Would a flood plain shake you out of an otherwise solid deal?

Question

Hi All,

First time posting, but long time reader here.

I have an opportunity to buy a fully remodeled 3 bed, 1 bath for $64K. It is tax assessed at $94K. My intention is to hold the property long term as a rental. Avg rental income for the area is $850. Conservatively, i'll assume $750.

Assuming I come out of pocket for 20% down (12K), the monthly mortgage payment will be approximately $250. Quick application of the 50% rule:  Rental Income of $750 / 2 = $375 - mortgage payment of $250 = $125 left over.

However, as the title stated the home is in a flood plain. While the area hasn't had a "declared flood" since 1985, i'm sure there are occasions where water is bound to cause problems, being located in a flood plain. Unfortunately, I can't say to what extent which is causing hesitation. Financially, I'm aware insurance will be heavier--a friend of mine lives directly across the street shared his insurance is $1500 a year, or $125 / month (twice the average rate for the county).

My questions is, how many of you have experience with owning a rental in a flood plain? Is this worth consideration? Or, am I being overly intimidated / concerned? Are there any learnings anyone with experience would like to share? What am I missing?

Thanks in advance for any insight.

Ethel Weaver · Answer

Looking for my first property now and that is the first thing I look at before moving forward to analyze the deal.  I will not buy in flood area.  The insurance is too high and the headache afterwards is a bit much

Michael Ran · Answer

as someone who has owned a flood plain property, there is not enough profit so pass on it!

John Teachout · Answer

My advice would be to acquire one of the millions of properties that are NOT in a flood plain. Any property is subject to nature's calamities but this would not be a "random" situation but one that is going to be "sooner or later".

I'd pass.

Colleen F. · Answer

Not as a first deal. Possibly not at all.  The issue is you have house insurance at whatever your standard cost is AND flood insurance which was several thousand for the last flooding home I had. FEMA is also remapping.  On top of all that if it is a real flooding property rather then one that floods every 100 years you do not want to deal with tenants getting flooded.  If it is on a flood plain,  and it is every 100 year flood an experienced investor if they got it for the right amount it would be ok.  A flood like a fire can happen anywhere but if you've had flooding it will probably happen again.  so if you you want to be hands off then no..

Jamie Young · Answer

I'm taking all this in, but wanted to take a quick moment to thank all who have responded. This community is by far the best I've been part of.

Sounds like I should let the deal pass. I didn't mention it in the original post, but this would be my first deal. The last thing I want is to start my RE investing journey on the wrong foot.

I am willing to bet I could get it for less than $64K, but even at say $55K (middleman is in it for $50K), the risks mentioned are hard to argue and admittedly conflict with my objective to be as hands-off as possible.

Sincerest thanks to each of you for the feedback!

Michael Olesky · Answer

@Jamie Young  Call around and get a few insurance quotes for the property and see what the flood insurance will cost you.  In FL, it can get up to several thousand dollars a year and kill even the best of deals.  Forget the 50% rule and use real numbers for all of your expenses.

Erick Harbert · Answer

From you numbers listed above it sounds like the flood insurance alone would eat up most of your cash flow? Have you called around just to get a quote on it? I would have to agree with @Doug McLeod that the opportunity cost could be very high on a very small cash flowing property and probably out weighs the gain.

You should be able to get a much better rental in the area for that kind of investment (time and money.)

Doug McLeod · Answer

The insurance protects you from catastrophic loss, but is it worth it?  How do you handle your tenant when the property becomes unlivable?  Will flood insurance cover lost rent? Can you get repairs done timely to re-rent after a flood if everyone around you is competing for contractor time and attention?  Will people be hesitant to rent in the area forcing you to accept lower rent for some period of time?

The numbers can certainly work, but how willing are you to deal with all the stuff involved when the flood does come?  If you want to be hands-off, I'd look for something else.

Fred Heller · Answer

Personally that's a deal breaker for me, and we have a lot of flood plains in Houston. My home is not in a flood plain, but adjacent neighborhoods are. Those neighborhoods flooded in 2001 when Allison came through, and then they flooded again this year with our big Memorial Day flooding. I'm sure there will be plenty of people on here who will disagree with me, but that's just not a risk I want to take.

By the way, my flood insurance is a little over $400 a year. I've heard, but do not know for sure, that flood insurance in a flood plain can cost a couple of thousand a year.