Alert: Harvey, Irma, Rita, Katrina
Don’t worry, it is not hurricane season yet. However, there are things you need to know now, before the storms approach.
I was just looking at reasons a real-estate investor might lose money on a fix-n-flip project or a vacation rental property deal and stumbled upon natural disasters as a possible cause of investment loss. After reading several articles and searching the real estate websites, I ran into tips for real estate investors facing an approaching natural disaster at yourflipcoach.com, Your Virtual Real Estate Coach. Be sure to visit Ryan’s site if you have a minute.
First, as a practical matter, it is very important to know that insurance companies will not bind a new policy or add additional coverage to an existing policy if a hurricane or large storm is headed for Texas. This is important for you to know if you are planning to invest in a property in Texas.
Make sure a hurricane is not on its way. Buy insurance that covers flood and wind damage and replacement costs, and don’t buy the property or the insurance if you can’t bind an insurance policy. Both you and your lender will want insurance on the property. Buy flood and wind insurance on your new property and make sure insurance binders are active well before the next storm.
Second, when you have found a buyer and a storm is approaching, time the closing of the deal so that closing is complete well before the storm event. The storm can get in the way of your closing in so many ways. Following a storm, roads and properties may be damaged and inaccessible. Even if you are dry, routes in and out of your area might be blocked or flooded. You could lose your buyer because they cannot get to you or to the property, or because the property is damaged.
A study performed by the Federal Reserve Bank of Dallas concludes that the “typical hurricane raises real house prices and, to a lesser extent, reduces real incomes for a few years.”
New Business Opportunity 5 Years Out
Third, be ready for new business opportunities following a storm. Damaging natural disasters and the insurance money that comes into the market after they pass can create new opportunities for real estate investors. Some property owners may want to sell, particularly if they did not have insurance. Even if they are insured, many home owners will take their insurance check and sell the property for whatever they can get. Some lots are sold at land value after the home was removed; but once a house is rebuilt, it can be resold again at near the same price in future years (about 5 years).
Residential Prices Rise Because Housing is Needed
The value of property that is high and dry after a hurricane will increase because homes are lost or uninhabitable. Housing will be needed. And, buyers and investors will be seeking solutions.
An article in Forbes by Jordan Lulich points out that right after a storm, home sales go down because property owners are too busy cleaning up. According to his article, two months after Hurricane Harvey, 31% of residential neighborhoods saw an increase in median house prices here in Texas.
It is still smart to invest in real estate in hurricane prone areas because residential property values increase over time. Repair costs associated with storms are certainly worrisome. Just be sure to buy insurance that covers wind and water damage to protect your asset.
Please give me a call when you find that perfect investment, and I can help you fund the project.
Ryan Kuhlman, January 8, 2018, Natural Disasters and Real Estate Investing, https://yourflipcoach.com/natural-disasters-and-real-estate-investing/
Jordan Lulich, June 28, 2018, Does Hurricane Damage Negatively Impact Your Real Estate Value/
Murphy, Anthony and Stroble, Eric, October 2010, The Impact of Hurricanes on Housing Prices: Evidence from US Coastal Cities. Federal Reserve Bank of Dallas, Research Department, Working Paper 1009, https://www.dallasfed.org/