QOTW: Are natural disasters affecting your investment strategy?
Alicia MarksPro Member
Fort Worth, TX · Member since 2020 · 1k+ posts · 2k+ votesQOTW: Are natural disasters affecting your investment strategy?
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Greg ScottPro Member
Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votesIt is commonly known that devastating 1906 San Francisco earthquake caused everyone to abandon the city permanently. It is now a ghost town on the edge of the sea.
Of course, I'm being sarcastic. I've seen people rebuild houses on shorelines wiped clean by hurricanes. People have short memories. I don't foresee much immediate impact.
43 Replies
- 4yMalcomb StapelPro MemberInvestor · Topeka, KS · Member since 2020 · 669 posts · 488 votes
@Alicia Marks in regards to strategy, yes, I do take it into account, but perhaps from a different angle. Where I am from tornadoes are a thing. We do have historical precedence for them taking huge chunks out of towns as they pass through. So while I do like the idea of owning large chunks of rentals in certain neighborhoods, I also like the idea of investing in other towns nearby to keep all of the eggs from being in one basket.
Not concentrating all of you rentals into one location is a hedge against both natural disaster and local economic fluctuation.
- Fort Worth, TX · Member since 2020 · 1k+ posts · 2k+ votes4yI found that I had issues insuring more than a few in one area. I also live in a tornado prone area, so no one wanted to insure several on a single street.
Quote from @Malcomb Stapel:
@Alicia Marks in regards to strategy, yes, I do take it into account, but perhaps from a different angle. Where I am from tornadoes are a thing. We do have historical precedence for them taking huge chunks out of towns as they pass through. So while I do like the idea of owning large chunks of rentals in certain neighborhoods, I also like the idea of investing in other towns nearby to keep all of the eggs from being in one basket.
Not concentrating all of you rentals into one location is a hedge against both natural disaster and local economic fluctuation.
- 4yJason BottPro MemberInsurance Agent · Nationwide · Member since 2014 · 2k+ posts · 1k+ votes
@Alicia Marks from an insurance perspective, this is a major issue. One commonly looked over by OOS investors.
Insurance rates on the West cost can be 1/4th of rates on the East coast due to the Hurricane exposures. Additionally, the rates on coastal properties are much more volatile than other areas of the country. It's just harder to predict and budget for such an unpredictable cost.
- Investor · San Francisco, CA · Member since 2017 · 303 posts · 327 votes4y
(As I write this, Memphis is on a tornado watch.)
The first earthquake I experienced was a 7.3 on the Richter, and later learned that the epicenter was 250-300 miles away from me. The distance did not stop an apartment building’s wall in my neighborhood from collapsing. The only damage to my apartment was a nail that popped out from the kitchen ceiling.
I experienced the 1989 Loma Prieta quake about half-way between the epicenter and San Francisco. The limit of my loss was a cup that fell out of my refrigerator the first time its door was opened after the quake.
In both these incidents, majority of the deaths occurred in areas many miles away from the epicenter. Some of that had to do with population density, but also the age and type of infrastructure (code,) and type of soil.
I saw the 1991 Oakland Firestorm from across the Bay.
Besides a couple of severe winter storms in the 1990s (including El Niño) that caused localized flooding and hill-slides, including under very expensive property, I can’t recall any other large-scale (natural) disasters that I in any way experienced personally. But I studied many - got an undergrad in emergency services management, perhaps impacted by my first quake memory. So:
I live where I live, with the full awareness that another large earthquake may happen - without any warning on the local weather forecast days ahead. I take some comfort in knowing that the soil under my CA home is on the denser side, and the house is bolted down to the foundation. It is also not likely to be impacted by any tsunami. I use the Bay Area bridges and various raised freeway connectors often. And, judging from the population - and property value - growth in the SF Bay Area over the last 30 years, even having easy access to footage from 1989 doesn’t seem to scare (enough?) people away.
As for fire danger: I am aware that if my insurance company decides to leave the area, I may not be able to find another one easily, due to proximity to a canyon with vegetation - despite no history of fires. This lack of competition changed in the last ~10 years, as more expensive fires have been hitting California more often. At latest annual renewal, my premium went up by over 30%.
Incidentally, an insurance broker I was speaking with on Monday told me that he recently bought a house in Napa, and has it insured for $2MM. I did not ask him how much he paid for the house. Well, his $2MM dwelling coverage policy costs him $18,000/yr, and the fire coverage had to be underwritten by the state as the last resort… because Tubbs Fire, Atlas Fire, etc. And there was a 2014 earthquake with injuries and a death… I am not aware that property values in the Napa area have been negatively affected despite these events, but it is not an area I ever considered investing in/evaluated. But if I owned there, I am rather sure I’d be considering getting out now, due to what I consider to be an uncertain situation that is already costing (far) more to deal with than just five years ago.
I used to own rentals along the Hayward Fault, which is “overdue”- not my word - for a big one. They made sense when I bought them, but the thought of that possibility definitely bothered me over the years, especially since they had a soft story. I sold the last one last year. But it was really more of a market timing decision than the earthquake concern, as the property no longer made up a large part of my portfolio to worry about its loss in a disaster. (And, shockingly, it has appreciated considerably since I sold it.)
(For those who may not know: earthquake insurance in California is expensive and comes with very high deductibles. But I do not believe that it is mandatory anywhere in the state/by any conventional residential lender.)
When I was looking to buy in Memphis, I was aware of the New Madrid Fault, tornadoes, and crime rates (and shrinking population) - but considered the probabilities, price/value in what I also (still) see as an underappreciated (if only for its geographic location) market, and size of my overall portfolio exposure, and went for it. I still own there. And this is not the first tornado possibility the area is facing since I bought there. (Here’s to hoping that everyone will be well.)
I am curious about how the Florida insurance situation will play out. My only property there - inland, 2016 construction - had its premium go up by over 20% at latest renewal (almost doubled in 5 years,) and shopping around resulted in much higher rates, as well as fewer available insurers. In fact, another company initially gave me a slightly better quote, only to pull out of the market the following week. I know that my situation is not the worst case.
I've passed up on properties in any elevated flood risk areas without giving them additional thought - regardless of whether flood insurance was (currently) required. But I did once attempt to buy a Midwest property for cash, where having a mortgage would have required flood insurance: in my (not-totally-professional, but still) opinion, it had an extremely low chance of getting flooded, unlike FEMA's belief. When my local agent presented it to me, it was with his absolute knowledge of my fears - it was looking like a great deal, because the flippers had not done their homework before their cash purchase, and local retail buyers kept getting turned off once they learned about the flood insurance requirement. The flippers were willing to take a loss on their high quality work. Unfortunately, the news about the potential great deal traveled fast, and I suddenly faced steep bidding competition from local investors. I could have participated, but when I buy something, I consider the exit strategy, so my cash offer was firm. This was years ago - in today's market, it would sell retail without a problem. So, I can certainly see myself making an exception for a great deal, where my personal assessment may not jibe with FEMA's.
So far, I have deliberately stayed away from coastal areas - can’t allow myself to be “part of the problem,” especially where (taxpayer-funded) NFIP is involved. But I do not have any STRs, so perhaps the probabilities math may work in some locations if I gave it enough thought.
I dislike tall trees in close proximity, but don’t let their presence kill an otherwise good deal. (Maybe I did a few times, but wouldn’t in the current market environment.)
I do prefer warmer climes - but away from direct hurricane hits and highest tornado likelihoods. Strangely, I’ve had more ice dam and burst pipe damage in Memphis than in Ohio. (Not that strange, actually, when you consider construction/rehab quality between the two locations. I can write a small book from experience on what a Memphis property manager/flipper/TK provider considered quality roof replacement.)
I used to look at maps of recent droughts in new investment locations, for the fear of tenants and industry moving to cheaper/restriction-free water bills/use. I no longer do that. The current California drought is not my first, and - historically - that hasn’t stopped population from growing. Unlike Las Vegas, St George, parts of Arizona (not picking on anyone, just off the top of my head,) I know that living close to a huge body of salt water is a potential - yet costly - salvation from a terrible drought. But CA is also planning to invest in more water storage.
So, absolutely, I consider probabilities of natural disasters in my investment decisions. But I don’t know if I build any strategy - except general geographic diversification for a number of reasons - around that consideration. And, just as absolutely, I am mindful that even when no hazards are obvious, some loss may still occur.
- Real Estate Investor · Thornton, CO · Member since 2015 · 65 posts · 42 votes4y
- Real Estate Investor · Thornton, CO · Member since 2015 · 65 posts · 42 votes4y
Quote from @Al D.:
(As I write this, Memphis is on a tornado watch.)
Woosh. Thanks for the heads up! I've got two in Memphis. The latest news says "Storm system passes through Shelby County, no confirmed tornado touchdown, agency says' Looks like we got lucky here.
As an aside, Believe in the science or not. The climate is a threat to our rental properties.
- 4yStephen KeigheryBusiness MemberRental Property Investor · New Orleans, LA · Member since 2018 · 717 posts · 555 votes
I invest in New Orleans so hurricanes are a big deal. Obviously insurance minimizes this issue The biggest issue though is flood insurance and FEMA 2.0 has effected flood insurance rates and driven them much higher. I now try and avoid flood zones.
Home Buyer Louisiana4.855 Reviews - 4yJames WachobBusiness MemberReal Estate Broker · Memphis, TN · Member since 2015 · 1k+ posts · 890 votes
@Michael Rodriguez and anyone with property in Memphis. I live in Memphis and we only experience some heavy rain. No damage that I have seen.
- Investor · Seattle WA · Member since 2021 · 37 posts · 5 votes4y
Quote from @Alicia Marks:
If you didn't catch the "Seeing Greene" episode recently, an excellent question was presented that I thought would be worth discussing. Every area you invest in has risks of natural disasters of all kinds, but these disasters seem to be more common and stronger than ever. While we all know that investments always have risks, it may be worth considering in regards to your strategy. Are you concerned about issues such as droughts, fires, and hurricanes when looking at properties?
Please remember that political discussions are acceptable in relation to laws and policies only, not political positions.
Am I concerned? No not really. The market that I am investing in doesn't have these risks. Personally I like it that way. Most investors in my area are concerned with the political climate.
- Rental Property Investor · St. Louis, MO · Member since 2020 · 6 posts · 2 votes4y
They do influence where I’d buy in Florida and I’d definitely think about certain water tables in areas that might possibly be underwater at some point.
- 4yBruce WoodruffPro MemberContractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
The only thing I would think about where I am is water availability. The whole SW is in trouble. Some areas around me have ample supplies while others are in drastic shape. This is not due to anything climate related, it's just that there are many millions more people drawing off the Colorado than was ever intended.....
- 4yRonald RohdePro MemberAttorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes
Quote from @Bruce Woodruff:
The only thing I would think about where I am is water availability. The whole SW is in trouble. Some areas around me have ample supplies while others are in drastic shape. This is not due to anything climate related, it's just that there are many millions more people drawing off the Colorado than was ever intended.....
Ever intended? by the creator?
Water will still be cheap, I think as a percentage of household spending, who cares if it doubles or triples? Its still way behind rent, food, transportation...
- Member since 2022 · 14 posts · 5 votes4y
What is the first rule of REI? Location, location, location; and I don't see this changing drastically in our lifetime.
- 4yBruce WoodruffPro MemberContractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
Quote from @Ronald Rohde:
Quote from @Bruce Woodruff:
The only thing I would think about where I am is water availability. The whole SW is in trouble. Some areas around me have ample supplies while others are in drastic shape. This is not due to anything climate related, it's just that there are many millions more people drawing off the Colorado than was ever intended.....
Ever intended? by the creator?
Water will still be cheap, I think as a percentage of household spending, who cares if it doubles or triples? Its still way behind rent, food, transportation...
Not by the creator, by the Govt when they built the Hoover Dam and urged more people to move West.
And it's not the price of water that is a concern. It is having ANY water at all for the entire Southwest US. Are you not hearing about this where you live? Lake Meade is dropping 60 ft a year...CA and AZ having to take 30% less. Etc. Look it up.
- 4yRonald RohdePro MemberAttorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes
Quote from @Bruce Woodruff:
Quote from @Ronald Rohde:
Quote from @Bruce Woodruff:
The only thing I would think about where I am is water availability. The whole SW is in trouble. Some areas around me have ample supplies while others are in drastic shape. This is not due to anything climate related, it's just that there are many millions more people drawing off the Colorado than was ever intended.....
Ever intended? by the creator?
Water will still be cheap, I think as a percentage of household spending, who cares if it doubles or triples? Its still way behind rent, food, transportation...
Not by the creator, by the Govt when they built the Hoover Dam and urged more people to move West.
And it's not the price of water that is a concern. It is having ANY water at all for the entire Southwest US. Are you not hearing about this where you live? Lake Meade is dropping 60 ft a year...CA and AZ having to take 30% less. Etc. Look it up.
I live in Dallas, we had several years of drought and water savings, lots of fear mongering of "running out" Fast forward to 2010+ and our lakes are TOO full. We have too much water and people are decrying the damage and lost buildable land due to rising freshwater.
I agree that Lake Meade is dropping, CA has terrible water management, but if they stopped subsidizing farmers/cattle (almonds are INSANE), drinking water would not be an issue at all.
- 4yBruce WoodruffPro MemberContractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
Quote from @Ronald Rohde:
Quote from @Bruce Woodruff:
Quote from @Ronald Rohde:
Quote from @Bruce Woodruff:
The only thing I would think about where I am is water availability. The whole SW is in trouble. Some areas around me have ample supplies while others are in drastic shape. This is not due to anything climate related, it's just that there are many millions more people drawing off the Colorado than was ever intended.....
Ever intended? by the creator?
Water will still be cheap, I think as a percentage of household spending, who cares if it doubles or triples? Its still way behind rent, food, transportation...
Not by the creator, by the Govt when they built the Hoover Dam and urged more people to move West.
And it's not the price of water that is a concern. It is having ANY water at all for the entire Southwest US. Are you not hearing about this where you live? Lake Meade is dropping 60 ft a year...CA and AZ having to take 30% less. Etc. Look it up.
I live in Dallas, we had several years of drought and water savings, lots of fear mongering of "running out" Fast forward to 2010+ and our lakes are TOO full. We have too much water and people are decrying the damage and lost buildable land due to rising freshwater.
I agree that Lake Meade is dropping, CA has terrible water management, but if they stopped subsidizing farmers/cattle (almonds are INSANE), drinking water would not be an issue at all.
I hear ya, but this is different than a drought that you go through back east where you have annual rainfall of some sort. I've gone through those. This is too many people living off of a dwindling supply of water. Even large snow/rainfalls for years will not fix this.
If California would allow desalination, that would certainly help but they won't. Maybe the masses of people leaving CA and moving east will eventually help, but I doubt it.
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