1st post, 1st property: 2 duplexes but need flood insurance.

Investor · Kansas City, MO · Member since 2017 · 4 posts · 0 votes

I am currently in negotiations on 2 side-by-side duplexes. I think it's a "B+" neighborhood, great school district, 90k per property, roughly $15,000 in maintenance costs (new HVACs, some mold in one). Buying as a pure rental property.

I just learned that the property is in a flood zone. $1,600 quote for flood insurance per property. The numbers still work out favorably, though. $600 rent/unit, $1,000 monthly earnings. 3 units filled, 2 have long term renters. Cap rate around 7.

I would love any advice for this deal.

(P.S. first post and first rental property. Property is in Kansas City, MO area).

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Jeff CopelandBusiness Member

Real Estate Broker · Tampa Bay/St Petersburg, FL · Member since 2015 · 1k+ posts · 2k+ votes

We deal with the flood insurance issue a lot here in Florida, and it almost always kills the cap rate. In my opinion, it simply becomes a matter of opportunity cost.

If the numbers work, they work (and I don't have enough info or knowledge of your market to help you analyze them).

But the real question is...Can you buy similar property(s) in a non-flood zone that will perform equally as well without paying $3200/yr in flood insurance?

If so, then buying this one may cost you the opportunity to buy that one.

If not, then buying this one (assuming the numbers are good) is almost certainly better than buying nothing.

However...there's always downside risk with flood insurance, so be sure to do your homework...If they remove the federal subsidies for the National Flood Insurance Program (the likelihood of which is a matter of debate), flood insurance premiums have the potential to skyrocket. If your flood rates double in five years, how does that change things? And will anyone want to buy it when you decide to exit?

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Jeff CopelandBusiness Member
Real Estate Broker · Tampa Bay/St Petersburg, FL · Member since 2015 · 1k+ posts · 2k+ votes
9y
We deal with the flood insurance issue a lot here in Florida, and it almost always kills the cap rate. In my opinion, it simply becomes a matter of opportunity cost.
If the numbers work, they work (and I don't have enough info or knowledge of your market to help you analyze them).
But the real question is...Can you buy similar property(s) in a non-flood zone that will perform equally as well without paying $3200/yr in flood insurance?
If so, then buying this one may cost you the opportunity to buy that one.
If not, then buying this one (assuming the numbers are good) is almost certainly better than buying nothing.
However...there's always downside risk with flood insurance, so be sure to do your homework...If they remove the federal subsidies for the National Flood Insurance Program (the likelihood of which is a matter of debate), flood insurance premiums have the potential to skyrocket. If your flood rates double in five years, how does that change things? And will anyone want to buy it when you decide to exit?
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Thomas S.
Member since 2016 · 13k+ posts · 12k+ votes
9y
With a cap at 7% your money would do better in a mutual fund, bonds or just about any other passive investment. You would probably be better off looking farther afield to invest and avoid the added cost of flood insurance.
Bottom line is that if real estate can not return greater than 10% it simply is not worth the amount of time and effort it takes to maintain.
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Lynn McGeein
Real Estate Agent · Virginia Beach, VA · Member since 2012 · 2k+ posts · 1k+ votes
9y
Also you need to be aware that flood insurance rates are rising, and there is talk that they may raise the current $250 annual surcharge for investment property and businesses. I have one property in a flood zone. Flood insurance started at less than $400 per year. It is now up to $750, and that is after dropping my coverage to minimum allowed by mortgage lender. No one in government seems to care about raising costs to landlords, so be careful. The only way I'd buy another property requiring flood insurance is if I got a great deal and either did not need a mortgage on it or could pay the mortgage off if insurance rates went higher.
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