Climate Risk & U.S. Real Estate: A New Focus for International Investors

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For international real estate investors, choosing the right market in which to invest is key. You want to grow long-term wealth. You aim for consistent cash flow from your rentals. But one factor is becoming very important: climate risk. This risk can affect property values and your profits.

I have some experience in this. The first U.S. investment properties I purchased were located in Jackson, Mississippi. Every year when hurricane season hit it was very stressful! There were tornadoes, hurricanes, and floods to contend. Once, I saw one of my rental properties used as the backdrop for a TV news report on recent flooding!

This article explains climate risk in U.S. real estate. We will show how it impacts property demand and prices. We will also highlight how higher insurance costs can reduce your cash flow rentals. Plus, we will look at how it can lead to more foreclosures. This helps you make smarter choices for your U.S. property investment.

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Key Takeaways: Climate Risk & Property Investment

• New Investment Factor: Climate risk (like floods or wildfires) is now a major part of real estate decisions. It impacts property value and demand.

• Affects Appreciation: Properties with high climate risk may grow in value more slowly. They might even see prices drop.

• Higher Insurance Costs: Areas with more climate risk have much higher insurance prices. This directly reduces your cash flow.

• Foreclosure Risk: Research shows a potential for a 380% increase in climate-driven foreclosures. This impacts lenders and market stability.

• Impact on Lenders: Lenders are starting to consider climate risk. This could make it harder or more costly to get mortgages in some areas.

• Protect Your Cash Flow: International investors must check climate risk. This helps protect your rental income.

• Strategic Due Diligence: Add climate risk assessment to your property research. This avoids buying a “problem property.”

Related: The Places to Invest in U.S. Real Estate in 2025: States, Cities and Neighbourhoods

Section 1: Climate Risk – The New Factor in Real Estate Investment

When international real estate investors look at properties, they check many things. Location, jobs market, demographics, and socio-economics are all important metrics. Now, climate risk is just as important. It is changing how properties are valued.

What is Climate Risk in Real Estate?

Climate risk means the chance a property will be harmed by natural events. These events can include:

• Flooding: From heavy rains, rising seas, or overflowing rivers.
• Wildfires: Especially in dry or forested areas.
• Extreme Weather: Like strong hurricanes or severe storms.

These risks are becoming more common. They can cause a lot of damage.

Climate as the “Sixth C” of Credit

A recent research report by First Street Foundation studies these risks. They say “Climate” is now the “Sixth C” of credit risk – alongside the traditional elements of character, capacity, capital, condition and collateral. This is a new idea for lenders. It joins other important factors like your ability to pay back a loan.

How Climate Risk Impacts Property Values

Properties with higher climate risk may not grow in value as much. They might even see their prices go down. Why? Buyers are starting to avoid risky areas. They know these homes could be damaged. They also know costs will be higher.

CBS News reported on this research. They noted that properties with high flood or fire risk “will see slowed appreciation.” This means your long-term wealth growth could be slower.

For international investors, this means you must look at a property’s climate risk. It is as important as checking its financial numbers.

Related: U.S. Real Estate Markets Forecast 2025 to 2030: Everything You Need to Know

Section 2: The Direct Impact – Higher Insurance Costs and Cash Flow

One of the biggest impacts of climate risk is on property insurance. For cash flow rentals, rising insurance costs can greatly reduce your profits.

Insurance Premiums Are Soaring

In areas with high climate risk, home insurance costs are going up fast. Insurers are paying more for damage from floods, storms, and fires. To cover these costs, they charge more for policies. Sometimes, they even stop offering insurance in certain areas.

CBS News highlights this issue. They mention that states like Florida and Louisiana are already seeing “increased insurance costs.” This is due to more frequent and severe weather events.

How This Hits Your Cash Flow

For your cash flow rentals, higher insurance costs are a direct expense. They reduce your net income.

Here is an example:

• Imagine your rental property brings in $2,000 per month in rent.
• Your mortgage, property taxes, and management fees total $1,500.
• This leaves $500 for cash flow.
• If insurance costs go up by $200 per month, your cash flow drops to $300. This is a 40% reduction.

This shows how easily rising insurance can eat into your profits. It can make a good investment seem less appealing.

Financial Instability and Foreclosure Risk

Climate risk also brings a hidden financial danger: foreclosures. The First Street Foundation’s research, cited by CBS News, warns that climate-driven foreclosures could increase by as much as 380% over the next 30 years. This is a massive jump.

This means:

• More Losses for Lenders: Banks face bigger risks when homes are damaged and loans cannot be paid.

• Market Instability: A rise in foreclosures can flood the market with distressed properties. This can push down prices for all homes in an area.

For international investors, this means greater overall financial instability. It could make it harder to get loans or raise lending costs. It also increases the chance of buying into a market facing widespread property issues.

Related: The Best U.S. Real Estate Markets for First Time Investors

Section 3: Strategic Investing in a Changing Climate – Protecting Your Wealth

Given the growing climate risks, international real estate investors need a new strategy. You must adapt to protect your long-term wealth and consistent cash flow.

Research and Analyze Climate Risk

Before you buy any property, do deep research on its climate risk.

• Check Flood and Fire Scores: Tools from organizations like the First Street Foundation can show a property’s flood or fire risk. These tools provide a “Risk Factor” score for individual properties. This helps you avoid buying a “problem property.”

• Review Local Data: Look at local news and government reports on climate events. Understand the history of floods, fires, or storms in the area.

Smart Property Selection

Consider these points when choosing a property:

• Lower Risk Areas: Prioritize properties in areas with historically lower climate risks.

• Resilient Features: Look for homes built to withstand local climate challenges. For example, homes elevated above flood levels.

• Diversify Your Portfolio: Do not put all your investments in one region. Spreading your properties across different states can help lower overall climate-related risks.

Financial Planning and Due Diligence

• Factor in Insurance Costs: Always get a real insurance quote for any property you consider. Do this before making an offer. Assume these costs might rise over time.

• Due Diligence Beyond Basic Checks: Your due diligence must now include a full climate risk assessment. This goes beyond typical home inspections. It protects you from overpaying for a risky asset.

• Understand ROI: Calculate your potential Return on Investment (ROI) with these higher costs in mind. Make sure the property still offers the consistent cash flow you need.

Build a Trusted Local Partner Team

Having a reliable team on the ground is more vital than ever for international investors. This team can help you with:

• Finding properties in lower-risk areas.
• Doing thorough climate risk assessments during due diligence.
• Managing the property to reduce risks.
• Setting up your investment structure for liability protection and tax efficiency.
• Navigating U.S. and local tax liabilities, including property taxes and capital gains tax.

Related: How to Structure Your U.S. Property Investment: Essential Guide for Non-Residents and Foreigners

Conclusion: Investing Wisely in a Changing Climate

Climate risk is changing the U.S. real estate market. For international real estate investors, it is a new and important factor. Properties with higher flood or fire risks can see slower value growth. They also come with much higher insurance costs. These costs directly impact your consistent cash flow rentals. The potential for vastly increased climate-driven foreclosures also adds a new layer of financial risk.

By understanding these risks, you can make smarter U.S. property investments. Focus on thorough due diligence. Factor in all potential costs. Build a strong local team. This approach helps you protect your long-term wealth and ensure strong cash flow in a changing climate.

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Frequently Asked Questions (FAQs) About Climate Risk & U.S. Real Estate for Investors

• Q1: What is climate risk in U.S. real estate, and why does it matter to international investors? A1: Climate risk refers to the potential harm to properties from natural events like floods, wildfires, or severe storms. It matters because it can lead to slower property value growth, higher operating costs (especially insurance), and reduced demand, directly impacting consistent cash flow rentals and long-term wealth for international investors.

• Q2: How do higher insurance costs affect my cash flow from rental properties? A2: Higher insurance premiums are a direct expense that reduces your net rental income. This can significantly shrink your cash flow rentals and make a property less profitable, even if the rent seems high.

• Q3: How can climate risk impact property demand and potential price appreciation? A3: As climate risks become more known, buyers may avoid properties in high-risk areas. This reduced demand can lead to slower property value appreciation or even price declines. Properties with high flood or fire scores may sell for less than similar low-risk homes.

• Q4: What is the risk of climate-driven foreclosures? A4: Research from the First Street Foundation suggests that climate-driven foreclosures could increase by as much as 380% over the next 30 years. This indicates growing financial instability for properties in high-risk areas.

• Q5: What should international investors do during due diligence to assess climate risk? A5: Beyond traditional checks, international investors should use tools like the First Street Foundation’s Risk Factor to get a property’s specific flood and fire scores. Also, get actual insurance quotes before purchasing to understand the full cost.

• Q6: Are there specific states or regions in the U.S. that are more affected by rising insurance costs due to climate risk? A6: Yes, states like Florida and Louisiana are already seeing significant increases in property insurance costs. This is due to their high exposure to events like hurricanes and coastal flooding.

• Q7: How can a trusted partner help international investors navigate climate risk? A7: A trusted local partner can help identify lower-risk markets, perform detailed climate-specific due diligence, and advise on property management strategies that reduce risk. They can also assist with setting up tax-efficient structures to protect assets from unforeseen issues.