Most jurisdictions in the United States have some form of zoning in place (The City of Houston,Texas is a notable example of one without formal zoning codes). We as real estate investors need to have a basic understanding of what zoning is, what it regulates and what its components are because zoning can affect so much of what we do.
This article is intended to serve as a basic introduction to zoning. Each jurisdiction is different and can have very different zoning regulations. So please check with your local officials if you have specific questions about the zoning where you invest.
Download Your FREE copy of ‘How to Rent Your House!’
Renting your house is a great way to enter the world of real estate investing, but most first-timers (understandably) have a lot of questions. Fortunately, the experts at BiggerPockets have put together a complimentary guide on ‘How to Rent Your House’. All the skills, tools, and confidence you need to successfully rent your house are just a mouse-click away.
What is Zoning?
Zoning in its simplest form is the regulation of and segregation of land uses. Zoning rules generally segregate industry from housing for example, by utilizing different zones in which specific land uses are permitted. Zoning regulates many other items as well, but we will get to that later; zoning does not make any thing happen, it merely restricts and controls.
Zoning arose around the turn of the last century and was finally legitimized by the US Supreme Court in 1926 in Village of Euclid, Ohio v. Ambler Realty Co., 272 U.S. 365. Since that time, zoning has taken on many shapes and forms across the country. But all zoning regulations contain two basic parts, a map and text. Both the map and text are adopted by the local legislative body, such as city council or county commission, just like any other law or ordinance and are generally known collectively as the zoning ordinance.
The zoning map is a map of a jurisdiction on which the various zoning districts have been drawn in. Most maps will contain a variety of zoning districts, such as several basic residential districts, a couple of commercial and industrial districts, an agricultural district and floodplain districts. Other districts could include hospital, recreational and parking districts. An example can be viewed here of my jurisdiction, Memphis, Tennessee (Click on zoning under hide/show layers – DPD).
The other portion, the text, is where the meat is. This is the portion of the zoning ordinance that describes what can be done in those districts depicted on the zoning map. The text portions can be quite small or be a multi-volume work.
At a minimum, the zoning text will contain:
- Descriptions of each zoning district,
- Definitions of terms used in the text (note these may be different than common dictionary definitions),
- Permitted uses in each zoning district, such as single-family dwellings, apartments, commercial, industrial, etc.,
- Bulk regulations for the district. These are things that regulate the overall density and design of the district and include:
- Minimum lot sizes,
- Setback requirements or the minimum distances structures must be from property lines and street rights of way,
- Building heights,
- Some will also contain clauses on maximum lot coverage or the maximum amount and lot can be covered by all buildings and structures.
- Procedural matters such as who is responsible for enforcement and how the map or text can be changed.
Many zoning codes can also regulate:
- The height, size and placement of signs and billboards
- Historic districts and the use of construction materials and paint colors in those districts.
- Adult entertainment (for fun, read the definitions of this section).
For an example, you can see the text of the ordinance that goes along with the zoning map for Memphis, TN here.
Why should real estate investors care about all of this bureaucratic mumbo jumbo?
Zoning can directly affect your bottom line, that’s why.
At a minimum you want to make sure the use on the property you are investing in is legal. In other words that it conforms to the zoning ordinance. Especially if you are a buy and hold person like me.
If you plan to develop, build or add on to a property you need to know what the zoning ordinance allows. Can you build what you thought you could build? Can you add on that third dwelling unit in the back? Do not trust the seller or the realtor here. Zoning can be complicated and many times people are simply misinformed. Check for yourself.
Once you buy it, no matter who did what in the past, the problem is all yours if there is one. Remember that zoning is not something to be taken lightly or ignored. They can and will make you tear a building down, stop the use or remove the addition if it does not conform.
Do not think that just because the use has been there forever that it is legal. Also, do not confuse a property assessor’s commercial designation for tax purposes with the actual zoning designation. Commercial for tax purposes may not be commercial for zoning purposes.
Key Points to Remember About Zoning
In closing, remember these points. Zoning directly affects the value of land. Commercial or industrial land is much more valuable than land zoned for five acre single family residential lots. Zoning is also political. Politicians sensitive to the political winds will decide what you can do with your private property. In this respect zoning can really dampen real estate investment or it can encourage it, depending on which way the political winds are blowing.
Finally, zoning can be changed by the local governing body at any time often with little notice. Keep in tune to what is going on. It seems that every ten years or so bureaucrats get an urge to “update” the codes. Watch this process carefully and protect your interests.
Author’s note: This is the first in a series of articles I hope to write on the various aspects of land use controls like zoning and subdivision regulations and how they can affect the real estate investor. In the future look for articles on topics like subdividing land, rezoning property, the board of adjustment, planned unit developments and many more. Happy Investing!