Skyrocketing Flood Insurance Creates Risk / Opportunity


Inspired Forum Member
If you have been researching Florida real estate lately you may have heard of the massive increases to flood insurance that started being implemented last fall.

March 24[sup]th[/sup] CBS Update on Florida Flood Insurance

The short story is that after Katrina the Flood Insurance program was bust and had to stop subsidizing older homes that do not meet current guidelines. For some homes constructed in the early `80`s for example the impact can be huge, in some cases sending premiums from a subsidized $ 1,600 to over $ 10,000 per year. The loss of subsidy was to be graduated annually or immediately lost when the property is sold. While it appears that some relief measures were implemented to roll back the most severe increases they remain to be phased in out of financial necessity.

Canadians buying second homes probably do not qualify for the subsidy anyway however they may face the additional rate hikes that will apply to all policy holders. If you are looking at property in Florida it is a good idea to check not only current flood insurance but future impact.

The effect of this policy is most dramatic for local residents because flood insurance is required to get a mortgage. A person living in a $ 200,000 home can face insurance premiums that are a far in excess of the mortgage payments. As also noted by CBS many of the affected properties are rentals and the increase will have to be passed on to tenants.

American homeowners and investors rely on mortgages just like here in Canada. If you cannot get a mortgage the value of the property is severely reduced.

In fact you have to pay to tear down the house if you want to build or even get a mortgage so arguably it is worth less than vacant land.

Where is the Opportunity for Canadians ?

Canadian investors generally rely on mortgages also. However they mortgage their Canadian properties to buy properties `all cash` in the U.S. The rates and terms are better and the cash flow from rents is generally more than sufficient to carry the Canadian loan. An 80,000 house can rent for $900-$1100 monthly.


A Canadian investor with no US mortgage is not required to have flood insurance on the property. Normal liability and other landlord insurance is however still available at regular rates.

The income is great but the most lucrative play is on the land. Many of the affected homes are in attractive areas near the water or where there is a high degree of new development. If anything the flood insurance crisis is driving redevelopment as replacing the old homes with new is one of the most practical solutions.

Once a new house is built in compliance with new flood standards the insurance is dramatically reduced. The flood premium on one of our 2541 sq ft new homes in a high risk zone is $ 314 annually.

The price for vacant land is roughly determined by taking the price of the home to be built and subtracting build cost and margin. The value of the land is therefore indexed not to the $ 80,000 house but to the $ 400,000 homes being built. If the price of the $ 400,000 home goes up 10% that translates to a gain of $ 40,000: 50% of the value of the $ 80,000 home. Tampa prices are expected to increase 10% annually.

What if There is an Actual Flood ?

Serious floods are statistically quite rare. As long as the flood does not happen immediately after you buy you will have still done well. The risk is that the house will be destroyed or rendered useless.

Then again if you buy at or near land value you should have paid little or anything for it. The land is the real investment and can be sold or retained at minimal cost.

y;">Happy investing:)

Thomas Beyer

Senior Forum Member
REIN Member
I can see how this can create a unique opportunity for Canadians buying in cash, but Florida has also one of the highest property taxes in the US for non-resident investors.

Before investing in any US state, check out ALL costs involved. It may make more sense to invest in FL rather than in some Canadian provinces or other US states such as TX, AZ, SC, NM, CO, OR, CA or NV, or it may not.


Inspired Forum Member
Thanks Thomas,

I found your securities posts extremely helpful and your website is a model. Excellent advice also to make reasonable account for ALL costs. This is a template we usually use to get a realistic baseline return running the numbers for the houses in question. The property taxes are accurate at about 1200 a year for an investor.

The observation about non-resident property tax needs some clarification:

Anyone who does not live in the property as a primary residence pays the same regular tax rate. There is a special Homestead rate for primary residences which cuts 50k from the appraised value.

Great advice also to make sure you get a cash flow projection with all costs from someone who is experienced in the type of deals and area. If you invest with them you can hold them to the fire on it also:)