Should I Buy a House in a Flood Zone?

Let me guess: You are asking this question because your prospective investment property was discovered to be in a flood zone. The bank said it won’t give you a mortgage without flood insurance. You perhaps asked an insurance broker and were told it would be expensive. Typical hazard insurance doesn’t usually cover flood damage. That cuts into your bottom line and you wondered – Should I even move forward?

If you are a homeowner looking for a primary residence, the decision will rest on whether you like the property and have enough W2 income to pay the insurance bill. A lot of property in flood zones are picturesque – think next to the beach or river. For you, it’s more about the beauty and how much you can pay. Only you can make that decision.

For the rest of us investors, it gets a little more tricky. Typically, any area FEMA designates as a 1% annual flood risk or higher will require flood insurance. Banks often require inspection of the flood maps to be performed (for a fee) to make sure the property they are lending on is or is not in a flood zone. The FEMA link above will get you to maps so you can do your quick check before inquiring about a property.

While homeowners can usually get reasonable flood insurance from the government through the National Flood Insurance Program, you’ll have to go private for investment properties. Depending on the area, flood insurance might be twice the cost or more of typical insurance. This often puts the cash flow in the red.

A wise investor would only purchase a property in a flood zone that had a high prospect for income. If the place is stable and hasn’t had a flood in many years, then one expects the seller to have factored that cost into their price. The worrisome issue is if there has been recent floods in the area, such as Southeast Florida, where there is a lot of uncertainty about future storms. If any insurance can be found at all, it is typically very expensive. This uncertainty then must be factored into your judgement.

The bottom line is – usually avoid flood planes unless you have backup finances to pay for increased insurance up to 4x the current flood insurance, or you have enough finances to repair the entire lower level of the place if/when it floods.

Dr. Equity