It’s been a tumultuous hurricane reason in the U.S. We want to say this right off the bat – when these tragedies strike, the last thing we should be worried about is real estate. The first response should prioritize people, not possessions – as painful as those losses can be, the loss of human life is far more devastating. We don’t want anyone to get the impression that we’re more concerned with passive income than the very real people affected by these storms.
But that doesn’t mean we don’t have some thoughts about these events related to investing in real estate.
While the impact of Helene and Milton is sobering on many levels, we do want to point out that there are some critical reminders here for real estate investors about risk exposure and management.
5 Sobering Risk Management Lessons for Investors
Lesson #1 – Every investment carries unique risks.
While all investment properties carry the same primary risks, these risks will always manifest in unique ways. That can make it challenging to manage them well.
- Local Economic Factors: Economic downturns or stagnation can impact property values, vacancy rates, and rental demand.
- Environmental Risks: Flooding, wildfires, tornadoes, blizzards, or hurricanes. The risk depends on location.
- Property Condition and Maintenance Costs: Unexpected issues with the structure, plumbing, roofing, electrical systems, encapsulation, etc., can be costly if missed during inspection.
- Market Saturation: Overdevelopment leads to an oversupply of similar rental properties, which can lower rental rates and increase vacancy periods.
- Neighborhood Changes: Changes in school ratings, HOA regulations, the construction of unattractive infrastructure nearby, etc. These factors can all affect future desirability and property values.
- Infrastructure and Utility Changes: Planned changes or expansions in local infrastructure (i.e., new roads or utility improvements) could lead to temporary disruptions or long-term value shifts (positively or negatively) in certain areas.
Keep Reading: The Overlooked Criteria for an Ideal Investment Market
Lesson #2 – Not everyone thinks long-term.
We want to say we were surprised to see that more people are expected to rebuild in Florida than to move. Construction continues in those same high-risk areas even though property insurance claims exceeded $100 billion for the 5th year in a row. Thanks, Milton. Now, we won’t tell people not to live in Florida. But we would sternly warn investors about putting their eggs in Florida’s basket, especially with their recent insurance troubles. Rebuilding over and over in the same high-risk areas and with increasingly fewer insurance options makes it an unwise long-term investment.
Lesson #3 – Continuous risk management matters.
Effective risk management has never been just about the buying process. It’s a continuous effort on the part of owners and property managers. Every risk mentioned in the first point – and then some – should be regularly re-evaluated and countered in some way. It might mean beefing up your emergency funds, investing in storm doors/windows, or creating disaster plans for your residents to follow. Stay informed and take an active role in mitigating risk exposure.
Lesson #4 – The unexpected can always happen.
We must stress this: no amount of risk management can eliminate risk. That doesn’t mean it’s not worth doing. But it does mean that things come out of left field from time to time. No one could have anticipated that Hurricane Helene would do the most devastation to Asheville and the mountain towns of Tennessee and North Carolina. These areas had no reason to expect it.
And sometimes, that’s how things go. As a real estate investor, the best thing you can do is manage the risk you do know – so when the unexpected happens, you’re not drained from battling run-of-the-mill issues.
Lesson #5 – You can’t assume managed risk.
Finally, we can’t assume managed risk. What do we mean by that? We mean that you can’t assume other people have done the work for you. Other people don’t have the same goals, long-term vision, or any stock in your success. The construction company is done when the home is built and sold. They don’t need to worry about long-term prospects for natural disasters. Just because things seem fine doesn’t mean they are.
Even if it looks like someone already did the work for you, verify. That means keeping up with property management reports, asking questions, and taking every opportunity to know exactly what your property is up against.
When you're ready to make your move, we'll be standing by.
