The Covered Land Play: Turning Rental Income Into Redevelopment Gold

In today’s dynamic real estate market, forward-thinking investors are increasingly turning to the "covered land play" strategy—an investment approach that generates rental income in the short term while positioning for long-term land appreciation and redevelopment.

What is a Covered Land Play?

A covered land play is a real estate investment strategy where an investor buys a property with current or potential rental income, or a property that is suitable for owner occupancy, but the primary value lies in the future potential of the land—such as redevelopment or rezoning.

How It Works

Acquisition of Income-Producing Property

The investor buys a property, such as an older residential or commercial building that still generates income or has the potential to generate income. This income “covers” (or offsets) holding costs like mortgage payments, taxes, and maintenance.

Land Banking for Future Development

While earning rental income, the investor holds the property as a "land bank", expecting the land value to appreciate. Long-term redevelopment opportunities—like converting to a higher-value use (e.g., from industrial to mixed-use or residential, or from residential to brand new construction residential)—are the ultimate play.

Value Add Through Redevelopment

Once the property or location appreciates due to market trends, rezoning, or infrastructure improvements, the investor redevelops or sells the land for a substantial profit.

Key Benefits of a Covered Land Play

• Cash Flow During the Holding Period: Rental income offsets holding costs while waiting for redevelopment.
• Ease of Financing: It is often difficult to get financing for vacant land but when there is a usable structure in place, it's usually easier to qualify for many types of financing options.
• Long-Term Upside Potential: The land's future use may unlock substantial value.
• Reduced Downside Risk: Income from existing structures minimizes risk compared to vacant land investments.

Examples of Covered Land Plays

Example One - Residential with multi-family zoning, such as LR1, LR2, or LR3 in Seattle

• Scenario: An investor buys an home in a great location with multi-family zoning
• Short-Term Benefit: Rental income covers mortgage, taxes, and operating costs. Or live in house hack.
• Long-Term Vision: The investor plans to demolish the existing home and redevelop the site into a 4 brand new townhomes.

Example Two - Shopping Center in an suburban market

• Scenario: An investor buys an outdated shopping center in an urban location that still has paying tenants.
• Short-Term Benefit: Rental income covers mortgage, taxes, and operating costs.
• Long-Term Vision: The investor plans to demolish the shopping center and redevelop the site into a mixed-use residential once the market conditions align or zoning changes.

Key Considerations

1. Market Analysis: Future land use potential depends heavily on zoning laws, demographics, and market trends.
2. Timing: Success often hinges on holding the property until redevelopment opportunities align.
3. Carrying Costs: While rental income helps, unexpected vacancies or maintenance costs can impact returns.

Tips for Investors: Executing a Covered Land Play

1. Target Transitional Neighborhoods: Look for areas undergoing zoning changes, transit expansion, or urban renewal. New state laws in WA are pushing municipalities to update their zoning code in this coming year.
2. Focus on Existing Cash Flow: Acquire properties with tenants to minimize holding costs. Leases can help you "hold and wait" for the right opportunity. Or you can look for a property you can live in or operate your business out of.
3. Understand Zoning Potential: Research up-zoning opportunities and work closely with local municipalities to identify sites with redevelopment upside.
4. Plan for Phased Redevelopment: Don’t demolish income streams immediately—phase projects in a way that balances rental income with construction timelines.

The Seattle Advantage

Seattle’s strong job market, tech sector growth, and focus on transit-oriented development make it an ideal city for covered land play investments. Investors who spot opportunities early, such as up-zoning or infrastructure improvements, stand to realize significant long-term gains. Furthermore, favorable land use code help propel the value of development sites.

Final Thoughts

The covered land play is a win-win strategy: immediate cash flow meets long-term redevelopment upside. By combining careful market analysis with patience and vision, investors can turn overlooked properties into cornerstones of future growth.

What are your thoughts on the covered land play strategy? Have you seen similar opportunities in your market? Share your insights or experiences in the comments below!

Contact us!

Adrian Chu, MBA

President & Designated Broker

Specialty Real Estate Group

Specialty Home Loans (NMLS ID 920749 / Company NMLS ID?2154241)

Managing Broker (WA 26434),?Principal Broker (OR?201223946),?Broker (CA?02061077)

Telephone: 206.407.5452

www.SREGUSA.com | www.SpecialtyHomeLoans.com | www.SpecialtyDB.com