Zoning Laws can Impact Your Investment Strategy

August 26, 2022

If you haven’t been paying attention to zoning regulations where you’re investing, you may want to start. Here’s why.

When you’re a real estate investor, it pays to understand local zoning laws. If you’ve never given them much thought, now is the time to dig a little deeper into zoning and how it can affect your real estate investment business.

In a nutshell, zoning laws dictate how a piece of property can be used in a certain geographical area. These municipal laws or regulations are found in most U.S. municipalities. The laws govern everything from land use to building height to density and setbacks. Cities and municipalities differ in their approach to zoning, with some having complicated, stringent zoning laws (San Francisco) while others are relatively lax (Houston).

The reasoning behind zoning laws

Cities have all sorts of reasons for implementing zoning laws. It might be to increase or decrease housing density, separate business and commercial areas from residential ones, encourage walking in some areas and driving in others.

Zoning can be overly broad and it can be highly specific. Zoning laws aren’t always set in stone — they can change as a city grows. And there can be variances that allow a property owner to do things not usually allowed in a certain area. There are different types of zoning, as well, including residential, industrial, commercial, agricultural, rural, combination, historic, and aesthetic. It’s important to keep this in mind when investing in your local area or in a new market.

Why zoning matters to real estate investors

It’s important to understand the zoning of any property you’re purchasing because it impacts how you can make money with that property. It can impact your exit strategy, let’s examine this made up scenario. Pretend you purchased a single-family home that you planned on converting into a duplex so that you could rent each separately. Then, you found out that zoning in that area doesn’t allow it. That scenario could cost you significant amounts of money.

Housing has become more expensive across the U.S. This is often due to both a lack of availability where people would most like to live and zoning laws that discourage density. Some cities and states are rethinking their zoning laws and making adjustments to encourage more housing on less space.

Making more out of less

Oregon passed HB 2001, legislation that, among other things, eliminates exclusive single-family zoning in much of the state in 2019. And California’s SB 9 opens up the possibility of using a single-family lot for duplex or subdividing. This rule also puts limits in place as it contains an owner occupancy requirement. California requires that a homeowner to live in one of the units for three years from the time of approval for a lot split. As these rules change frequently, it’s important to speak with your tax and legal professionals about these rules and regulations.

Every state and locality within a state may have different rules and what passes zoning muster in one area may be completely forbidden in another. To find out what zoning laws are for a property you’re thinking of buying, you’re going to have to do some leg work. Start by asking the broker or real estate agent. You’ll also want to confirm by checking out your local government zoning resources online or in person at your municipality’s local planning department. Contractors and builders are other sources who should be attuned to the latest zoning regulations.

When in doubt, though, always complete your own due diligence and seek the advice of legal professionals.

How to use zoning to your advantage

As an investor, you can exploit rules by understanding the zoning laws in your markets. Here are some examples:

Add an ADU

We’ve all heard about the limited housing inventory and in many areas the lack of affordable housing as well. To combat this, many municipalities are now relaxing or removing regulations on ADUs or accessory dwelling units.

ADUs can increase property value in several different ways. It might simply give the person living in the home a separate, extra space for work, hobbies, or living. Or, if you’re buying a property to rent, adding an ADU may allow you to generate two rental streams from one property. There are many uses for ADUs on a property. Generally speaking, adding an ADU will increase the value of the property, regardless of how it might be used.

Look for properties that are underutilizing the current zoning rules

Don’t assume that the current owner is taking advantage of zoning laws. For example, a property’s zoning may have changed over time or the previous owners converted a multi-family into a single family house even though zoning never changed. There are also times when you can identify properties where their designation may change in the future. You can do this by paying attention to local government’s plans for the area.

Consider investing in an opportunity zone

Although it’s more complicated than regular real estate investing, investing in an opportunity zone can be a way to make money and help an underserved community in need of investment. The program allows you to defer your capital gains tax liability by putting that money into qualified opportunity funds. Work with your tax and legal counsel before embarking on this type of investment.

Invest in new markets with Sundae

The good news about today’s real estate investment world is that you don’t have to invest in only one market. Sundae operates in multiple markets across the country. If there are zoning laws you don’t like in your area, invest elsewhere!

Try Sundae’s Marketplace.

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Erin B

Erin Behan is a writer and editor covering real estate investor strategy for Sundae. She's lived in L.A., New York, and Atlanta and currently resides in Portland, Oregon, where she writes and edits for a number of outlets, including WebMD, Farmers Insurance, and Vox Creative. She spends her free time hiking with her two boys, snuggling with her cat, and enjoying the best of the Pacific Northwest.