Recently, I’ve been thinking about how climate change may positively or negatively affect real estate values.
If you are planning on investing in real estate and passing down your real estate holdings to your children, then it’s worth thinking about how climate change may affect real estate values in the future.
I realized the other day that every single one of my properties is on a hill. I didn’t purposefully go out and hunt for properties on a hill. It just happened that way.
The only property I owned that wasn’t on a hill was sold in 2017. Maybe subconsciously, the reason for the sale wasn’t due to the hassle of being a landlord. Perhaps it was due to my dislike of facing another building.
As a real estate enthusiastic, one of my main criteria for owning property is that it must have good feng shui. And one aspect of good feng shui is having a pleasant view. When you enter a property, you can just feel the positive or negative feng shui. A lot of the feel has to do with light, direction, sound, and layout.
Besides, having a view gives a property a unique competitive advantage. Views make properties more desirable. And the more unique and desirable the property, the better it will hold its value or appreciate over time.
Given it’s human nature to want what you can’t have, I decided to set my sights on acquiring a beachfront or close to beachfront property in Hawaii for my ultimate retirement home.
I dreamed of being able to step onto my ocean-facing deck and feel the sea breeze on my face every morning. While doing my morning stretches, I wanted to smell the ocean, especially now that rolling lockdowns will likely become the norm.
In my search, I found a couple of “affordable” beachfront properties in Honolulu that needed remodeling. Then I was reminded by readers, my father, and by several natural disasters that perhaps owning a beachfront property is not a great idea long-term.
Let’s take a glimpse at how climate change affects real estate investing.
How Climate Change Affects Real Estate Investing
One of the main, multi-decade investment trends I’m investing in is real estate in the heartland of America. I’ve put my money where my mouth is and have invested a sizable amount of capital in various commercial real estate projects since 2016.
Besides the growing trend towards remote work thanks to technology, what I now realize is that climate change could also provide a positive catalyst for my investment thesis.
According to a study published in PLOS One in January 2020, as many as 13 million people in the United States could be forced to move inland by 2100.
Take a look at this map of the United States that shows the areas most affected by rising sea levels (blue).
The cities the researchers say will benefit the most by 2100 from “climate refugees” include: Atlanta, Houston, Dallas, Denver, and Las Vegas. But I’m not so sure about Houston since it has its own flooding issues.
One thing you might notice on the map is that the migration inland isn’t very far. When I think of the heartland, I’m thinking of the center of America. Now I realize I need to expand my definition and my search for heartland real estate investments.
The areas that benefit the most (darker red) are still relatively near the coasts. The areas that won’t be seeing much benefit (white) are more in the central west and central north parts of the country. So one has to really pick and choose which cities may truly benefit the most.
Since most of us will be dead by 2100, climate change isn’t an immediate issue. However, for those of you considering investing in real estate for your children and your grandchildren, climate change is worth paying attention to.
It seems that if the climate researchers were to model out an additional 100+ years, there would be an even larger number of migrants and a deeper penetration inland.
Rising Sea Levels: From Beachfront To Ocean View
Based on my growing concern of flooding, I’ve decided to give up my goal of one day owning a beachfront home or close to the beach home in Hawaii.
I’ve carefully followed the luxury property market in Honolulu since 2014. It is clear to me that once you get in, it is VERY difficult to get out. Homes priced above $3 million tend to sit for at least 6 months. I’ve followed a handful of homes that were listed in 2016 that still have not sold.
Instead, it is much better to rent a beachfront home and not take on any natural disaster risk. With the money saved from the downpayment, it’s better to invest in lower-cost areas of the country using my BURL methodology. I could use inland real estate investment income to more than pay for the Hawaii beach home rent.
The alternative is to do what I didn’t realize I’ve been doing since 2003. Buy view properties in the hills. I like the seclusion of the hills. It’s so much less densely populated up here too. Although I won’t be able to smell the sea breeze, viewing the sea may prove to be just as comforting.
From a long-term investment perspective, due to the concern of rising sea levels, it seems reasonable to assume that at some point, oceanfront homes will underperform and ocean view homes in the hills will outperform the general real estate market.
Thus, the ultimate question becomes: how will ocean view real estate compare to heartland real estate? The answer will likely depend on job growth opportunities and migration trends.
For me, I’ve decided to invest in both markets because I believe both will do quite well.
Climate change will affect real estate more significantly in the future. But for today, it’s best to invest in the property and area that provides you the most joy.
Key Points About Climate Change
- If you own property on flat lands in the blue areas of the map above, your property may be at greater risk of flooding in the future. Properties at greater risk of flooding may require flood insurance and may lose value or underperform compared to property in the hills.
- For those of you who want to buy property in a flood zone, it’s worth negotiating more aggressively to take into consideration future risk. At least check the annual flood insurance cost before buying.
- Property in the hills may be exposed to fire risk if there are a lot of surrounding trees. Therefore, inquire about fire insurance as well. Make sure property in the hills have a solid foundation.
- Climate change is not an immediate reason to invest in heartland real estate, demographic trends are. However, by 2100, perhaps climate change will have a more significant impact on real estate values.
- Buy a home with good feng shui. It’ll make you feel happier every time you come home. A home with good feng shui will also better retain its value.
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Be A Strategic Real Estate Investor
It’s nice to live the good life by buying ocean view or beachfront property that gives you joy, regardless of climate change. At the same time, it’s worth strategically investing in real estate for solid income and greater returns.
Check out Fundrise and their eREITs as a way to earn earn more stable income and returns. The income is completely passive and there is much less concentration risk.
If you are bullish on the demographic shift towards lower-cost and less densely populated areas of the country, check out CrowdStreet. CrowdStreet focuses on individual commercial real estate opportunities in 18-hour cities.
You can use the higher income from your real estate investment portfolio to pay for your beachfront or ocean view property expenses. Invest in real estate to personally enjoy and invest in real estate to earn.
Readers, do you think climate change will negatively affect coastal real estate? Would you invest your money on ocean view real estate or heartland real estate? Do you think oceanfront property will underperform or lose value over time?