping to someday increase the density and thus the value of your property, perhaps the best strategy is to buy in the early stages of new zoning proposals in your municipality.
If you network well with zoning attorneys, consultants, and members of your local government, you can figure out early when proposed changes are being debated in the community, revised, or voted on. Having a deep rolodex of the important players in your area is a key component to making this possible, so be sure to always put intentional effort into networking and keeping connections with people in related fields.
The investor with the high amounts of knowledge about their market has a great long term advantage for this reason. Cities will often make proposed zoning amendments viewable online, and they must have some way by law for you to review if they do not. This way, you could invest in a property that you know is being proposed for increased zoning perhaps a year or two before other investors catch wind of it and drive the prices up.
5. Historical, Conservation, Parking, and Other Miscellaneous Regulations:
These are typical due diligence items for development, but it might be a bit easy to overlook if your primary goal is a longer term investment with just the possibility for future development.
However, it’s easy to get ahead of yourself if you found a great covered land play that dimensionally seems to allow for greater density than currently exists. If you don’t carefully review all other regulations in your zoning ordinance, for example if your property is located in a historic district, you will likely be emotionally deflated years down the line when you go to redevelop.
The way to avoid this is to treat these investments the same way you would as a development deal that you intend to do in the near term. If, upon review, you find that the lot has some issues that might prevent development, then it might still be a great investment — it all depends on your strategy.
Whether you intend to develop the land yourself someday or not, you can’t know the true value of the investment without knowing what is allowed by the zoning code. Perhaps someday you go to sell your property and, having never paid proper attention to it being included in a favorable zone, you price it incorrectly and leave a lot of money on the table. That’s why it is suggested that even if development is not on your radar for your investment, you should still get a solid understanding of the zoning regulations for your properties.