Mitigating the Risk of Wildfire Damage to Your Investment Property
Starting in August, California was set ablaze as an unusually fierce storm set more than 12,000 lighting strikes in 96 hours and ignited numerous fires in Northern California. In the week that followed, it reached “gigafire” status - California’s first 1-million acre fire.
The fires, known as the August Complex, has contributed to the worst fire season California has ever recorded: 4 million acres in California have burned to date — far exceeding the previous record of more than 1.8 million set in 2018.
In Southern California, the mix of the hottest August on record in California and dry vegetation primed the area for wildfires as well. Recently, 70,000 residents in Orange County were ordered to evacuate.
Across California, more than 4 million acres have burned. So its easy to see why fire insurance premiums are soaring.
The California Wildfires this Fall have driven up fire insurance premiums and subsequently home prices as supply continues to fall short of demand.
Wildfire destruction in 2017 and 2018 cost insurers more than $24 billion, and in 2019, more than 350,000 homeowners saw their policies cancelled entirely, leaving them to struggle to find affordable new ones. This led to homes being pulled off the market. And the homes that remained on the market increased in price.
Despite the worry over rising insurance costs, demand continues to stay high and is expected to remain high through 2021.
Typically, after the wildfire season, there is a dip in prices. No one wants to look out the window and see their neighbors’ burned homes. However, because it is such an unusual year, prices are expected to hold steady and even increase due to pent-up demand from the pandemic-induced lockdown.
For areas untouched by the fires, investment property owners can expect home values to increase significantly. For residents who already can’t afford California’s high home prices, more will turn to rental properties. Thus, California real estate investors who own rental properties can expect to see a shift to multifamily homes and increasing rental rates.
What about owners whose properties were burned? Should they rebuild? There are two things to consider: the wildfires have increased insurance rates and construction costs will rise as new building codes are passed to make houses better able to survive fires. This could mean that your insurance payout won’t pay for the full rebuild.
While recovering from a wildfire isn’t easy, it's helpful to stay aware of the changing economy after the disaster in order to make wise investment decisions.