To buy and hold investors in natural disaster zones - such as hurricanes impacting Houston TX or panhandle of Florida (Pensacola was hit this year by Hurricane Sandy), how do you account for this risk in your investing?

For example, Houston looks great on paper. But I see distressed properties for sale that were flooded by Hurricane Harvey; if insurance covers this why aren't the properties fixed? Even if this type of damage is atypical, what about more common damage? Does this result in frequent insurance claims? Do you need higher reserves?

Thanks

@Steve W. I invested in the Bay Area for 30 years, sold the last property in 2017. Had outstanding returns despite the 1989 earthquake-which did set me back quite a bit. Who knows what the next 30 years will bring?

I have wondered the same question, however someone had told me the flood zone greatly decreases after leaving the city limits of Houston Tx. I have personally decided to avoid these areas as we would like to house hack the first several investment properties, so we don't want to live in Houston or Florida anyways. But obviously this is more of a personal decision and I look forward to other comments on this subject!

I have been investing in Pensacola since 2015 and Hurricane Sally in September of 2020 was my first natural disaster as a landlord and the first major event for this area since Hurricane Ivan in 2004(although there was flooding in low lying areas due to heavy rains in 2014 the impact was less widespread). I had two properties with significant roof damage and had to file an insurance claim. The hurricane deductible in an area like Pensacola is typically 2% of the amount that your property is insured for but can be adjusted up or down to some degree. I was aware of this higher deductible risk and I make sure to keep a little extra cash in reserve through hurricane season every year. The surprise expenses were clean up and fences. Insurance doesn't always cover these items, at least not fully, and if your property wasn't damaged then it won't cost enough to file a claim but it will certainly impact your bottom line. EVERYTHING after a hurricane is slow and expensive. The pain in the butt factor is very high and it was not a fun experience as a landlord. That said, I had been saving CapEx funds toward a new roof on my quadplex that was damaged in the storm and that money paid the hurricane deductible on both properties that were damaged and my extra expense for cleanup and fences at other properties. All in all I should come out even or slightly ahead with two properties that have a new roof compared to paying for the roof I had already planned to replace in the next year or two. I'll probably keep a little more cash in reserve after the experience and I will be sure that all of my insurance policies cover loss of income.

@Steve W.

I agree with @Matt Jones be prepared for the disaster.  Have some capital for your portion of the insurance.  You’ll need to cover the vacancy mortgage payments if you have a loan while it’s being rehabbed.  Remember you could end up receiving cancellations until things settle down depending how bad the disaster was.  As Matt mentioned, the disasters are few in general over a long period of time.  You just need to be prepared.  

On insurance make you have code update coverage.  If repairs are needed and a permit is required the repairs needed might require upgrades from what was there.  In other words insurance companies cover like for like products.  If there are new requirements since it was built such as additional hurricane requirements you will need to fund the difference of what was there versus the code upgrade.

@Matt Jones

Thanks for the honest discussion, great to hear from an investor actually operating in the region! I also spent like an hour watching your YouTube videos :) good stuff

@Kenneth Garrett

Fantastic tips, thanks Kenneth. Do you invest outside of IL?

@Steve W.

I'm working on buying my first STR in the Florida Panhandle. Hopefully my current offer gets accepted. I have a number of LTR in Illinois and Wisconsin. To a degree I have some out of area rentals, but not 1000 miles. I've built my team currently with the LTR that are over an hour away that I still self manage.

Smart move having the reserves for sure !

@Steve W.

Every markets have their Pros and Cons, I am an Investor and Realtor in the Houston Area and I can tell you that Houston still remains a top destination for a lot of investors for many reasons. 

Yes, you need cash reserve for unforeseen events and I do have cash reserve for all my rentals. 

Hurricane Harvey was an outlier that prooves all meteorologist and historical data wrong and it hits places with 500-1000 floodplains. The distressed properties your seeing for sale could have been abandoned or not fixed for several reasons 

1). Maybe the owner does not have home insurance.

2). Maybe they go the insurance claim and diverted the funds to solve another personal or investment problem.

3). Maybe the properties have been sold to other buyers in "AS-IS" condition.

4). Maybe it's inherited properties and no one cares about them amongst other reasons.

This does not result in frequent insurance claims and most insurance policy cover these type of events that's why need to have a comprehensive/complete insurance coverage to cover all the natural disasters that may occur and factor it in you deal analysis.

As @Jillia Virtue mentioned, The effects of natural disasters are felt more in the Houston Downtown areas and toward Lake Charle, Louisiana. Watch out for any properties close to a Bayou or Greenbelt and properties with very low elevation. 

@Matt Jones also made a great point about Pensacola market. 

I will suggest you dig further into the Houston market if you have it on your list.

Goodluck