Zoning Regulations Add $100,000+ to Property Developers’ Pockets
It’s important to pay attention to zoning regulations. Understanding your area’s codes can add money to your bottom line.
For developers, understanding zoning regulations should be a top priority. You wouldn’t want to invest hundreds of thousands in development only to run into problems with the law later on. Not only can this result in a failed project, but you might also incur hefty penalties.
Compliance may be the first but it isn’t the only reason to be familiar with zoning regulations. Knowing your codes can have a big say in your profits. This is true for all types of developments – from single-family properties to large-scale commercial complexes.
You’ll find out how it’s possible to profit from the local zoning rules. But before that, you’ve got to understand the basics first.
Zoning Regulations and Their Purpose
In the next 25 years, it’s projected that the population in certain parts of Australian will double. This means a lot more people and businesses will need places to live or conduct business in. With an eye toward sustainable expansion, local governments need to plan strategically.
This is especially true for the metropolitan areas. Without careful planning, an area could easily become overpopulated. This can result in a lack of facilities and infrastructure that, at the very least, makes the standard of living below the national average.
In this context, zoning regulations ensure that everyone (particularly developers) is on the same page. The codes define what you can do with any property that you buy, which allows you to develop the right strategy in creating a balanced and profitable portfolio.
In Australia, zoning regulations fall under six categories:
- Public use
Under each of the above six categories, there are specific zoning codes. In fact, there are so many of them that it can be quite difficult to keep track or understand.
The states and territories, including the areas within them, have different urban planning strategies. Those would require different codes.
Regardless, it’s crucial to know the applicable zoning codes inside and out.
How Zoning Regulations Impact Your Strategy
It’s best to illustrate this with an example. For this purpose, we’ll use the residential codes in NSW. R1 is the general residential code and R2, R3, and R4 are for low, medium, and high-density areas.
For example, under R4 you have permission to build, but your units must not exceed a certain height. Similarly, you can develop townhouses in R3 but there’s likely a restriction on the number of townhouses per site.
This speaks to the compliance aspect of your strategy, without which you won’t be able to build or sell your development. Beyond that, understanding the zoning codes can also be key to making smart property decisions.
Take for instance the case of a Sydney-based investor named Jeremy Iannuzzelli. He recently bought a 900sqm plot in Eagle Vale, which is an R3 (medium-density) area and had this to say:
‘We’ll look to do some things with it later on in the future, pending if we can get a couple of the other properties [on] either side of it. So there is a lot of margin in that property, as is, and there’s even more margin if you can consolidate a couple of properties around it.’
He further explained that even if the price of the property were to drop further, it’d still have great potential. According to Iannuzzelli, the true value of a property in the area, besides its construction, is in everything that it can achieve as an R3 property.
Furthermore, zoning codes can help you determine if you’re paying a fair price for a property. This applies particularly to the codes governing the area’s infrastructure.
As Iannuzzelli explains:
‘So, it’s understanding why is that property worth $600,000 and they want $700,000, is it potentially better to pay $700,000 for a property with R4, as opposed to a street away paying $600,000 for a slightly better-looking house?’
The point is that you should look beyond the property itself when creating your development strategy. Take the zoning into account when making your final decision.
In that light, outwardly counterintuitive strategies, like paying more now, can actually make sense if there’s potential for even bigger returns in the future.
Better yet, there are many more opportunities that can come with an understanding of zoning regulations.
Knowing Your Codes Can Make You Rich
As established above, it pays to consider the zoning codes when developing any property. You’ll discover if the property is worth your money or if you should maybe pay more in another zone that better fits your needs.
Savvy developers know how to take advantage of zoning regulations to maximise their returns. In some cases, this can amount to hundreds of thousands in profits.
There are many ways to profit from this.
First of all, Iannuzzelli mentioned property consolidation. This can be an amazing tactic for securing outsized long-term profits.
When Iannuzzelli bought the Eagle Vale block, he was hoping to build at least two properties on it, and maybe even squeeze in three townhouses.
Taking it one step further, Iannuzzelli saw great value in the houses adjacent to the block. Owned by elderly people, the neighbouring houses were understandably very run-down. This meant that they didn’t have much value to an investor or a homeowner.
But not so for Iannuzzelli, who had strategic value in expanding his own block. If he were to purchase the corner block, adding new houses to it would mean a much higher return on his investments.
Iannuzzelli described it as such:
‘When you buy property, you really need to understand what’s the plan for it, you don’t just sometimes buy in scattered territories. The golden rule sometimes, generally speaking, [is] when the property next door comes up for sale, you buy it. But it has got to be within reason.’
He goes on to explain that you must take a look at the zoning regulations when buying next-door properties. That’s because zoning restrictions will tell you if the strategies are going to work. As long as you abide by the codes, property consolidation can be an excellent wealth-building strategy.
But that’s not all…
You can also profit from knowing your codes without any elaborate strategies.
You see, it’s quite common for property agents to make mistakes when advertising a property. Without knowing the regulations, they might market a property in a completely wrong way. And you can profit from this.
A great example was observed in an investor who bought a residential development block that’s been mistakenly advertised as commercial. The agent confused the mixed-use zoning designation and as a result, he didn’t advertise it as residential or commercial.
That’s probably why the property spent a lot of time on the market, with price drops in an effort to speed up the sale. The investor who knew better took advantage of this and bought the property at a great price.
If everything goes according to plan, the investor’s knowledge of the regulations will bring a staggering $400,000!
You’d be very surprised to hear that this has happened again and again. If an agent fails to know zoning codes, they might advertise a property for much less than it’s worth. But by recognising this, you can bag a great deal and significantly boost your margins.
Know Your Codes
As you can see, there are many reasons to keep abreast of what’s happening at the local governments and get to know the zoning codes in your area. First and foremost, you’ll be playing by the rules without running into zoning-related legal trouble.
On top of that, this can be the anchor to securing a hefty profit. As shown in the examples above, developers have much to benefit from understanding zoning regulations.
Of course, it will take a bit of time for you to figure it all out. But it’s going to be worth your while.