By Nicholas Tsontakis | DwellBoldly
In an unpredictable real estate market where prices are high, interest rates are high, and deals seem hard to come by – a shift in property analysis makes sense. An alternative to simply running numbers on what has already been developed on a property is to run numbers based on the full development potential of a property. This can help you find a gem without having to look at any more properties.
It often pays to understand some of the intricacies of a jurisdiction’s zoning ordinance to uncover deals. While searching for cash-flowing properties in the City of Phoenix, one might notice many developed multi-family properties show a duplex but are zoned R-5. In Phoenix, R-5 zoning allows for 43.5 dwelling units per gross acre, surely one could build more than two units on those properties, right? The deeper you dig, the more layers you can unpack and the more you can start to see the full potential of many of these lots and, suddenly, an overpriced 2-unit property might become an underpriced 10-unit property. It does take some research and work to figure this out, but it could end the frustration of not finding the right deal. Let’s look deeper into the example of a duplex on a corner property that might allow for more units in the City of Phoenix.
You receive an e-mail from your realtor regarding a duplex on a corner lot. While the list price seems high, you notice that the zoning says R-5 and you know that R-5 is Phoenix’s highest-density multi-family zoning so this could be good. First, do not assume that your realtor knows for certain the zoning of the property as many listings are miscategorized. To find out the zoning, enter the address in a search on the Maricopa County Assessor site, and you can find the base zoning for a property if it says R-5, which is a good start. You can also find the net square footage of the lot and view maps with aerial images where you can take rough measurements on the Assessor’s website. While pulling information from the Assessor’s site, also pull up the City of Phoenix’s zoning map as this shows additional zoning information on the property. On the city’s map, you might notice that the zoning says R-5 with additional abbreviations afterward, those extra abbreviations are important, but we will keep our example simple. The next place to look is into the City of Phoenix Zoning Ordinance, a table there shows us that the density allowed for an R-5 property is 43.5 dwelling units per gross acre. Great, but what does gross acre mean? The gross area of a lot, when we look at the definition in the city’s Zoning Ordinance, includes the right-of-way dimension outside of the parcel’s property lines. Some cities will use gross area and others will use net which can be significantly different.
On our corner property, if the parcel measures 100’-0” x 60’-0” the net area of the lot is 6,000 square feet or 0.14 acres. Since the lot is in Phoenix, we can include an additional right-of-way length (right-of-way dimensions vary per street but we will use 25’-0” in our example) on two sides, we calculate the gross area by multiplying 125’-0” by 85’-0” so 10,625 square feet or 0.24 acres. Using the net area, which is the number the listing will show and what the County shows as lot square footage, to find density, we would conclude that we can build six units on the site. But when figuring out the gross area we see that the allowable density is ten units on the site – that is 1 ½ times more in units! A property with ten units may work even if a property with 6 does not. This is just one way that understanding the zoning ordinance in a City/Town/County can help you make intelligent investment decisions.
This example only focuses on allowable density, but there are many other factors that come into play when designing and developing a multi-family property, but it illustrates the concept that the more you understand the effect of the Zoning Ordinance on your potential investment, the better your investment decisions can be. It doesn’t always make sense to just run the numbers on what is there, running the numbers on the potential of the property can help you find deals that are not immediately apparent.
Here are the websites referenced in our example:
Maricopa County Assessor:
Phoenix Zoning Maps:
(https://www.phoenix.gov/pdd/mycommunitymap and click on “Launch My Community Map” then enter the address)
Phoenix Zoning Ordinance R-5 Table (our example uses the first column in Table 2 as many Phoenix properties fall into that category):
Phoenix Zoning Ordinance, definitions: