House used to be in a flood zone, has 10% cap rate

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House used to be in a flood zone, has 10% cap rate

Abdul Hassan
New to Real Estate · Member since 2018 · 13 posts · 3 votes

Hi everyone, newbie here looking for some advice.

I'm looking at a 4 family rental property in Bound Brook NJ. The house is in the part of town  that used to be a flood area, but since they've completed the "flood control project" about 2 years ago it no longer has that designation -  e.g. the house will not require flood insurance. 

The rental is fully occupied currently (has been for 2 years) and is bringing in about 58k in rental income, 41k net after expenses. It's listed at 375k, so it has over a 10% cap rate (hard to find in my area). 

The house itself is in decent shape (will find out more during inspection time), and I've made some calls around the town and it seems that there hasn't been much flooding in recent years, but I'm not sure what to do. I'm scared to go forward with it because of the past history with flooding in the area. The cash flow it produces is great, but it feels like a game of hot potato - you don't want to be the person who owns the house if/when it floods. I worry it'll be difficult to fill if/when the current tenants leave, and if it does flood again, I worry it'll be impossible to sell without taking a loss (thus wiping out any cash-flow gains).

What are your thoughts? Would you buy a good income generating house in a once-designated flood zone?

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Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
8y

Yep.....no vacancy, capex, ongoing repairs, turn over repairs, management. 

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    8y

    The expenses listed at 30% are unrealistically low....it’s missing some stuff....vacancy, turn over costs, ordinary maintenance, capes, manage,ent, etc.

    0Reply
  • Abdul Hassan
    OP
    New to Real Estate · Member since 2018 · 13 posts · 3 votes
    8y

    @Wayne Brooks The expenses listed include gas, water, taxes, and insurance. It's self managed by the current owner.

    0Reply
  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    8y

    Yep.....no vacancy, capex, ongoing repairs, turn over repairs, management. 

    1Reply
  • Abdul Hassan
    OP
    New to Real Estate · Member since 2018 · 13 posts · 3 votes
    8y

    Yeah, the expenses seem a little low - I thought the same thing at first when I heard how much he's paying for heat ($3900). I already have a nice sized emergency fund for repairs and such, and 'm working on negotiating the price down some more so there's still wiggle room. Doesn't look like there's a lot of competition on this home, which is also kinda worrisome since on paper it does seem like a good deal to me (a self-admitted newbie) - I figure there'd be some more eyes on it.

    What are your thoughts on the location, if any @Wayne Brooks? For the sake of the discussion, let's assume the numbers are spot on.

    0Reply
  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    8y

    No idea on location, that’s a local knowledge thing.

    0Reply
  • Robert Murphy
    Insurance Agent · United States · Member since 2017 · 115 posts · 60 votes
    8y

    @Abdul Hassan I would consider a few things. Try a google search looking up the name of the community with "flood" for instance "Bound Brook NJ" and see if you can find anything about a flood the community might have had or you can look into calling the local floodplain manager and ask them if the home has flooded before. If it hasn't great I would still get a flood insurance policy because the government subsidizes flood policies that are in areas the are consider low to moderate. If the community was able to petition the government to remove the community from the floodplain and succeeded, great!! May not mean the flood risk is gone because sometime these "removing from the floodplain is more political then actual risk". Basically saying only MOTHER NATURE knows what will happen when it comes to flooding and just because a property is in or out of a floodplain or more likely flood map doesn't mean that the property could never flood. No one know however if you do move forward with the property I would have flood insurance as a way to mitigate risk even if it is not required by your loan and the best thing is if it is not required you can get it rather cheap like $68 a month for single to 4 families. Just to be safe I would have an extra "renter insurance" notice that your renter's sign that says you recommend getting flood insurance so you are covered. Just to be safe. 

    If you want help with talking about the flood risk I am more then willing to I'm kind of a flood nerd. 

    AT your service your Flood Nerd Robert

    1Reply
  • Abdul Hassan
    OP
    New to Real Estate · Member since 2018 · 13 posts · 3 votes
    8y

    That's awesome @Robert Murphy. I've spoken to a few people who live in and nearby the town - all of them say it used to be bad but hasn't flooded in years, and the water level doesn't rise as much as it used to when it does rain. But as you said, only mother nature knows what will happen. Good to know flood insurance is that cheap - I've always heard flood insurance in itself was a joke, which also scares me a bit.

    Good idea on recommending renters insurance.

    0Reply
  • Kevin SchaeferPro Member
    Real Estate Agent · Emerson, NJ · Member since 2013 · 182 posts · 34 votes
    8y

    On residential sales I see flood zones as a major concern, but on a rental property many investors I've talked to see this as an acceptable risk as normally the insurance would cover it the cost of any repairs. So i guess the real conundrum is that you aren't getting insurance because it's no longer required being this is no longer a flood. 

    0Reply
  • Abdul Hassan
    OP
    New to Real Estate · Member since 2018 · 13 posts · 3 votes
    8y

    @Kevin Schaefer I definitely would get the flood insurance! I'm just questioning whether my fears are reasonable. 

    The question is more or less philosophical at this point - I think the real answer is, like most things, "it depends". I just want to pick the brains of some smart investors out there who've been doing this way longer than I have.

    1Reply
  • Roger Magan
    Member since 2018 · 2 posts · 0 votes
    7y

    I'm a newbie myself. If the nos looked this good and you seem to know a lot about the town, did you end up buying it? If not, what happened? Please share the valuable information for people who are still learning here. Thanks.

    0Reply
  • Abdul Hassan
    OP
    New to Real Estate · Member since 2018 · 13 posts · 3 votes
    7y

    Hi @Roger Magan. The numbers looked good on paper, but after total consideration, I decided against it. 

    Even though it was fully occupied, the house would’ve needed some repairs a lot sooner than later. It wasn’t in the best condition. I probably could’ve negotiated the price down even more since there was no other interest, but I lost interest all together. Even though the house itself isn’t in a flood zone anymore, the town still has a bad history for flooding. And because of that a lot of business owners are scared to open back up. There’s not much of a draw to the area, and I didn’t want to deal with the potential vacancy headaches on top of everything else. Another thing that came to mind was climate change - who’s to say things won’t get a lot worse in the future. I didn’t want to get involved in an expensive game of “hot potato”.

    Instead, I invested in a 3 Family closer to Rutgers. A lot more costly, but a lot higher demand / higher rents. Only time will tell if my decision was right or wrong, kind of.

    Cheers

    0Reply
  • Roger Magan
    Member since 2018 · 2 posts · 0 votes
    7y

    Thanks Abdul. Seems like a wise decision. Most folks don't look at possible repairs in the future, which could be anywhere from tomorrow to few years from now. Other factor is about possible vacancy situation due to reputation of the town. Those things would certainly bring down the CAP rate. Wish you the best.

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