Rent Rate and Flood Insurance

[Jason Merchey]

For all you in Charleston or Mt. Pleasant or South Carolina in general, here is a dilemma I face. @John Semanchuk and @Anthony Conway I'd especially like to hear from you. It is a two-parter: rent amount and flood insurance.

There is that metric out there that holds that you can get about 1% of the property's value in a given month in rent. That is, spend $100,000 on a house and you can get about $1,000 in rent. I think that may hold in some less expensive areas. In areas that would be considered "middle class" and "appreciating, not depreciating" or "seeing influx not outflow" such as Hanahan, GC, Summerville, Park Circle etc. I don't think that is the case. I see that as being more like .008 of the value in a given month. Thus, purchase for $150,000 and earn $1,500 in rent. Even that is a bit optimistic. The house I am rehabbing on Sumter Street, that is governed by a .006 multiplier, meaning the value is about $380,000 and the rent is ideally about $2,100.

Frankly, I was thinking about not keeping the house due to the potential for flood insurance rates that could kill the cash flow even further. Alternatively, not putting flood insurance on it will save $1,500 a year now, and perhaps if the whole peninsula gets snagged in a redrawn flood map category it might save $5000 per year. But with the odds of an event occurring being maybe 1% or up to 2% if the weather patterns keep getting weirder, that doesn't sound wise.

So long story short (or medium!) I am now a little less sanguine about hanging on to it to gain the appreciation it could see. I hate to let go of the $50,000 that not selling it would earn me (a little profit + no sales costs), but at $5,000 a year in flood insurance rates, if the worse happens, that instant equity will be slowly eaten up - and I bet that appreciation on the peninsula as a whole will be much less than the 5-7% I would like to see because everyone will be in about as bad a situation or worse than I am. Alternatively, the value of this house might go up a bit because it's probably in the top 50% of elevations (13.3 feet) on the peninsula. It's all very sketchy.

So that is one question I would ask, namely, do you have any insight into this situation I face? Is it true that flood insurance rates are a total crapshoot?

Another question that I have for you would be, When I am calculating the cash flow on alternative investments, if I look at say, a $150,000-$200,000 house in one of the areas I mentioned, preferably either in Park Circle or Dorchester II district, do you see the rent multiplier being like .008? I was aiming to see $1,200 rent off of a $160,000 - $180,000 house. If it is more like $1,000 I should be aware of that fact. If it's $1,200 or greater, then my calculations make buying four of those with 25% down on each a decent alternative to putting my one, big ostrich egg in a basket.

Do you have any thoughts on any of this?