Variance in real estate investing refers to the measure of deviation between the actual value of a property and its expected value. It helps investors assess the risk associated with an investment by analyzing the fluctuation in property values over time. Understanding variance enables investors to make informed decisions and mitigate potential financial losses.
Variance: Practical Example
Imagine you are a real estate investor named John who is considering investing in a new development project. Before making any decisions, you want to assess the risk involved and understand the potential fluctuations in returns. This is where the concept of variance comes into play.
As you analyze the project’s financials, you notice that the projected rental incomes for the commercial spaces within the development have a high degree of variability. This means that the potential rental incomes could vary significantly from the average expected income.
To better understand the potential impact of variance on your investment, you decide to calculate the variance of the projected rental incomes. By doing so, you can get a sense of how much the actual rental incomes might deviate from the average, providing you with insights into the potential risks and rewards of this investment.
After gathering the necessary data, you plug the rental income figures into a variance formula and calculate the variance. The resulting value provides you with a numerical representation of the degree of variability in the projected rental incomes.
Upon reviewing the calculated variance, you realize that the projected rental incomes have a relatively high variance. This indicates that there is a significant possibility of rental incomes deviating from the average, which could introduce higher levels of risk into your investment.
Considering this information, you weigh the potential rewards against the associated risks. While the high variance suggests the possibility of greater returns, it also highlights the increased uncertainty and potential for income fluctuations.
Ultimately, understanding the concept of variance allows you to make a more informed decision as a real estate investor. By recognizing the potential risks and rewards associated with the projected rental incomes, you can adjust your investment strategy accordingly, whether it involves seeking additional diversification, implementing risk management measures, or exploring alternative investment opportunities.
As you discuss your findings with your fellow real estate investor friend, Jane, you mention, “The variance in the projected rental incomes for this development is quite high. It indicates that there is a significant possibility of income fluctuations, which introduces higher levels of risk into the investment.”
Intrigued by your analysis, Jane realizes the importance of considering variance when evaluating real estate investment opportunities. She decides to incorporate this concept into her own investment analysis, ensuring a more comprehensive assessment of potential risks and rewards.
FAQs about Variance in Real Estate Investing:
1. What does the term “variance” mean in real estate investing?
Variance, in the context of real estate investing, refers to a legal permission granted by local authorities to deviate from specific zoning regulations or restrictions for a particular property. It allows investors to use the property in a way that may not conform to the existing zoning laws.
2. When is a variance typically required in real estate investing?
A variance is typically required when an investor intends to use a property in a manner that doesn’t align with the current zoning regulations. For example, if an investor wants to convert a residential property into a commercial space, they may need to obtain a variance to proceed with the desired change.
3. How can a real estate investor obtain a variance?
To obtain a variance, a real estate investor must typically submit a formal application to the local zoning board or planning commission. The application should include a detailed explanation of the proposed use, supporting documents, and any necessary fees. The investor may also be required to attend a hearing to present their case and address any concerns raised by the community or the zoning board.
4. Are there different types of variances in real estate investing?
Yes, there are generally two types of variances: use variances and area variances. A use variance allows an investor to use a property for a purpose different from what is permitted by the existing zoning regulations. An area variance, on the other hand, permits an investor to deviate from specific dimensional requirements such as setbacks, lot size, or height restrictions.
5. What factors are considered when evaluating a variance application?
When evaluating a variance application, local authorities typically consider factors such as the impact on the surrounding neighborhood, potential safety concerns, adherence to the community’s comprehensive plan, and any objections raised by neighbors or other stakeholders. The decision is usually based on whether the proposed variance aligns with the overall goals and best interests of the community.
6. Is obtaining a variance guaranteed for real estate investors?
No, obtaining a variance is not guaranteed. The decision to grant a variance rests with the local zoning board or planning commission, and they carefully evaluate each application based on the specific circumstances and regulations in place. It’s important for investors to thoroughly research and present a compelling case to increase their chances of obtaining a variance.
7. What are the potential benefits of obtaining a variance for real estate investors?
Obtaining a variance can provide real estate investors with increased flexibility in utilizing a property, potentially expanding its market value or income-generating potential. It allows investors to pursue unique opportunities that may not have been possible without the variance, thus enhancing their investment strategies.
8. Are there any potential drawbacks or risks associated with seeking a variance?
While variances can offer advantages, there are also potential risks involved. The variance process can be time-consuming and may require additional expenses, such as hiring legal counsel or experts to support the application. Moreover, there is no guarantee of success, and if the variance is denied, the investor may need to reassess their plans or seek alternative investment opportunities.
Remember, consulting with a local real estate attorney or zoning expert is advisable when dealing with specific variance requirements, as regulations can vary significantly between jurisdictions.