Why Real Estate Investors Should Consider Highest and Best Use

jim kobzeff

by James Kobzeff
Mar 3, 2017

Highest and best use is an important real estate concept that should be understood by real estate investors in regard to all their real estate investments. What is it?

Simply put, the highest and best use for real estate can be defined as

"the best economic use of a property with respect to what is legally and physically possible at any given time".

Let's say we're driving through an area where commercial buildings surround a lowly single-family home. Although the single-family home might—at its face value—be worth about the same as other similar homes throughout the city, this is undoubtedly not the highest and best use for the property because commercial real estate typically increases property value. In this case, a change in zoning or other regulations that would allow the owner to convert the property to commercial use can indeed increase the property value dramatically and yield the investor a profitable yield.

Okay, that's the idea. So let's consider some other situations that might help real estate investors determine whether or not the property they own is functioning at its highest and best use.

  1. A house or small units on a commercial or industrial lot
  2. A house or small units on a large lot zoned for a larger multiple unit complex
  3. A property where the parcel map shows the building sitting on two or more separate tax lots
  4. A four-plex that actually consist of two duplexes on separate tax lots
  5. An apartment with large enough unit's to configure and add a second or third bedroom
  6. A rental property where zoning permits additional extra units

Rule of Thumb

The mathematics, of course, will vary greatly due to local restrictions, building setbacks, green belt requirements, parking codes and such, to the extent that each property has a different end result. Fair enough, but you get the point. A property's real value (and profitability) might lie just beneath the surface—if not immediately, perhaps in the nearby future.

Here's to your real estate investing success.

So You Know

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james kobzeff author

James Kobzeff is a former realtor with over thirty years of investment property experience and is the owner/developer of ProAPOD Real Estate Software.