As an investor, understanding water rights is pivotal for navigating the real estate landscape. Long-term planning, due diligence, and adherence to conservation laws are essential. Analyze case studies, stay abreast of environmental legislation, and carefully evaluate water rights implications before making real estate investments. This strategic approach ensures a sustainable and profitable portfolio for you as an investor.

You’re not alone if you’re a real estate investor concerned about environmental issues and how they will continue to affect your opportunities and current investments. Increased indoor and outdoor water use, combined with historic droughts in many parts of the U.S., has made securing water rights for investment properties more important than ever. But what are water rights, and what are their implications for investors?

What Are Water Rights?

Water rights refers to a property’s legal access to a water source from a river, lake, or underground aquifer. Access to water (or the lack thereof) can seriously affect the value of a property and its use.  There are four main categories of water rights: riparian, littoral, groundwater, and prior appropriation.

Riparian Water Rights

Riparian water rights take advantage of a property’s location near an adjoining body of flowing water (one that touches or crosses through the property). These grant the investor or landowner reasonable use. Reasonable use considers what the water is being used for (i.e., irrigation, drinking, or industrial production) and how many other people are using it in this way.

Littoral Water Rights

Littoral rights deal more with recreation than water consumption, but they are essential to understand when investing in a property. These deal with adjacent stagnant bodies of water, including oceans, lakes, and seashores.

Groundwater

Who owns the water underneath the surface? That’s a huge question for investors that can make or break an investment property. Some regulations stipulate that a property with a well owns the water within it, while others assert that, given the wells are typically replenished by an underground aquifer or a shifting water table, certain restrictions apply.

Prior Appropriation

Prior appropriation grants water access to investors or landowners in the order in which they occupied the property. This is referred to as “first in time, first in right” use, and it’s most common in very dry areas where water is a finite resource. Some areas break this category down further. California, for example, breaks prior appropriation down into pre-1914 appropriation and post-1914 appropriation based on laws passed during those periods.

Less Common Water Rights

A less common category of water rights is prescriptive rights. This is similar to squatter’s rights in that a person claiming prescriptive rights argues that they have always used the water in a manner that should be allowed to continue. Most courts hearing arguments of this kind brought by landowners with an actual legal right to water will rule against prescriptive disputes.

Laws and rules governing water use and consumption can vastly differ from state to state. Some states turn regulation of water rights over to local governments, while others rely on local custom and usage. 

Your legal rights to water will change depending on the type of water rights you have. For example, riparian rights conferred by a stream flowing through your property are restricted because, in many cases, you cannot dam the stream to prevent water from flowing to another property.

Whether you are buying a residential property or as an investment, it is essential that you understand who makes important decisions regarding how much water you can use (and what you can do with it).

Water Rights Implications For Real Estate Investors

Investing In Water Might Be Worth More Than The Land

Find a real estate agent who specializes in land sales, and they will reiterate how valuable access to water is. Depending on where you live, you might begin your search for an investment property based on water rights alone.

Property Value Is Directly Tied To Water

The more water a property has and the broader access you have to that water, the more expensive the property will be. A property with broad allowances for irrigation, hydroelectric power, or even bottling for drinking water will have a higher value than one with limited access to water. Understanding the category of water rights and the extent of their reach is critical in determining a property’s actual value.

Investing In Water Is A Risk

Even with the best real estate professionals counseling you, it’s important to understand that there are significant investment risks when it comes to water rights. This resource is subject to legal and environmental challenges, and local changes can impact access and how you are allowed to use water. Unpredictable climate events such as drought can also reduce water and water access.

Looking Long-Term Is Critical

Due diligence is crucial when dealing with water rights, and it involves more than just anticipating potential issues. Take the time to dig back into the property’s historical water use to see how it has changed and been expanded or reduced over time.

Identify Development Opportunities (And Restrictions)

The amount of available water regulates development in many areas. When purchasing land to develop, look for areas with significant water rights. These allow for more potential uses in the areas of agriculture, recreation, or conservation. 

On the other hand, don’t plan to squeeze an area dry by overdevelopment. Not only will this cause your investment to fail, but you could also be legally liable for harm done to others in the process.

Be Mindful Of Conservation Laws

Environmental conservation is an incredibly salient legislative topic right now, and this is affecting land use and development. Build your reputation and increase the sustainability of your investments by keeping track of environmental laws and staying in compliance with regulations. 

Follow Case Studies

Case studies can provide insight into real estate transactions where water rights played a pivotal role. Areas in the western and southwest United States are grappling with who owns water under the ground and have made several difficult decisions affecting development. Understanding the challenges of these areas can help you better predict what might happen as the climate shifts in the future (and water becomes more protected and valuable).

Invest Carefully

Understanding water rights and their implications requires careful analysis of legal frameworks, sustainability, and projected environmental considerations. It is possible to secure a profitable investment with plenty of water rights conferred but take the time to understand the complexities of water rights first. This can help you better mitigate your risk and lead to better, more successful investments.