Your Neighborhood Zoning Laws Could Be A Path To Profits
Do you know what the zoning laws are near your rental property? While this may seem irrelevant to property management concerns, zoning can impact your income streams — and these laws can change on a regular basis. Below, find out how neighborhood zoning laws can be your path to profit as a landlord.
Understanding Zoning Types
While the terms used vary from state to state, zoning categories typically include:
• Single-family residential
• Multifamily residential
• Open space — e.g., parks
Your city’s planning department will have zoning information for all neighborhoods, so it’s easy to check before you make an offer on a property.
Why Landlords Should Care About Neighborhood Zoning Laws
With any investment property, your goal should be profit. Zoning laws dictate what type of development is allowed in the neighborhood, and they suggest how the city views the area. If it’s zoned strictly residential, chances are, the neighborhood won’t change much. That might be nice if you want an easy source of reliable income. Though if your landlord mindset is growth-oriented, you’ll realize the income potential for a residential neighborhood will only increase when rent prices climb.
Mixed-use areas are zoned for both residential and commercial use. Neighborhoods with a mixed-use residential zoning can hold homes and businesses. New homes going up in the area are likely to be multifamily properties, such as luxury condominiums with ground-floor retail spaces. Over time, the character of the neighborhood will change; this is where the path to profit for landlords lies. As the neighborhood becomes more desirable, you can raise rents.
While it can take years for a mixed-use neighborhood to get the sort of quality-of-life neighborhood spots that will appeal to renters (such as coffee shops or yoga studios), a purely residential neighborhood won’t get those amenities.
How Zoning Affects Profit
When you understand how zoning affects future development, you can evaluate neighborhoods where you are thinking of investing in property.
Generally, mixed-use neighborhoods are beneficial for landlords, because they draw renters who want to live near urban amenities. Not only does this make it easy to fill vacancies, access to amenities often means you can charge more for the apartment.
As the neighborhood changes, property values often increase, which leads to higher real estate taxes. Higher taxes cut into the profit you earn for every property. As long as you can receive enough rent to cover your expenses and the higher taxes, you will win. If taxes go up while you have tenants on a fixed lease, you will take a financial hit until you can raise the rents.
There are downsides to development, as well. If other homeowners cannot keep up with higher taxes and their mortgage payments, foreclosures could spike. A high neighborhood foreclosure rate can cause your property value to dip. Alternately, if developers overestimate demand and there is a glut of available units, your property’s value can decline, as well.
Zoning can only tell you part of the story. Compare a neighborhood’s zone with other factors — from crime rate to availability of public transit — to decide whether to pass or put down an offer.