[Disclaimer: We are not accountants, lawyers, or financial advisors, so please consult your own team of professionals about the topics covered in this article.]
If you’re considering investing in rental properties, zoning is something you’ll want to understand before making any decisions.
So, what exactly is zoning?
Zoning refers to the local government regulations that dictate how property in specific areas can be used. These rules determine whether you can use a piece of land for residential, commercial, industrial, or agricultural purposes.
For real estate investors, zoning laws are essential because they define what types of properties you can develop or lease, how much land you can build on, and the number of units allowed on a property.
Understanding Zoning Codes
Zoning codes are usually assigned to different areas by local municipalities, such as cities or counties, and they can vary significantly depending on the location. Common zoning designations include:
- Residential (R): This code typically permits the construction of single-family homes, duplexes, or sometimes multi-family apartment buildings, depending on the sub-codes.
- Commercial (C): Areas zoned for businesses like offices, retail, or restaurants fall under commercial zoning.
- Industrial (I): These are for manufacturing plants, warehouses, or similar heavy-duty operations.
- Agricultural (A): This is for land used for farming or related agricultural activities.
You can typically find zoning information through local government websites or by contacting the city or municipality where the property is located. Some areas may also offer zoning maps that allow you to visually identify zoning types in specific neighborhoods. Zoning can vary even from one neighborhood to the next, so due diligence is crucial.
Why Zoning Matters to Real Estate Investors
For investors, zoning is a double-edged sword—it can open up opportunities, but it can also get you into trouble if you’re not careful.
Watch Out for Zoning Pitfalls
One of the primary things you need to be aware of as a rental property investor is ensuring that the property’s zoning aligns with your intended use. For example, buying a property with the intention of using it as a short-term rental (like Airbnb) might seem lucrative, but if short-term rentals aren’t a permitted use in that zone, you could face significant fines or be forced to cease operations. We know many investors who fell into this trap and were forced to sell their properties.
Another example is non-conforming properties, which can be tricky. You might come across a home being used as a duplex in an area zoned for single-family residences. We actually had a property like this that we house-hacked. The home was located in a single-family zone, but we converted it into a duplex. While this could have resulted in a non-conforming use issue, we navigated the complexities, and it never became a problem. In fact, we sold the property for a significant profit! However, had the city enforced the zoning more strictly, it could have impacted our ability to rent the property out as a duplex.
Potential Opportunities Zoning Can Offer
Zoning isn’t just about limitations; it also presents opportunities if you know where to look. For instance, one exciting opportunity comes in finding “pockets” of favorable zoning in otherwise restrictive areas. Imagine a city that heavily regulates short-term rentals in residential zones but has a small commercial zone that allows them. By purchasing a property in that commercial zone, you can operate legally in an otherwise tough market for short-term rentals.
Another major opportunity is upzoning, which refers to changes in zoning laws that allow for more intensive uses of the land, often providing an opportunity for increased property value. For example, one of the investors in our community purchased a property near a school and retail area. His block was later upzoned, allowing him to either add more units to the existing property or redevelop it into a higher-density building. This change significantly increased the property’s potential and market value.
Other potential opportunities include:
- Rezoning Applications: In some cases, you can apply to have your property rezoned to allow for a more profitable use. For example, changing a residential lot to commercial zoning could allow you to open a business or build multi-use buildings.
- Mixed-Use Zoning: Areas with mixed-use zoning allow for both residential and commercial development, giving you flexibility to cater to different tenant types and potentially increasing your rental income.
- Legal Nonconforming Use: If you find a property that doesn’t conform to current zoning laws but is grandfathered in, you might have a unique opportunity. As long as the property continues to be used in the same way, you may be able to operate without needing to change the structure or use.
The Bottom Line
Zoning is a key factor that can make or break a real estate investment. Understanding the zoning restrictions and opportunities in the area where you’re planning to buy is essential. It can protect you from making costly mistakes—like purchasing a property you can’t legally use as intended—but it can also help you uncover hidden gems where the zoning works in your favor.
Whether you’re dealing with zoning challenges or looking for ways to capitalize on favorable zoning changes, taking the time to research and understand local laws will always benefit your bottom line. And remember, when in doubt, consult a local zoning expert or attorney to ensure you’re in the clear before closing the deal.
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