Fires, Floods & Earthquakes: How to Protect Your Real Estate from Mother Nature

by | BiggerPockets.com

Fires and floods—even earthquakes—have been bad this year.

It all goes to show how unpredictable mother nature can be, and my thoughts are with those directly impacted.

(And if you want to help out one of the worst-hit areas, check out Joshua Dorkin’s recent post, “Help Our Friends in Puerto Rico by Donating to the BiggerPockets Hurricane Relief Fund.”)

Since I live outside of Philadelphia, my exposure to recent events has been limited. That said, I have rebuilt homes after fires and floods in the past, and I also worked with homeowner’s insurance from time to time as a contractor, actually doing insurance work, and as a real estate agent.

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Thinking Beyond Insurance

These recent natural disasters have caused us real estate investors to stop and think about what protections we have in place for our own properties. This includes insurance, of course, but it’s about much more than that.

For example, I think that factoring in a property’s potential vulnerability to weather-related risks as part of your screening process before buying could save you from having to deal with problems later. I can tell you that I’ll probably avoid buying more properties in floodplains after dealing with my share of flood damage—no matter how good of a deal.

Related: What Kind of Insurance Do You Need as a Real Estate Investor?

So, I’d like to share what I’ve learned over the years in hopes that it might help someone avoid some of the problems I’ve experienced. (Please join me and share whatever advice you have for folks in the comment section).

hurricane-irma

3 Ways to Protect Your Real Estate

1. Due Diligence

This first step may seem like a no-brainer, but when you’re purchasing a property, it’s important to assess your risk of possible property damage. It’s not a bad idea to get a CLUE report that shows a claims history of the home you’re buying to see if it may impact your insurance rate due to previous claims—because your insurance rates are based partly on the property’s history.

Part of your due diligence should include assessing whether a property is in a floodplain. I’m sure you know that lenders require flood insurance when financing properties in areas known to be vulnerable to flooding, but did you know that most properties flooded in Houston by Hurricane Irma were not in flood zones—and so they had no flood insurance?

That said, it’s a good idea to at least start with FEMA’s flood zone maps.

Apart from floods, ask yourself whether the particular geography of where you’re buying has extra risk. Is it in an area with a history of earthquakes, tornadoes, or fire? Even if so, that doesn’t make it a deal breaker (as investors in earthquake-prone California are well aware), but it’s a risk factor you should consider. And don’t forget trees. Did you see all the pictures of downed trees after Irma?

Consider also how the property’s construction increases or decreases weather-related risks. Is the living space elevated? Are the property’s heating and cooling systems based on the ground floor or higher? Were hurricane straps used? Are the materials fire resistant? You get the idea.

2. Insurance & Reserves

In my state of Pennsylvania, landlords are not permitted to insure the contents of their properties. Instead, this responsibility falls on the tenants and is often required as part of the lease terms. For the real estate investor, this leaves them with homeowner’s insurance and possibly flood insurance.

If you live in a hurricane-prone area, your homeowner’s policy may cover damage caused by hurricane winds but not damage from flooding. Also, hurricane coverage typically requires a different deductible than the deductibles for other types of damage. Earthquake insurance is also known for having high deductibles.

That said, all policies are not created equal, and there is no one-size-fits-all insurance policy.

Here’s what Lee Rogers, President of RealProtect, tells me are the key questions you should ask your insurance agent:

  1. What is your deductible? Does your deductible apply per property or per occurrence?
  2. What perils are covered? Many policies cover you under a broad or basic coverage form. These perils limit what types of losses are covered. Under a special or “all risk” form, you are covered unless it is specifically excluded. Please note that flood and earthquake are typical exclusions.
  3. Will you receive payment based on replacement cost or actual cash value? If you have replacement cost, there is no depreciation withheld when you settle your loss.
  4. Do you have a coinsurance clause? If you’re not sure how coinsurance works in a property insurance policy, it is important to understand, as you can face significant penalty for being underinsured.
  5. What amount of coverage do you have in place? Is the amount of coverage you have in place adequate to repair or rebuild?
  6. What’s your loss of rental income coverage? Many investors also suffer a loss of income in the event of a claim. Do you have sufficient loss of rental income coverage in place in the event you have a covered insurance loss? Most insurers will cover you for up to 12 months of lost rental income while your dwelling is being repaired or replaced.

Note that flood damage is typically excluded in a homeowner’s policy. So, does it always make sense to pay for flood insurance, especially if you own the property free and clear and aren’t required to have it? Not necessarily. As mentioned above, you ought to assess your property’s risk. What is the likelihood of the event happening?

Here’s what I mean: I have a property that sits in a floodplain, and the flood insurance on it kept going up until it was about $1,600 a year. What did I do? I decided to self-insure the property. I paid off the mortgage—which eliminated the requirement of having flood insurance—set aside reserves to cover possible flood repairs, and made some structural changes to the property (like moving utilities up a floor) to decrease my risk.

Related: Home Insurance: 5 Tips for Finding the Right Policy

Yes, I must be prepared to cover the costs of repair if the property floods, but I’m betting on the fact that the long-term savings from not paying flood insurance premiums will pay off.

Disclaimer: This is a personal decision, and I’m not advising you to do what I did.

home flood protection

3. Maintenance & Construction

If you decide to go ahead and buy a property despite weather-related risks or if you have properties now that you want to make more weather-event-proof, you can also take steps to reduce the likelihood of damage to the property through proper maintenance and as well as newer construction methods.

For example, after Hurricane Sandy swept through the east coast of the United States a few years ago, many residents rebuilt their properties using different methods. Many of them raised their homes several feet, making the first floor above ground either a basement or a garage.

Or maybe it makes sense to move utilities (for example, the hot water tank or the HVAC unit) to the first or second floor as opposed to the basement. There are also newer construction methods being used that can help prevent roof damage in a high wind situation.

Proper maintenance practices that could help prevent damage include winterizing vacant properties, updating smoke detectors, and performing routine inspections.

So, what are some suggestions you have regarding maintenance, construction, insurance, or due diligence that might help other investors in their battles against mother nature?

Please share below!

About Author

Dave Van Horn

Dave Van Horn is President at PPR The Note Co. – an operating entity that manages several funds that buy/sell/hold residential mortgages, both performing and delinquent. Dave has been in the Real Estate business for over 25 years, starting out as a Realtor and contractor and moving onto everything from fix and flips to Raising Private Money.

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