top of page

Weathering the Storm: Tips for Investing in High-Risk Properties


photograph of a gray storm cloud moving over land

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.



Impact of Climate Change

Climate change has led to a rise in the occurrence and intensity of extreme weather events. It is all too common to switch on the news and learn about communities grappling with the devastating impact of floods, tornadoes, hurricanes, and wildfires.


Coastal Properties

Climate change has had one of the most significant impacts on coastal properties. Over the past two decades, climatologists have observed a significant increase in the number of Atlantic hurricanes. This surge in both frequency and intensity poses a greater risk of property damage along their paths. The Gulf Coast region has experienced a 2-3° rise in air temperature, resulting in an unprecedented capacity for moisture retention. A prime example of this was Hurricane Harvey in 2017, which poured an astounding two feet of rain on Houston within 24 hours. Certain areas received up to 60 inches of rain during the storm, causing widespread flooding across an area equivalent to the size of New Jersey.


Rising Energy Prices

Unfortunately, rising temperatures can also impact the costs of managing an investment or rental property. 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."


In the middle of a historically hot summer, we saw those costs rise in real time. Energy prices in Q2 2022 rose 41.6%–the steepest rise since April 1980—boosted by a 60% rise in gasoline prices and a 13.7% increase in prices of electricity. The more demand for these utilities, the more expensive they become.


Wildfires

Wildfire risk can have a significant impact on property values. This is especially true for real estate investors and homeowners in California, who must carefully consider the potential risks. According to projections from a nonprofit research group, as reported in the Los Angeles Times, the number of California properties facing severe wildfire risk is expected to increase sixfold in the next 30 years, solely due to the effects of climate change. It is crucial for stakeholders to take these factors into account when making informed decisions about their properties.



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 absolutely 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.



Risk Mitigation Strategies for Property Investment

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 in 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:



Comments


Commenting has been turned off.
bottom of page