The headlines of the LA Wildfires have deservedly been on the human and financial cost of this natural disaster. A special thank you to those who reached out to our own LA-based Thomas Schulte.
As we know, so much of the financial conversation is centered around real estate–destruction, prevention strategies, rebuilding and permitting, and more. While most of the headlines focus on personal residential stories, our world of investment real estate needs to learn a great deal from what continues to unfold.
As food for thought today, here are a few of the high level lessons investors would be wise to remember.
1. Risk Mitigation Through Location Strategy
No location is immune to natural disasters, but some are far more at risk. In this case, the heavily vegetated foothills present a much higher fire risk than flat, urban infill locations. It’s the same market, so to speak, but with much different risk exposure.
2. Diversification for Stability
Like any good investment, diversification matters. In this case, we don’t want to see investment properties too heavily concentrated in specific communities. We saw just how quickly disasters can decimate entire communities. No neighborhood is immune, but we have far more protection by going after properties that aren’t concentrated.
3. Market Adaptability
External events can create both challenges and opportunities. Changes in insurance costs, construction expenses, and rental demand can influence investment outcomes, making it crucial to stay informed and flexible. We’re expecting some headwinds for that market, such as challenging permitting and the availability and cost of materials and labor. Flexibility is a premium, and again, real estate investing is not a passive investment.
4. Strong Financial Partnerships
Understandably, there’s a lot of panic when disasters happen. Part of what we prefer about private placement investments is that we can be highly selective about the financial relationships involved. It’s crucial that we prioritize lenders where we have strong relationships to maximize long term alignment.
5. Planned Illiquidity
Many of the real-estate driven alternative platforms available from the big brands still behave much like the stock market, leaving the door open to panic selling. In the case of the LA wildfires, we’re seeing short-term panic in the real estate market that eliminates the opportunity for long-term recovery. When we work with investors who have a fully integrated financial plan, we often see more stability when it comes to their liquidity needs. They’re well positioned to ride out the recovery, an enormous advantage.
My Takeaways
I hope you found these interesting and useful if you’re curious about how the world of real estate investing is navigating this set of exceptional circumstances. Whether real estate or the stock market, I think crisis reveals the fundamentals we’re used to hearing:
- Diversification is non-negotiable at a portfolio level.
- Risk management is best managed by those who have done this before and know what to look for.
- We need our investment strategy to be aligned with our financial criteria–both in short term cashflow and long term growth.
