When it comes to real estate investing, one of the most important factors you can consider is the after repair value (ARV) of a property. ARV is the estimated value of a property once you’ve completed repairs and renovations. However, ARV alone isn’t enough. There’s one big factor that can completely alter property values: rezoning.
In this blog post, we’ll explore what rezoning is, how it can affect a property’s ARV, and what you need to know so that you’re always making informed real estate investments.
What is rezoning?
Before we take a look at how rezoning impacts the value of real estate, it’s important to understand exactly what rezoning is. Rezoning is a local government process that changes how a piece of land can be used.
Cities and counties set zoning regulations to protect areas and make sure that properties of a similar type are grouped together. Setting these regulations protects property values and usually makes sure that people can live and work in peace without different use cases disturbing daily life. In short, zoning regulations are what keep factories from popping up in the middle of neighborhoods.
There are several types of zoning categories. Each one determines what kind of property builders can put in a location and what existing properties can be used for. These include:
- Residential – Homes and properties where people live
- Commercial – Stores, restaurants, and offices where businesses operate and people work
- Industrial – Plants, factories, mines, and warehouses where businesses manufacture, research, and store goods
- Agricultural – Farms, ranches, orchards, and timberlands where people grow crops and raise livestock
- Open space/recreational – Green space and parks where people go to spend time
- Special purpose – Cemeteries, churches, museums, and government buildings that don’t fit into the other categories
As you can tell, each of these categories serve a different purpose. Most people don’t want to live right next to a factory, and zoning keeps that from happening. However, zoning regulations aren’t set in stone. They can change, and when they do, the changes can have drastic effects on property values.
Rezoning for high density
Not all zoning changes are negative though. One way they can positively impact a property’s ARV is when they reclassify an area for higher density development. For example, if a property is rezoned to allow for the construction of apartment buildings or condos, its ARV can increase significantly. This is because the property owner can now use it for purposes that create bigger profit margins, such as multi-unit housing.
Higher density development can also increase the value of surrounding properties by bringing in new attractions that make the area more desirable. However, this isn’t always the case. Homeowners and residents may not be happy with the change. Likewise, potential buyers may lose interest in the area if they’re looking for a single-family neighborhood.
Rezoning for commercial use
Rezoning for commercial use is another zoning decision that can positively and negatively affect property values. If a property is rezoned to allow for retail or office space, the ARV of the property will likely increase. This is because commercial properties tend to generate more income than residential properties. Commercial properties also tend to hold their value, making them a stable investment.
However, the surrounding properties may not get this benefit. If the business that moves in disrupts traffic and creates noise, it may affect renters’ or potential buyers’ quality of life, decreasing the value of the property. On the other hand, if it brings new restaurants, activities, and attractions, it may drastically improve the benefits of living in the area. In this case, surrounding properties will be worth more!
Rezoning for specific use
Another zoning change that can have positive and negative effects is rezoning for a specific use. For example, if a property is rezoned for a school or park, the property’s ARV can decrease, since it can no longer be used for profit-generating developments. Additionally, properties located near public facilities such as schools or parks may have less privacy and more noise, which can also affect their value.
On the flip side, rezoning for specific use can protect the value of adjacent properties. Sometimes vacant lots can be a source of uncertainty because people who live nearby have no way of knowing how they’re going to be used. When a property is rezoned for a specific use, the people living nearby at least know what’s going to move into their neighborhood instead of waiting for a developer to come along and make that decision.
In other cases, rezoning for specific use can raise property values by bringing in new attractions and beautifying an area. Some homebuyers and renters choose a location simply because of its proximity to their children’s school. Others want easy access to their favorite park. As you can tell, rezoning for specific use can impact an area in a variety of ways. If you want to gauge how rezoning is going to affect an area, the best option is simply to consider what’s coming with the change.
Rezoning and property taxes
Finally, it’s important to understand how rezoning impacts property taxes and insurance rates. In general, properties that are classified as commercial and industrial will be subject to higher rates. If you’re going to use a property in a way that will generate enough money to cover these expenses, then this shouldn’t concern you. However, if you’re flipping, wholesaling, or renting, then you should take this into account before you make a purchase.
Unlike the other factors on this list, there’s no way to avoid or mitigate property taxes and insurance rates, so it’s important to understand all of your expenses before you sign a real estate contract.
Key takeaways
As you can see, zoning changes can have a significant impact on the potential value of a property. Regardless of your investment strategy, understanding how these changes affect the future value of a property will create new opportunities and help you avoid costly mistakes. While the rezoning process rarely takes place quickly, it can catch you off guard if you aren’t aware of what’s happening in your market.
Before you decide to buy a property, it’s always a good idea to check with the local planning department. You can also find information on upcoming zoning decisions on the county or city council website. This information will tell you whether or not these concerns are something you need to worry about.
Of course, you can’t control what happens after you buy a property, but by doing your due diligence, it’s easy to set yourself up to profit on real estate deals. And who knows, zoning changes may work in your favor. What starts as a residential rental could turn into a commercial rental 10 years from now. That’s why you should always keep an eye on the future and make the most of opportunities when you’re investing in real estate.
