Flood zone properties. Can they be a good investment.
Member since 2019 · 4 posts · 0 votes
Hello BP,
I am just starting out and trying to find my first flip house near Pacific, MO. What I have found a lot of is houses that have been flooded for sale for very cheap. Mostly small single family homes around $15,000 and even a few duplexes around $25,000. Most of these houses were abandoned after two major floods in 2015 and 2017. What interests me is that several houses have been raised above flood level and rehabbed. A local contractor gave me a rough estimate of $35,000 to raise a small house above flood level based on similar jobs in the area. Has anyone ever raised a house for a flip? What kind of problems come with flooded houses?
First I want to say I have not done this which may disqualify my answer. You are new to investing and there are so many things to look out for so be very diligent and do a lot of research before you jump in. Also I do not think it is good to start with the first ever flip being a super high risk long term project. Not that it is not worth evaluating. It is, I look at every house like this, and it works for me. If the numbers work it works if not, then that is your answer.
What I mean by that is this is... Look at comps... comparable houses, with comparable fixtures you would provide, in the same area, of houses that have been raised. This may be a hard task in it's self based on how many have been completed and sold to get those comps. That is challange #1. However if you can find real good comparable properties, there are a couple of things that need to be taken in to consideration. The house will still be in a flood plane so I think that insurance is basically double the same house in a non flood plane. Consult your insurance agent to get real numbers. Next is the house still desirable or is it next to a highway, train, swamp, dump, or any other distraction and what are the neighboring houses like? A trashy neighbor cannot be fixed and a train cannot be moved. Is it accessible by way of good roads? etc.
You did not say what the foundation is, slab, crawl space basement, etc. That could make a difference, since you can't raise a basement or slab that I know of.
The biggest things to consider is does it fit your criteria? As a new investor have you decided what your criteria is? You need to have that up front. You will change that from time to time as you travel the road and find new opportunities, and that is alright but set up guidelines and hone them as you walk this path.
Here is our criteria:
Is it in a neighborhood that will not likely get vandalized during rehab or before occupancy? Yes = Skip it.
Renting:
Does it beat the 1% rule? $100,000 = $1,000 a month in rent.
Is the cash flow > $200 a month? or $100 per door in multi family after all expenses.
What is the Cash on Cash ROI > 12% if we have to leave 10,000 long term are we making a good return on that money?
Flip:
Does it fit the 70% rule for the number? Most people use the 70% rule. Hint:Use the BP calculators
How long will the rehab take? Take that in to consideration.
Can you verify comps?
What is the ROI on the job? You have to use your realistic numbers.
Are you confident you can you hit your target profit number for a flip?
Of course this assumes you are good at estimating, and have a great relationship with a couple of contractors. If you are not experienced in estimating, get experienced. Do not leave it to the professionals, it is not their money if them miss something big like an electrical panel being out of code or termites they did not see. You have to turn houses and learn from your mistakes or work with someone to help you or what ever it takes. Ask thousands of questions and get bids on all the work from several contractors. Or use something like J Scott's book Estimating Rehab Costs.
And one final thought. Pay no more than 1/3 up front, on any project, 1/3 at completion, and 1/3 after final walk through with everything completed and signed off. No sob stories. If a contractor asks for more than that pay them for what they have completed and find another contractor.
Hi John,
I just bought a house right by the Mississippi in STL, but it's not in a flood zone as it's high above the river on a levee built after the Great Flood of '93 (I presume).
I would suggest getting that house raised above flood level and making sure you get everything in writing that it will in fact BE above flood level and outside the zone of any potential damage. Even if you had flood insurance, but couldn't raise the house above flood level, I would stay away as I've heard floods are nothing but headaches for investors. That option to raise the house sounds like the safest one to me, so long as you cross all your Ts and dot your Is.
Pete
First I want to say I have not done this which may disqualify my answer. You are new to investing and there are so many things to look out for so be very diligent and do a lot of research before you jump in. Also I do not think it is good to start with the first ever flip being a super high risk long term project. Not that it is not worth evaluating. It is, I look at every house like this, and it works for me. If the numbers work it works if not, then that is your answer.
What I mean by that is this is... Look at comps... comparable houses, with comparable fixtures you would provide, in the same area, of houses that have been raised. This may be a hard task in it's self based on how many have been completed and sold to get those comps. That is challange #1. However if you can find real good comparable properties, there are a couple of things that need to be taken in to consideration. The house will still be in a flood plane so I think that insurance is basically double the same house in a non flood plane. Consult your insurance agent to get real numbers. Next is the house still desirable or is it next to a highway, train, swamp, dump, or any other distraction and what are the neighboring houses like? A trashy neighbor cannot be fixed and a train cannot be moved. Is it accessible by way of good roads? etc.
You did not say what the foundation is, slab, crawl space basement, etc. That could make a difference, since you can't raise a basement or slab that I know of.
The biggest things to consider is does it fit your criteria? As a new investor have you decided what your criteria is? You need to have that up front. You will change that from time to time as you travel the road and find new opportunities, and that is alright but set up guidelines and hone them as you walk this path.
Here is our criteria:
Is it in a neighborhood that will not likely get vandalized during rehab or before occupancy? Yes = Skip it.
Renting:
Does it beat the 1% rule? $100,000 = $1,000 a month in rent.
Is the cash flow > $200 a month? or $100 per door in multi family after all expenses.
What is the Cash on Cash ROI > 12% if we have to leave 10,000 long term are we making a good return on that money?
Flip:
Does it fit the 70% rule for the number? Most people use the 70% rule. Hint:Use the BP calculators
How long will the rehab take? Take that in to consideration.
Can you verify comps?
What is the ROI on the job? You have to use your realistic numbers.
Are you confident you can you hit your target profit number for a flip?
Of course this assumes you are good at estimating, and have a great relationship with a couple of contractors. If you are not experienced in estimating, get experienced. Do not leave it to the professionals, it is not their money if them miss something big like an electrical panel being out of code or termites they did not see. You have to turn houses and learn from your mistakes or work with someone to help you or what ever it takes. Ask thousands of questions and get bids on all the work from several contractors. Or use something like J Scott's book Estimating Rehab Costs.
And one final thought. Pay no more than 1/3 up front, on any project, 1/3 at completion, and 1/3 after final walk through with everything completed and signed off. No sob stories. If a contractor asks for more than that pay them for what they have completed and find another contractor.
Flood plains can be difficult. A block can make a difference as to whether it is in the flood plain or floodway which can make a difference in what you can do. Realize that the house will sell for much less than similar non-flood plain houses. Flooded houses can have mold or other contamination due to flood waters carrying raw sewage and chemicals. Probably not a good first project so proceed with caution.
It really depends on where the house is located. I own five houses in a flood zone, all on the same street in fact. However, I happen to know that this neighborhood has never flooded even during the disastrous Easter flood of Jackson, MS in 1979. It is considered a flood zone because the houses back up to a creek. But flood insurance is expensive and mandatory if you have a loan on the house. Three of my houses have flood insurance and two don't because I paid cash for those two. Incidentally, it can be hard to find a house in Mississippi, *not* in a flood zone.
Thank you all!
That is some really useful information. I definitely have a few things to consider. I might start looking for houses on higher ground.