As a real estate investor, staying on top of real estate trends can help you make decisions that drive you past a mediocre retirement to wealth that lasts for generations. If that’s important to you, then one of the latest trends you should know about is horizontal property regimes.
Horizontal property regimes (HPR) are popping up in rapid-growth areas like Nashville, TN. According to the Metropolitan Planning Department of Nashville, the amount of local HPR developments have skyrocketed in the past decade—jumping up to nearly 800 properties from 2015 (1,822) to 2016 (2,621). As of July 2018, there are 1,134 new HPR developments. That’s quite a contrast from the 148 HPRs built in 2010. (1)
Before you decide where to make your next real estate investment, find out what exactly is an HPR, why it’s popular in Nashville, and what it could mean for your investment opportunities.
A horizontal property regime is a zoning policy that legally allows you to build two new houses on a piece of land that previously only had one house. After you sell the two houses, both of your buyers co-own the property and share a single tax bill. HPRs were legally instituted by the Horizontal Property Act. (2) Each state has specific laws on horizontal property.
One of the unique characteristics of a horizontal property regime is what’s referred to as “Detached with HPR.” This just means that the buyer of an HPR house only owns the land beneath the house. The surrounding land is considered common ground that’s maintained by a homeowners association (more on that later).
HPR homes are described as “tall and skinny” because of their narrow design. They’re built this way because they have to fit a plot of land that once held a full-sized house. But why would home buyers want a tall and skinny home? Why are they popping up in Nashville?
Every year, there are more people moving to Nashville than there are available houses. As a result, newcomers don’t have many housing options to choose from in popular downtown areas.
The limited supply has created a high demand for zoning changes, like horizontal property regimes, that allow for increased density in desirable neighborhoods. Old houses are being torn down to make way for two new houses that share the same yard near urban amenities.
You might think a smaller yard would turn away home buyers; however, many buyers like the idea of doing less lawn care with a smaller yard to maintain. And since these homes are located closer to urban areas with denser communities, children have plenty of alternative activities to get involved in to make up for not having a big backyard.
Plus, many millennial buyers like the added benefit of having a rooftop as their own private-lounge space for barbecue parties and an urban view.
You might be wondering, How is an HPR house different than a condo, duplex, or townhouse? The main differences are related to legal and home ownership implications.
For example, a horizontal property regime requires the co-owners to form a homeowners association (HOA). Since HPR houses share the same lot, the surrounding land is considered a shared common area (as opposed to a limited common area). An HOA keeps both owners accountable to a private set of rules to ensure the houses remain marketable.
HOA rules might include:
Paying fees that go toward ground maintenance, waste management, etc.
Maintaining home and yard appearance
Limiting the number of pets
Keeping noise levels down
The HOA defines legal obligations and rights of each joint owner of the same property. It’s similar to the bylaws set for a condominium. The HOA for a horizontal property regime must be formed with a legally registered entity, which requires an annual fee to be paid to the issuer.
A simple and recommendable way to do this is to form an LLC. An LLC doesn’t cost much and it makes clarifying interests a little more legally efficient compared to incorporating.
If the HOA isn’t formed with a legally registered entity, then the property will have to be set up as a “planned unit development” (PUD). This creates additional layers of legal complications, including financial problems with lenders and appraisers.
Horizontal property regimes can be a great opportunity for real estate investors. Since they allow for two home transactions to take place on one plot of land, there’s an opportunity for great returns within a desirable time period. But before making a decision, talk to a real estate investment firm to learn more about the market where you’d like to invest.
Are you interested in making smarter decisions when it comes to your investment strategy? If you are, get a free consultation with one of our investing professionals to grow your understanding of real estate trends that are creating profitable opportunities.