How do I assess future risk?

Question

How do you assess future risk when running numbers on a property?

How do I know what insurance will cost in the future? What if certain areas have a history of spiking premiums?

How do I know if an area has future climate issues (flooding, etc)? If insurance spikes and I need flood insurance eventually, this could impact my cash flow greatly in the future.

John Clark · Answer

I find that there is much wisdom in reading the entrails of a goat.

Jaron Walling · Answer

You have to hedge against the risk you described or don't buy investment properties. Define your goals and keep reserves the entire time. Manage your personal finances and keep a 6-month emergency fund. Protect your properties with insurance and add an umbrella policy for additional protection.

I deal with flood plain regulations for my 9-5 job (violations and permitting). The best course of action is to avoid buying in them completely. Don't be fooled by cheap real estate and cash-flow. The risk isn't worth the reward if a 100 year flood occurs. I'm saying this from experience and the nightmares people deal with because they bought (or inherited) a house near a river or stream.

Check your states website for detailed mapping tools. Below is the FEMA National Flood Hazard Layer where you can search for an address and create a report. Insurance companies live and die by these maps. In my state we have a DNR "Best available flood hazard" layer tool which combines detailed studies a individual streams. Insurance companies currently do not use these maps but it's a "snap shot" into an area that's flood prone. Adding flood insurance to property that's not in a FEMA mapped flood zone is extremely inexpensive. We added a flood policy to our primary residence based on the water drainage, neighbors stories about our lot, and experience in the industry. Our flood insurance policy is like $30 per month.

https://hazards-fema.maps.arcgis.com/apps/webappviewer/index...

John Clark · Answer

I find that there is much wisdom in reading the entrails of a goat.

Tony Wilcox · Answer

The truth is the insurance industry wouldn't be able to tell you this either. They might have a guess, but weather is not the only factor in rate. Costs of materials and labor also impact rates for future claims. For instance, post covid inflation has gone up which has cause the cost of claims to drastically increase. A roof for a home that used to cost $10,000 now costs almost $20,000 5 years later. What I will say is carriers are trending towards either increasing deductibles for wind/hail, or not allowing full replacement costs on roofs. This means the total cost to replace your roof tomorrow and not being depreciated. Think car insurance if you total your car. You don't get a brand new car if you total a 5 year old car. They pay you out for that same 5 year old car. Every carrier wants to get to that spot on roofs I can promise you that. They are just figuring out when and how they can accomplish that considering all mortgages require full replacement costs on all loans. Hope this helps.

Bruce Woodruff · Answer

Bottom line is: sometimes ya just gotta take a chance. Once you've done your due diligence and run your numbers in your spreadsheet, you have to just go for it.

Now re future climate issues....we do NOT know which way that will go. Don't buy into the hysteria. In my life, we've seen it go from potential warming to hysteria about about a new ice age...and you hear this repeated even nowadays. So bottom line don't waste time worrying about 'climate issues'....you can't control them so just be smart and don't buy a house in a floodplain or on top of a volcano :-)

How do I assess future risk?

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