Are you buying a house in a flood zone as an investment? Are you wondering how good or bad of an idea it is? Or which strategies can you best utilize to reduce the risks and increase your chances of making a profit?
In this blog, I aim to explore flood zones from a real estate investor’s point of view to answer all of these questions. So, without further ado, let’s jump into it!
What is a Flood Zone?
Before getting started on the details of buying a house in a flood zone, it’s best to start by explaining what a flood zone is, and how different areas might be categorized as different types of flood zones.
To put it simply, a flood zone is an area, typically a coastal area, that has an increased chance of flooding.
In the case of a coastal area, the flooding could occur when the water level rise, causing the water to submerge part of the coast that’s close to it.
Another type of flooding which is also common is flooding caused by high amounts of rain. This could occur in valleys, for example, when all the water from the rain comes down the valley causing a flood.
Related: How Climate Change Affects Real Estate Markets
Types of Flood Zone
The Federal Emergency Management Agency (FEMA) has categorized flood zones based on the level of risk that an area has for flooding.
While FEMA has designated several types of flood zones with varying characteristics, there are two main categories of flood zones that you should be aware of as an investor when buying a house in a flood zone:
- Special Flood Hazard Areas (SFHAs) – these zones have a higher chance of flooding. According to FEMA, there is at least a 25% chance of flooding in these areas within the duration of a 30-year mortgage.
- Non-SFHAs – these areas have a moderate to low risk of flooding. According to FEMA, zones in this category will only receive around 33% of the federal disaster assistance for flooding when compared to SFHAs.
To know what category a zone falls into when buying a house in a flood zone, you can look at the zone’s code:
- SFHA zone codes begin with the letters A or V
- Non-SFHA zone codes begin with the letters B, C, or X
Since this zone categorization will have an impact on your insurance, it’s is of utmost importance for you as an investor to know what zone category does your house falls into before making any decision to purchase.
Is Your House in a Flood Zone?
Luckily, FEMA made it very easy for any prospect to find out if they’re buying a house in floodplains or any type of area with a risk of flooding.
You can simply visit FEMA’s website and look at their Flood Map Service Center to determine if your property is located in a flood zone.
Additionally, you can and should always consult a real estate agent in the area, as real estate agents should be aware of all the details that might affect your purchase decision.
Finally, if you’re looking to buy a house in a floodway and you’re wondering about the resale value of homes in flood zone areas where you want to buy, or if you’re wondering how the prices of these houses differ from other houses in the market, make sure to use Mashvisor’s property finder tool to see all the available properties for purchase in any area that you’re interested in.
Buying a House in a Flood Zone – Insurance
Now that you know all about flood zones, what they are, and the different types of flood zones as categorized by the Federal Emergency Management Agency, let’s talk about the most important aspects to you as an investor when asking yourself: should I buy a house in a flood zone?
The first aspect that I want to talk about here, and a very important aspect, is flood insurance.
Flood insurance is a type of insurance that covers damages and losses caused by floods.
This type of insurance is required by lenders such as Fannie Mae, Freddie Mac, FHA, USDA, and VA Loans, from homeowners who own a property in an SFHA zone (A or V designated flood zones).
If you’re applying for a conventional mortgage by a private lender, however, and the property is located in a non-SFHA zone, then your lender might not require flood insurance. But that doesn’t mean you shouldn’t insure against flooding regardless.
Related: 10 Types of Insurance for Real Estate Investors
Pros and Cons of Buying a House in a Flood Zone
Naturally, there are advantages and disadvantages to owning real estate in a flood zone.
In this case, however, the list of advantages might be slightly smaller than the list of disadvantages, making this a very niche market when it comes to real estate investors.
There are a number of notable advantages that come with owning a house in a flood zone.
The first and foremost reason why real estate investors might want to buy property in flood zones is the property prices.
In most cases, and especially if it’s an SFHA zone, properties in these areas will be considerably cheaper than their equivalent in other areas when it comes to the price per square foot.
This alone gives an alluring appeal to houses in flood zones, especially to investors who may not have a large sum of money that they can put down.
Another very noteworthy advantage that houses in flood zones has: is the appeal of their location.
Since flood zones are mostly in coastal areas near the shores, this means that they’re very attractive to live in due to their proximity to water.
This means that if you opt for buying a property in a flood zone to use as a rental property, for example, it will be very easy for you to find tenants and maintain a high occupancy rate in most cases due to the high demand for living there.
While the aforementioned advantages might make it seem tempting to buy a house in a flood zone, it’s important to weigh them against the following disadvantages before deciding to make the decision.
Firstly, while flood insurance is available to protect you against flood damages, it is by no means cheap to insure against flood.
For example, the average cost of a National Flood Insurance Program (NFIP) plan is $700 annually. That is a total of $21,000 if you’re planning to own the house for the duration of a 30-year mortgage.
Additionally, this flood insurance may not cover all of the damages that a flood might cause, especially in the case of severe floods that may result in you having to rebuild the entire house.
According to Drew Scott, vice president of Personal Lines at Stratford, “the maximum amount of coverage available through the NFIP for a residential home is $250,000”.
Not to mention all the stress that it can cause!
Losing a house, even if your insurance is going to cover it, is a big deal! If you’re using the house as a primary residence, it means that you will have to relocate while your house is getting rebuilt, and you might lose your personal belongings to the flood as well, all of which can’t be replaced by insurance.
What Does the Future Look Like?
The good news here is that the future doesn’t look very bleak for houses in flood areas.
This is because the government has been increasing the focus on finding ways to mitigate floods or reduce their impact on properties at risk.
This is done mainly by building flood barriers along coastlines with flood risks, which can drastically reduce their risk of flooding and cause property damages in the area.
Another way to reduce the risk is to build or buy properties above flood levels in flood zones. So, a small hill in a flood zone, for example, might make the property on top of it be relatively safe from damages caused by a flood.
It is also important to note that there are some ways when it comes to building or renovating a home that can also mitigate some of the flood damages, such as replacing materials with sturdier and more durable ones or placing electric sockets higher up the walls to increase resilience.
Investing in a Flood Zone – Strategies
When you’re thinking about investing in a property in a flood zone, you need to shape your strategy around the risks associated with owning a property in a flood zone.
As I mentioned earlier in the blog, real estate properties in flood zones have high appeal in terms of their location and surrounding area.
This makes them ideal as rental properties due to the abundance of demand.
This also means that you can use the property as a vacation beach house during the high vacancy seasons.
The biggest appeal to renters in these areas is that they won’t have to think about the long-term consequences of owning a house in a flood zone. And the rental income that these properties will generate can often outweigh the risks associated with them.
Another good strategy to use is to buy and resell.
Similar to a fix-and-flip, but instead of fixing a distressed property you will be instead modifying and upgrading it to make it flood-proof before reselling it at a higher price. This will also make the property stand out compared to other properties around it if you’re marketing it as a flood-proof property in a flood zone.
Buying a House in a Flood Zone? Start Here!
If you want to buy a house in a flood zone or any other type of zone in the US, make sure to use Mashvisor!
Mashvisor is a real estate platform that helps real estate investors throughout their investment journey: from finding amazing properties with high potential returns to comparing them and identifying the best strategy to use, to closing the deal!
Mashvisor’s platform comes equipped with all the tools that you will need.
Using our property finder, for example, you can use robust and interactive filters to narrow down your search and find properties that perfectly match your search criteria in terms of budget, projected return on investment, and optimal rental strategy.
If you’re interested in buying a house in a flood zone, in particular, you can use our property marketplace to find off-market properties that sellers are offering at reduced prices, along with all the property details that you will need in order to make your decision.
There are both ups and downs to buying a house in a flood zone. It is your job as an investor to take all of these advantages and disadvantages into consideration before making your decision if this is an investment that’s worth your time and money.
It is also important to keep in mind that when it comes to flood zones, you should account for the distant future, as floods become more frequent and their risk increases.
This also means, however, that humanity will have more time to think about ways and develop technologies and new methods to mitigate floods and reduce their impact on real estate properties.
It’s also important to stay up to date on all things related to owning a house in a flood zone, such as your state’s laws and regulations regarding the matter and the types of insurance that are available to you.
So, should you buy a house in a flood zone? Think thoroughly about it, and let us know your decision!
And of course, when the time comes for you to buy, don’t forget to check out Mashvisor and use our platform to make the process much easier for you in the future!