On October 1, 2013 changes to FEMA flood insurance program took place which are expected to have dramatic effect on real estate values in Florida and other States where there are a number of flood zones.
This writing summarizes the effect of the changes, it's effect on the current portfolio, and identification of opportunities moving forward.
Identification of issue.
Email administers a mandatory national insurance program for properties in high-risk flood areas. This is accompanied by a complex series of flood maps and surveying elevations for any given area which dictate the amount of risk. When building new homes in the flood area it is possible to simply adhere to the FEMA guidelines and thereby reduce the amount of risk and has the rate of insurance payable. Below is a picture of a stem-wall upon which new home is to be built in the flood area.
The system has only been implemented however since the mid-1970s and continued through the 1980s. Living by the water has always been popular and many of the homes in flood risk areas were constructed well before that time. The map view below shows new houses built on a stem-wall on the one side of the street with older houses built at road level on the other (see height of door/entrance).
As can be seen the stem-wall is almost as high as the first floor of the house without one so that the older house would be almost underwater before the newer one were even affected. On a purely risk-adjusted basis the market rate of insurance for the older house would be in excess of $10,000 per year. To compensate for this a series of subsidies has been put in place for older homes to normalize insurance rates. However as a result of several recent natural disasters which severely depleted the fund the subsidies were legislated to be phased out effective October 1, 2013. The phaseout is gradual for most homeowners except in cases where the homes have been recently sold. Nevertheless even homeowners who remain in their homes have complained of rates doubling wild new purchasers (of older homes) have seen rates increase up to 3000%.
The obvious effect of this is to diminish the economic value of these older homes as the flood insurance premium alone would be sufficient to otherwise carry a much newer or larger property. As a result there have been several political initiatives by governors of affected states including Florida to cause amendments or reversal of these policies. It seems unlikely however that they would be entirely reversed as a result of funding constraints.
Effect on Current Portfolio
The units in the rental portfolio were all newly constructed so as to avoid the subsidized premiums. Other than normal rate increases they should not be affected.
New Opportunities
Assuming that the increased rates remain in force, they also present some unique opportunities: many of the properties affected by the increased rates are in desirable waterfront areas where there is a lot of new construction activity. The factors outlined in this paper may be responsible for causing yet more transformative change as old properties are replaced with new.
A further opportunity lies in the exemption from the mandatory insurance for properties which are owned free and clear. This would include properties which are purchased with funds borrowed from another country provided that there is no US mortgage registered against the property. The majority of rental investments are financed in this manner as limited other options exist.
As the properties can be purchased for a nominal premium over the cost of comparable vacant land and are in good areas, they produce excellent income during the hold. At the same time this income gives the investor far more flexibility than with the raw land.
As with many strategies the trick is not just identifying the opportunity but also having the resources to implement. Check out our websites and blog for information on our rental management and construction activities.
Left: Picture of one of our current new builds showing height of stem wall.
