Variance is the statistical measure between numbers in a data set. In investing terms, investors use variance to determine how much risk a potential investment holds and whether they will profit from it.
Let’s get more specific with “portfolio variance.” If you have an investment portfolio, the portfolio variance measures the weights of each asset in a portfolio against each other to determine the standard deviation squared.
In real estate, variance carries a slightly different meaning. A variance in real estate is legal permission to use land or build in a way that strays from current zoning laws. For example, if you own an apartment building that is one story high and the rental business is booming in your city, you might want to build a second story on the apartment building to expand your rental income.
Let’s say your local zoning board only allows one-story residential buildings. In that case, you’d need to seek out a variance from the zoning board to build a second story on that property. Zoning rules vary from locale to locale but generally have similar general structures in each state.
Types of Variance in CRE
This type of variance means you’re getting permission from the Zoning Board of Appeals (the “ZBA”) to use the property you own in a way that is not technically allowed. For example, if you own a shopping mall and additional property nearby, you want to build a parking lot on the other property. If that area is not zoned for parking in your locale, you would have to seek an area variance approval.
This type of variance gives the property owner permission to use land in a way that is restricted by local zoning regulations. For example, in commercial real estate, you would have to seek a use variance to build a storefront in an area zoned for residential use.