Dean Graziosi Real Estate Blog

The astute real estate investor tracks area economic activity, population growth, industry and commercial activity, as well as quality of life. All of these factors will influence the growth of the area, and home price appreciation usually follows. If building isn’t keeping pace with population growth, one can expect rent increases for better return on investment as well.

As government gets more involved in almost all phases of our lives, another very important factor to watch in an area is governmental regulation and its impact on building and development. A primary reason for much of the price appreciation in California has been governmental restrictions on development and construction. Anything that increases the costs of construction will also increase the value of homes.

Some examples of restrictions and covenants that increase the cost of building new homes are:

· Minimum home square footage restrictions

· Minimum lot sizes

· Increasing setbacks from lot lines, thus decreasing usable lot space

· More green space perpetually dedicated to open land

· Mandated building envelopes

When minimum lot sizes are enacted, the number of lots that can exist in an area decrease. The price per acre or square foot for the land increases, thus increasing the cost of the home ultimately constructed. Similarly, more green space, greenbelts, and space permanently set aside as open land drives up land prices. Creating more space between homes is also accomplished by increasing the setbacks from lot lines. This again decreases the land available for construction, usually resulting in larger lot sizes as well.

Many subdivisions also restrict homes to a minimum square footage, and exterior appearance and construction materials are also frequently written into restrictions and covenants. There are usually good reasons, at least for those currently residing in an area, for these restrictions. However, this natural human trait of closing the door behind them when they find their home does cost future residents more to build. The first residents in the area want to keep their property values moving in a positive direction, so they enact restrictions and covenants that assure at least the same size and quality of residences in the future.

A smart real estate investor will track the progress of government and subdivision restrictions in the area. When the trend is for increased oversight and regulation, one can usually assume a corresponding increase in construction costs. Therein lies the opportunity for above average property appreciation in the future.

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