For real estate investors, the allure of purchasing property in scenic coastal areas or other regions with high storm risk can be both a thrilling adventure and a nerve-wracking proposition. On one hand, these properties often promise picturesque views and lucrative revenue potential. On the other, they're exposed to unpredictable weather conditions that can ravage or reconfigure the landscape in a heartbeat.
Understanding and mitigating the risks associated with natural disasters is a cornerstone of real estate investment. This is especially the case in regions prone to storms. Balancing the rewards against the inherent uncertainties can pay dividends, but only if you approach the investment strategically.
LandApp provides risk index scores for environmental and man-made risks for over 150 million properties across the country. Whether you're a land professional, a property owner, an investor, or a real estate professional, LandApp's risk indexes can help you evaluate property risks at a glance to ensure that you're making informed decisions.
Impact of Climate Change on Storm High-Risk Properties
Climate change has become a significant concern for investors in risky property investments, as it has led to an increase in both the frequency and intensity of extreme weather events. Understanding the implications of climate change on properties with high risk is crucial for making informed investment decisions.
Coastal High-Risk Properties
One of the most profound impacts of climate change is observed in coastal high-risk properties. Over the past two decades, there has been a notable increase in the number and severity of Atlantic hurricanes. This rise poses a substantial threat of property damage along coastal areas.
For example, the Gulf Coast region has experienced a 2-3° rise in air temperature, resulting in greater moisture capacity and more intense storms. Hurricane Harvey in 2017, which dumped an unprecedented amount of rain on Houston, serves as a stark reminder of the potential devastation.
Rising Energy Costs in Risky Property Investments
Climate change also affects the operational costs of managing risky property investments. According to Forbes, “It’s projected that more tenants will rely on electricity to run fans and HVAC systems to stay cool. The same goes for an increase in water usage. These trends can place a higher burden on the electrical grid and city resources."
As temperatures rise, tenants increasingly rely on electricity for cooling, leading to higher energy consumption and costs. In Q2 2022, energy prices saw a significant spike, with a 41.6% increase driven by higher gasoline and electricity prices. For investors, this translates to increased expenses in maintaining and running high-risk properties.
Wildfire Risks for Properties with High Risk
Wildfires are another major concern for properties with high risk, particularly in regions like California. Climate projections indicate a sixfold increase in the number of properties facing severe wildfire risk over the next 30 years. These projections highlight the need for investors to thoroughly assess and consider wildfire risks when investing in high-risk properties. The increased threat of wildfires can drastically affect property values and necessitate higher insurance costs.
The Importance of Research and Due Diligence
Before you even consider investing in a property where storm risk is high, thorough research is not only beneficial but necessary.
Understand the Storm Cycle
Different regions across the country are at different risk levels for different types of storms. Some face annual hurricane seasons, while others endure monsoons or typhoons. Understanding the local storm cycles is the first step. The frequency, severity, and patterns of these storms can provide valuable insights into property risk and long-term prospects. The National Oceanic and Atmospheric Administration (NOAA) provides many free resources.
Know the Geography
Study the lay of the land. Topography can dramatically impact a property's resilience against flooding, storm surges, or high winds. Coastal properties might boast higher resale values, but they face the brunt of hurricane impacts, which can make many buyers wary.
Review Historical Weather Data
Decades of storm history are available and can be a goldmine for investors. Assessing the damage from past storms will give you a realistic picture of potential risks. Tools like FEMA's Flood Map Service Center can identify flood zones, providing reliable data for decision-making.
Strategies and Tips for Investing in High Storm-Risk Properties
Climate change has led to a rise in both the frequency and severity of extreme weather events. It's become commonplace to switch on the news and hear about communities grappling with the devastating aftermath of floods, tornadoes, hurricanes, and wildfires.
Shockingly, a significant portion of American homeowners (31%) have already endured property damage caused by climate-related disasters. As the number of destructive storms, fires, and floods continues to escalate annually, real estate investor clients face an ever-growing risk of property damage or even the complete loss of their investment properties.
This unfortunate development is taking a noticeable toll on the residential real estate investment market, touching every aspect of the industry from rising insurance prices to occupancy challenges during and after disasters, to the decline in popularity of specific regions. So after conducting thorough research and determining the risk profile, it's time to consider how to navigate those risks effectively.
Insurance: Your First Line of Defense
Insurance is the investor's shield against storm risk. Make sure to purchase comprehensive coverage that includes flood and wind damage protection. Consider the deductible and any special exclusions in the policy. Engaging an insurance professional who is familiar with your target region can be invaluable. It is now more important than ever that real estate investors are armed with the insurance resources they need to help protect their investments.
Compliance with Local Building Codes
Stringent building codes are often put in place to mitigate risks associated with high winds and floods. Ensure that the property is up-to-date and compliant. Non-compliance could mean substantial costs or even demolition post-storm.
Fortify the Property
Where feasible, invest in strengthening the property against storm damage. This could mean installing impact-resistant windows, reinforcing the roof, or securing the foundation. These upgrades not only reduce risk but can also be strong selling points in the event you want to divest.
Diversification and Exit Strategies
When dealing with storm-prone properties, it's wise to spread your investments across different regions and property types. Diversification can help mitigate the impact of a single storm on your entire portfolio. Likewise, have clear exit strategies in place in case the risks outweigh the benefits.
Portfolio Spread
Consider investing in properties in several geographic areas that have diverse weather patterns. This can help reduce the chance of widespread storm damage impacting your entire investment portfolio.
Reassessment and Resale
Following a significant storm, assess whether the property's value and saleability have been permanently affected. In some cases, selling an affected property could be the most strategic move.
Long-Term Holding
In the face of repetitive local storms, adopting a long-term holding strategy can be more feasible. Consider the long-term recovery prospects for the region. Major storms may lead to infrastructure upgrades, which could improve the property value in the future. Conversely, if a region is prone to repetitive damage, it's a sign to reevaluate your investment strategy in that area.
How to Assess Storm Risk
Investing in properties in areas with high storm risk requires a combination of foresight and due diligence. By conducting thorough research, adopting proactive risk management, and leveraging the right tools and professionals, you can bolster your investments against the risk of extreme weather events.
Property investors interested in learning more about the storm risks associated with a potential property can leverage LandGate's LandApp tool, which provides risk indexes for various types of environmental risks, such as wildfire risk, straight-line wind risk, and more:
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