FEMA’s 2020 Changes and the Need for Income

By Rodney Johnson

I live 200 feet from open water, facing Clear Lake, Texas. It’s not a lake, it’s a bay off of Galveston Bay, and it’s definitely not clear. But other than that, the description is perfect.

My downstairs area is 9.2 feet above sea level and consists of garage space and a storage area. The first living space is 18 feet above sea level. Still, I’m in FEMA’s Flood Zone A1, so, as long as I have a mortgage, I’m required to have flood insurance.

That could be a problem.

The Trump administration just announced it will restructure the program, better aligning premiums with risk. The new rates will be published by April 1, 2020, and will go into effect October that same year.

I’m certain my rate will increase, which is enough for me to consider, “Do we sell the house?”

The question is bigger than just our home, because we have to think about long term costs and cash flow. This is the same math that all of us must do as we get older.

How do we manage costs as we get closer to a fixed income?

Flood insurance has always been a racket. Private insurers got out of the business decades ago, leaving just the federal government, which charges something of a flat percentage on your home based on your risk of flood.

But the flood maps haven’t been updated for some time, and the program doesn’t account for different loss experiences.

Notably, expensive homes tend to have more expensive repairs, and therefore use more of the program’s assets. Combining those two issues, people less susceptible to flood subsidize those in higher risk areas, and lower-priced homes subsidize higher-priced dwellings.

Tightening up the program makes sense, but it could still be personally painful, and now there’s a hard deadline of next October.

The conversation…

My wife and I have only been here a couple of years, and we really like the home and neighborhood. But the yard is bigger than I want to manage, and the house is more than we need. Now we have another reason to consider a change.

But as we all know, moving sucks. And the older I get, the worse it becomes.

Maybe I should pay off the house and then go without flood insurance. But even just writing that down sounds like a terrible idea.

We simply could buck up and pay the extra cost, and then hope that the new insurance tables don’t dramatically tank property values. However, lower property values would decrease my property taxes. If my wife and I plan to stay here for many years, we have an odd incentive to see property prices fall.

Looking farther afield, we have to consider the larger economic landscape…

When the U.S. economy next hits upon hard economic times, chances are that our home will take a bit of hit. Maybe not as much as other locations since we’re at the epicenter of the energy boom, but a general downturn certainly won’t help us.

That leaves two things to consider. We’ve got to determine how long we think we’ll live here, which will drive the decision to either move within a year or stick it out. And then we have to look at the other side of the equation, generating income instead of growth from our portfolio.

Why income matters

Last week, I mentioned my new business venture of renting golf carts on the beach. It’s no accident that I chose a business that throws off a bunch of income.

I’m looking down the road at a time when steady income will be the most important attribute of my portfolio. Unfortunately, that time keeps getting closer!

In addition to outside business interests, I also keep a sharp eye on Charles’ Peak Income service.

It’s no secret that I’m a fan of closed-end funds, and I think pipeline companies offer good value. Today, I can use the income from such investments to reinvest (just like Charles does personally, as he noted in The Rich Investor) and grow my position.

In the future, I can switch from reinvestment to receiving the cash flow. Even better, such investments should weather any economic downturn better than general equities. That might give me some cushion against falling home values, and a way to pay my future flood insurance premiums.

What rising expenses (no pun intended) do you face?

And on the flip side, have you added more income to your balance sheet in recent years, maybe through home rentals, Airbnb, or a new side business like mine?

Let me know at economyandmarkets@dentresearch.com, or on our social media channels.

Rodney

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