Investing in Areas With A History of Natural Distasters

[Steve W.]

To buy and hold investors in natural disaster zones - such as hurricanes impacting Houston TX or panhandle of Florida (Pensacola was hit this year by Hurricane Sandy), how do you account for this risk in your investing?

For example, Houston looks great on paper. But I see distressed properties for sale that were flooded by Hurricane Harvey; if insurance covers this why aren't the properties fixed? Even if this type of damage is atypical, what about more common damage? Does this result in frequent insurance claims? Do you need higher reserves?

Thanks

[Matt Jones]

I have been investing in Pensacola since 2015 and Hurricane Sally in September of 2020 was my first natural disaster as a landlord and the first major event for this area since Hurricane Ivan in 2004(although there was flooding in low lying areas due to heavy rains in 2014 the impact was less widespread). I had two properties with significant roof damage and had to file an insurance claim. The hurricane deductible in an area like Pensacola is typically 2% of the amount that your property is insured for but can be adjusted up or down to some degree. I was aware of this higher deductible risk and I make sure to keep a little extra cash in reserve through hurricane season every year. The surprise expenses were clean up and fences. Insurance doesn't always cover these items, at least not fully, and if your property wasn't damaged then it won't cost enough to file a claim but it will certainly impact your bottom line. EVERYTHING after a hurricane is slow and expensive. The pain in the butt factor is very high and it was not a fun experience as a landlord. That said, I had been saving CapEx funds toward a new roof on my quadplex that was damaged in the storm and that money paid the hurricane deductible on both properties that were damaged and my extra expense for cleanup and fences at other properties. All in all I should come out even or slightly ahead with two properties that have a new roof compared to paying for the roof I had already planned to replace in the next year or two. I'll probably keep a little more cash in reserve after the experience and I will be sure that all of my insurance policies cover loss of income.