How Transitional Properties Make Good Investments

Transitional properties can make a great investment. They are a diamond in the rough that is easily passed over. In this article, we will discuss what a transitional property is. We will also analyze what makes them such good investments and how to maximize your profits off of them.

What are Transitional Properties?

A transitional property is a piece of real estate that is in the process of changing from one use to another. A common transitional property is that of an older single family home that has recently been rezoned B-2 or Office/Service. The property is still being used as a residence, but it is clear that the area is becoming more commercial. The higher traffic count and ambient noise combined with a more commercial nature makes this less desirable as a home even though it has been grandfathered into the current zoning.

What Makes a Transitional Property a Good Investment?

Frankly, it is the land. When a property advances out of a residential zoning and into a commercial one, the land value rapidly increases. There will be a point, however when the improvements will be contributing little overall value. But meanwhile, a prudent far-sighted investor can capitalize on the land appreciation while enjoying market rents for its residential tenants.

While most homeowners will shy away from buying transitional properties, they can make good rental investments. Often tenants have less qualms about renting properties that have a more road noise or traffic. They give little concern to surrounding commercial properties. While zoned commercial, transitional properties can still command market rent if the units are well maintained. If purchased from property owners soon after the re-zoning, you can get these properties at the “residential value.”

How to Make Money off Transitional Properties

While you are enjoying the steady income stream that a transitional property is generating, keep your eye on the commercial demand for properties in the area. Check to see if the land is appreciating. To make the most profit off this investment, it is important to time the actual transition.

If you find that property values are rising and there is an increase in construction in the re-zoned area, consider advancing your income property to the next transitional stage. You have two basic options:

Option #1: Sell to a Commercial Property Investor

This is perhaps the easiest way to capitalize on your transitional property investment. Selling the “residential” property as a commercial one will change your buyer pool. Place the emphasis on the location, property size and zoning. Downplay the improvements. If you play it right, the current land value (as vacant) should exceed your original purchase price.

Option #2: Convert the Use of the Transitional Property

This option can create even a greater degree of profitability. Convert the utility of the real estate from residential to office. Often the conversion costs are minimal. There is a good demand for such converted buildings. Market this new office property to real estate companies, attorneys, dentists, counselors to name just a few. You can expect to see a marked increase in your income stream by converting to a commercial rental property.

Investing in transitional properties is a win-win situation. Not only can you benefit from the residential income stream, but the change to a commercial zoning will allow you to maximize the property’s potential and capitalize on the commercial value.