A Natural Disaster Could Wipe Out Your Investment: What to Consider Before Buying

Disasters are no joke. They are tragic on many levels. And as an investor, it is vitally important that you are alert to these risks and invest accordingly.

Let’s be real. It might seem cool to invest in some beautiful coastal properties, but it may also come with the extreme risk that the property won’t last very long. If you’ve got a couple billion in the bank and you are OK with gambling a couple million on a beach home in a hurricane zone because you know you you can afford to buy another without it hurting you financially, go for it. But if you really can’t afford to lose your capital or your home, then it’s worth paying attention to the physical risks associated with holding real estate.

Natural Disaster Risk Across the United States

This interactive map from CNN Money shows the natural disaster risks to real estate across the United States. Some areas are clearly far more prone to disaster than others. That means your odds of losing your assets and their cash flow are far higher in some places. There are risks from wildfire, earthquakes, tornadoes, floods, hurricanes, and more. In this day and age, we are also increasingly facing man-made disasters and terror threats in some U.S. cities too.

It’s true that the direct risk of damage to a single property in a given season may be small. However, many underestimate the risks of local economic pain associated with these disasters. What if half of your neighborhood is wiped out by a storm? That’s still going to impact your property. If local businesses are shut down for months because they have no power or water, that is going to impact demand and the ability for tenants to pay rent and owners to pay mortgages.

How do you minimize your exposure to these hazards? Insurance is a good start. Don’t just get the most basic coverage with the highest deductible and leave it unchecked forever. Get a deductible you can afford. Make sure you have extra coverage for local hazards like flood. Review your insurance regularly to increase or decrease coverage and premiums as the property value fluctuates.

Protect Your Property

As a buy and hold investor, making sure your rehab work is good quality and that you keep on top of property maintenance can make a difference too. What features can you add to protect your property? Note that these might earn you a discount on your insurance.

Diversification is also necessary. Instead of putting all of your eggs into one basket with one big house, consider spreading your capital across several less expensive properties. If one out of 10 gets hit, you will probably still be fine. Diversify by location, too. Maybe you’ll choose a small portfolio in Ohio or Indiana to balance what you own in California or Florida. This is another reason to use leverage. By partnering up or using financial leverage, your cash position in each property and the risk of losing it is also minimized.

Where are you investing right now? How seriously do you look at risk of disaster when choosing markets?

Let me know with a comment!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.