Yes, global warming sucks…
Obviously, for any intelligent human being, global warming is a given scientific fact. Stop reading this article here if you think otherwise. The most recent spate of natural disasters befalling the United States, as well as the world, involve numerous hurricanes, with so many becoming calamitous. Jonas 2016 was the latest in a series of acts of God that have befallen the U.S. And with each natural disaster, whether in liquid form, resulting in tremendous flooding damage, or with the advent of heavy snow storms, resulting in snow damage to huge swaths of the country, property investors need to be extremely well-prepared. A healthy hurricane can flood your rental property with ease, depending on it’s site location. A large snow storm can produce numerous extra damage and costs for the property investor – not to mention the costs of simple snow removal.
An ounce of prevention…
I have written previously here in the aftermath of other huge natural disasters, like hurricanes Irene and Sandy. I have instructed about the proverbial “ounce of prevention,” having noted that “I must preach the rather trite notion of “be prepared” when purchasing an investment property. Unfortunately, it can’t be stressed enough. You can secure your property with extra flood insurance (if your insurance company will allow it), you can take all necessary precautions to lessen the damage of any potential storm to your investment, and you can (and must) certainly build into your pro forma income statement a generous allowance for emergencies. But until you’ve waded through your property’s flooding basement in the middle of the night, wondering why you purchased this house, and ruining your decision to having done so, you eventually learn that each property you acquire will be an altogether new learning experience in how best to protect your investment.”
Preparing for the worst
It is critical that you plan ahead of time for emergencies like natural disasters. I have gone so far as to recommend in prior articles here that “before bidding on any investment property, make sure to add a line item in your pro forma income statement as a provision for just such emergencies, like storm related damage. It’s very easy to blow this off, especially when you’re trying to make a deal work on paper before you purchase. And don’t expect insurance to necessarily pick up the costs – some policies don’t allow for flood damage, and even if it is covered, you’ll still have a deductible to contend with too. And then there are the potential demands of your tenants if they have any of their possessions damaged.”
Review the siting of your property
Experienced property investors know that, before they attempt to make an offer on a building, they must review the site to determine the potential dangers in case of a hurricane, for example. Can the basement flood easily due to the topography of the house? I have noted before that “if you’re on the bottom of a hillside, you can run into problems. Same with being situated next to any water source – be it stream, lake or ocean. Make sure you look at the house during or just after a big rain storm, so you can see first hand if there are any issues with flooding or water seepage in the basement area. In addition, check to see if the current or previous owner installed any waterproofing solutions already.”
The two most common ways to waterproof a house involve landscaping and/or installing an interior curtain drain (also known as a French drain). Landscaping is the more expensive solution, and can involve not just re-grading the entire perimeter of a house, but installing an exterior curtain drain at the same time around the perimeter. (Of course, always look for simple solutions to a water problem first. For example, if gutters are broken or missing, or if downspouts are emptying directly onto the perimeter, rather than being led out many feet from the house, these can be inexpensively corrected.) Installing a gravity-fed curtain drain system leading to a sump pit equipped with a sump pump inside the perimeter of the basement is the next best alternative for waterproofing. The main drawback: if the sump pump were to fail. That’s why, in a very flood-prone area, installing a secondary, battery run sump pump is always a good idea. Of course, if power were to go out for an extended period of time, you’re still going to have a problem. Unless you get a back-up generator to run during any power outage…
Beware simplistic waterproofing solutions
I have also recommended that you need to be extremely wary of “the easy way out,” or very simplistic, seemingly cheap waterproofing solutions. I have written before that you should “not bother with basement wall waterproofing treatments that can be rolled on like paint. Yes, they’re inexpensive – but they’re a waste of time. The walls may stay dry, but all that water behind the wall is just going to fall to the lowest points anyway – and will start coming up through the concrete basement floor slab at some point. This is due to all the hydrostatic pressure of the rising water table surrounding the house.”
Getting the right type of insurance
It’s incredibly important that you never undervalue your insurance needs as you look to acquire investment properties. Too often property investors will consider the expenses that only add to the value of a property. I call these the hard costs of the investment. For example, renovations to a kitchen or bath or performing extensive landscaping on the property are things that will have a direct relationship to your overall costs, since they will actually be seen by the eyes of a potential buyer (or tenant).
Crunching all your numbers
But it’s also just as important to consider the soft costs of investment property acquisition when crunching all your numbers. These represent the costs not normally associated with what the potential buyer (or tenant) will not see. An expense such as proper insurance should not be overlooked when estimating overall expenses. For property investors, underestimating the cost for insurance is simply foolish. I have noted before that “you should be considering getting full replacement cost for property in case of something catastrophic…If your asset is wiped out because of a flood or fire you do not want to be woefully underinsured. Thinking that you’re only going to hold the asset for a very short period of time in the case of flipping, or that your tenants don’t care what kind of insurance you carry is terribly shortsighted.
Make sure when you purchase any investment property that you have it properly insured – and that means obtaining full replacement value coverage. It’s extremely important to spend the extra $100 or $200 to make sure that you cover yourself in case of catastrophe. I know it’s not easy to add more expenses when you think you can cut corners since prospective buyers are not going to see this particular expense…It’s foolish to shortchange and not fully protect yourself financially in the event of a real catastrophe to your investment property. Better to be prepared and be safe than sorry. Always protect your assets and add an inflated figure for insurance to your list of expenses that you’ll have to satisfy on a monthly basis.”
Go with a higher deductible for more savings
Make sure you shop around for insurance carriers to find the best deal, but be certain that you’re looking to get full replacement value for the property. Your investment property is too valuable to risk taking such a huge loss (the difference between full replacement value and market value in insurance parlance) in case of catastrophe. If you’re going to save on insurance the best way to do it is through obtaining a higher premium deductible amount on the house. So instead of a $500 deductible, consider going with a thousand dollars or more for each claim’s deductible amount. This will at least help defray the added cost of getting full replacement value insurance on the property. But be sure to add this extra expense for the higher deductible into your pro forma income statements before you make any offer.
Photos courtesy of chameleonmarketing.wordpress.com, generoagency.com, imggood.com, minnesotabasementrepair.com, licensedatabase.com, floridianpropertyconsultants.com