4 rules for buying property in flood zones

Real Estate | 18 Mar |

Investing in real estate comes with many risks and unexpected costs. Some of those unexpected costs come from repairing damage after harsh weather, including storms and floods.

Some real estate investors wouldn’t consider buying real estate in a flood zone. Why would anyone knowingly invest in a property that could be wiped out at any moment? The truth is, some of the most successful real estate investors buy property in flood zones. It seems strange that anyone would purchase property in an area prone to water damage and destruction, but there’s a right way and a wrong way to buy property in a flood zone.

1. Avoid coastal property

Coastal property is highly desirable but comes with a greater risk of flooding and other storm-related damage. With rising tides bringing homes closer to the water, people are more willing to rent coastal property than to buy it. When you buy coastal property to rent out, you’re taking the chance that it won’t be destroyed in a storm before you pay off the mortgage and make a profit. However, mother nature is unpredictable, and it’s not a smart risk to take.

A recent study by the U.S. Geological Survey found that $150 billion worth of coastal California real estate is at risk of flooding by the end of this century. The risks assessed by scientists included rising sea levels, storms, and beach erosion. The study concluded that people are at greater risk when sea levels rise in conjunction with other threats.

You may not see the destruction of your property in your lifetime, but if you plan on leaving it to your kids in your will, think about what you’ll be leaving them with.

2. Consider flood zones with a resilient and strong economy

New Orleans is an example of a city that didn’t recover well after catastrophic flooding. After hurricane Katrina hit in 2005, the city has struggled to rebuild its community and economy.

Other flood regions – like Houston – have a shockingly quick recovery time. The area is in high demand. People are drawn to Houston for all kinds of reasons, and despite a continued risk of flooding, the Houston economy remains resilient.

Real estate investors actually contribute to Houston’s quick recovery after each major storm. For example, in 2001 after Hurricane Allison, one investor bought around 50 flooded homes, fixed them up, and sold them at their full pre-storm sale price. He did it again after hurricane Harvey. How is this possible? Houston has a strong economy, and he, along with other investors, know it.

Unlike New Orleans, investors know Houston has a resilient economy, and their investment will provide a return.

3. Buy to sell

It rarely makes sense to buy property in a flood zone with the intention of turning it into a source of long-term income. Let’s face it – five years from now, there could be a hurricane that devastates the community and destroys your property. When that happens, you’ll lose a chunk of your income, your investment will be worthless, and you’ll still have to pay the mortgage.

If you’re going to buy property in a flood zone with a resilient economy, do it with the intention of selling the property as quickly as possible. The best time to buy these properties is after a devastating storm or flood.

4. Always carry flood insurance

Thanks to recent catastrophic storms, flood insurance premiums are on the rise. However, you can’t afford to skip coverage. In some areas, the government requires all homeowners to carry flood insurance.

In high-risk areas, there’s a 25% chance flooding will occur during a 30-year mortgage. Low-risk areas make a flood less likely, but don’t bet the house on it.

Invest in flood zone property wisely

Flood damage is complicated to deal with. Aside from the property damage to the structure, you’ll experience damage to fixtures, mold in the walls and underneath the carpet, and other complications.

You don’t want to own a property that gets destroyed in a flood. You want to be the investor who swoops up flooded homes, fixes them up, and resells them quickly.

Following these four tips will help you wisely invest in flood zone property.

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