As a real estate investor, you may be tempted to overlook zoning for properties you are renovating. For properties with rehabs of over 50% of their value, it is always a good idea to confirm their zoning. Read on to find out why.
What Is Zoning?
Zoning refers to a set of rules or regulations that dictate how real property can and cannot be used. Municipalities establish zoning to create districts or neighborhoods that are intended to promote economic development, control traffic flow, manage noise levels, reserve space for residential living and protect valuable resources.
Some examples of zoning classifications are:
- Single-family residential
- Multi-unit residential
Zoning laws regulate details of construction, such as:
- Limitations on maximum building height
- Building setback requirements
- Minimum square footage
- Minimum parking
- Green space requirements
What Happens When a Municipality Changes the Zoning of a Property?
Also referred to as “grandfathered uses,” a legally nonconforming use of property occurs when its zoning changes and the property does not conform to the new zoning regulations.
Land use must have been established before the present zoning regulations were implemented. A nonconforming use is allowed if the land use is not expanded or altered in any way.
Why Should I Care?
A change in zoning from residential to commercial has caught investors by surprise when executing their plans.
Suppose you want to convert a single-family residence to a duplex or quad. You may not be allowed to do so if the zoning has changed from residential to commercial.
You may not be allowed to convert that duplex to a single-family residence in this scenario. If the After Repair Value (ARV) assumes that you can make the conversion, the deal may not work when you are forced to shift in order to comply with new zoning regulations.
You plan to add to the Gross Living Area of the building, and your exit strategy and ARV are based on the additional square footage. You go to pull your permit, but the building official notifies you that new setbacks are in effect and you do not have usable land to make the addition. Will your exit strategy still work? How will your ARV be affected?
Some municipalities allow nonconforming use until the property ceases to be used in that specific manner. For instance, if a property is vacant for an extended period, the municipality may not allow continued nonconforming use.
Casualty events may present a unique circumstance for nonconforming properties. If a casualty event, such as a fire or flood, results in more than 50% damage to a property, there are two potential outcomes. First, the property may not be rebuilt at all. Alternatively, if the property is rebuilt, it must comply with the zoning regulations that are currently in effect.
Will your insurance policy cover the total property loss if a municipality does not allow you to rebuild the structure? The answer depends. Did you purchase ordinance or law insurance? Does your coverage include the undamaged portion of a building that requires a code upgrade?
As a Real Estate Investor, What Should I Do?
When undertaking a project that changes a property’s current use, expands its footprint or is in an area that has undergone transition, it is always worthwhile to do a quick zoning check.
Contact your local building, planning and zoning office and ask how to obtain zoning verification.
If the property is nonconforming, do your due diligence. Confirm you can pull a permit if necessary to make the changes outlined in your renovation plan. Additionally, remember to talk to your insurance agent to ensure you have the appropriate coverage.
At Longhorn Investments, we have a team of talented professionals dedicated to helping both new and experienced investors find the right loan for their real estate investments.
We tailor our recommendations to your specific needs because we understand that no two clients or situations are the same. Contact us today to discuss what financing options are available to you.