To what extent should natural disasters factor into decisions?
Investor · Los Angeles, CA · Member since 2015 · 13 posts · 14 votes
To what extent should natural disasters factor into decisions?
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Ronald RohdePro Member
Attorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votesOriginally posted by @Account Closed:
I'm a commercial real estate investor in California and am interested in hearing about how and if other investors factor earthquakes into their investment decisions. For example, if there's a 50% chance of a magnitude 8 earthquake within the next 30 years, would that factor into your underwriting/valuation at all? Would you consider it at all when deciding whether to sell vs. refinance-and-hold a property? (Assuming you're experienced enough and comfortable investing outside of California)
Earthquake insurance is very cost-prohibitive and deductibles are usually 25%, so let's disregard property insurance. It doesn't seem like any brokers or investors in California are considering earthquakes. On one hand, you don't want to let something that may never happen get in the way of your financial growth, but one natural disaster can ruin your portfolio especially if you only own a few properties. Looking forward to hearing your thoughts.
The investors I know that are concerned about losing it all to an earthquake and won't carry insurance don't invest there. Plenty of lower risk locations with insurance to provide a complete hedge against total loss. Another way would be to put earthquake rebuild funds into an escrow account, whatever you're willing to pay as a premium could be used toward re-building.
3 Replies
- Investor · Colorado Springs, CO · Member since 2011 · 322 posts · 238 votes6y
Hi @Account Closed this discussion may be a little out of my lane. However, no matter what lane we travel in we all have to evaluate risk. I recommend you pull a Risk Assessment Matrix off the the internet and see if it helps. I tend to run a risk assessment in a rule of thumb type way in may head for literally everything I do. Hard to describe without looking at a matrix (its a visual tool) but you will want to consider the SEVERITY of the outcome 'Y' axis with the PROBABILITY of the event 'X' axis. SEVERITY axis will include something like: catastrophic, critical, moderate, negligible. PROBABILITY axis will include something like: frequent, likely, occasional, seldom, unlikely. You will have to assign both a severity and a probability to the circumstance around your deal. In my opinion you should always stay away from anything that you consider extremely high risk unless you can mitigate the circumstance to reduce your risk to moderate or low; insurance, partners, cost etc . 2cents.
- 6yRonald RohdePro MemberAttorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes
Originally posted by @Account Closed:
I'm a commercial real estate investor in California and am interested in hearing about how and if other investors factor earthquakes into their investment decisions. For example, if there's a 50% chance of a magnitude 8 earthquake within the next 30 years, would that factor into your underwriting/valuation at all? Would you consider it at all when deciding whether to sell vs. refinance-and-hold a property? (Assuming you're experienced enough and comfortable investing outside of California)
Earthquake insurance is very cost-prohibitive and deductibles are usually 25%, so let's disregard property insurance. It doesn't seem like any brokers or investors in California are considering earthquakes. On one hand, you don't want to let something that may never happen get in the way of your financial growth, but one natural disaster can ruin your portfolio especially if you only own a few properties. Looking forward to hearing your thoughts.
The investors I know that are concerned about losing it all to an earthquake and won't carry insurance don't invest there. Plenty of lower risk locations with insurance to provide a complete hedge against total loss. Another way would be to put earthquake rebuild funds into an escrow account, whatever you're willing to pay as a premium could be used toward re-building.
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes6y
If you are buying retail it's about what the lease says and if tenants have to pay for specialty type insurance and coverage on behalf of the landlord.
I know some investors I have stay away from coastal areas with global warming raising sea tide levels over the next few decades. They also stay away from tornado alley. Basically they like business friendly states ,reasonable property taxes, good pop and income growth, and stable weather patterns and conditions over time.
Josh the KEY becomes can you sell your current location assets and 1031 exchange to achieve the same or better returns without all the climate risk factors for other properties ? I have lots of CA clients buying commercial properties and I would say about 85% are doing a 1031 and selling off to buy in other states. Many are worried about rent control laws on the horizon in their area capping income potential while imposing more laws on upgrades an standard of care to the units.
The ones that still want to own in CA that I have are buying excellent dirt with the chance for high appreciation over the next few decades and the cash flow going in is minimal.
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