Scholastic Capital Update #20 | Insurance

Scholastic Capital is an evergreen real estate fund that buys single family homes in elite school districts. We then rent those homes on long term leases to highly qualified tenants interested in being there for the school district.

We do this on behalf of our investors looking for a “high floor, bond-like” real estate fund. Our investors, and new investors who may join us, are typically interested in our monthly cashflow distributions, equity appreciation, and depreciation tax benefits.

Hello Friends of Scholastic Capital,

The biggest story in real estate over the next decade will be insurance. Full stop.

Today’s post is going to talk about this in more detail. However, I understand that insurance is not always the most interesting topic in the world.

For that reason, we’re going to instead focus on how different cohorts of people are impacted. 

As you read this, know that this is a 10 year prediction. It won’t seem likely over a 1 year period..

You and your family will fit into one of these cohorts below, and you can see our prediction at Scholastic of how insurance will impact you.

For many of these cohorts, the prediction is not pretty. For that reason, we hope we are wrong. 

But, we don’t think we are.

Insurance context:

As you likely know, insurance prices have been growing at double digit percentages over the past few years. Multiple explanations have been provided for what to blame.

The challenge is the solution. There is not a credible explanation out there for why insurance prices will stop increasing. 

At Scholastic, we have repeatedly tried  to find a reason why insurance prices will normalize. We haven’t found a strong case. 

The most common solution tends to be “the government will step in.” However, actuary risk is very difficult to do. Most insurance experts tend to believe the government is not capable of managing that risk effectively. 

Unfortunately, the recent California fires support that thesis. The California insurance plan appears to be tens of billions of dollars short and homeowners are going to get, at best, pennies on the dollar from the California insurance plan.

If you accept to be true that insurance will keep rising, then you need to start thinking about how this will impact everyone. 

Let’s talk about how higher insurance prices impact each cohort.

High Insurance Risk states

Let’s talk about all the different cohorts of people who live in high risk states. These are states on the west coast and south.

These most notable states are California, Florida, and Texas due to their population and economy.

The first two are likely obvious due to wildfires and hurricanes. Texas is increasingly a high insurance risk state due to hail storms and a high roof replacement rate.

The key fact to know here: you cannot have a mortgage without insurance. The mortgage company requires it.

Cohort #1: Homeowners in high risk states with a paid off house

These folks are not required to have insurance since their house is paid off. 

Since they don’t need insurance, they likely will not have it as the price increases. This is especially true because folks with paid off homes tend to skew to older and retired homeowners.

A retired homeowner is on a fixed income and cannot afford increased insurance. And since they are older, they are very unlikely to sell their home and move.

This is an understandable decision from their perspective.

However, their paid-off house is their largest financial asset. If it is destroyed in a hurricane, fire, or similar, then this cohort of homeowners is in financial ruin.

Cohort #2: Homeowners in high risk states with a mortgage

These folks are in a no-win situation.

The insurance company will continue to increase prices. The mortgage company then forces the consumers to accept those prices.

In this scenario, the homeowners have three options:

1. Pay the increased insurance rates

2. Sell their home to get out of the mortgage

3. Get foreclosed on

Most will opt for path #1, if they can afford it.  

If they cannot afford it, they will default to path #2 to try and sell their home. The challenge is they will likely be selling at a large loss and will incur a significant hit to their equity.

We don’t think this will lead to mass foreclosures as most will opt for path #1 or #2.

Cohort #3: The local economy/small businesses in the area

Let’s make this tangible.

In 2019, the average insurance premium in Florida was $1,988. In 2025, it’s $8,770.

Insurance is now $6,782 a year more than it was five years ago.

Let’s go back to everyone with a mortgage who took path #1 and is paying that higher insurance rate. Time to think about that from a local economy perspective.

If households are spending almost $7K/year more on insurance, that means there is $7K/year that they are no longer spending elsewhere. 

$7K is a ton, especially when you think about how there are millions of people in the state. 

As insurance rates continue to rise and people have less money to spend elsewhere, that will eventually hurt local businesses, restaurants, movie theaters, etc. 

Cohort #4: Home buyers with a mortgage

This cohort of folks wants to buy a house, maybe their first one.

The challenge is a lender needs to approve them for a mortgage. To do that, the bank needs their income to be at least 3X what PITI will be for that house.

PITI is Principal Interest Taxes Insurance. 

As an illustration, if PITI is $50K a year, the family needs to make $150K a year.

Here’s why that matters: if insurance is $15K a year for the house, the bank needs the family to make $45K a year just to cover the insurance alone.

As a result, these areas become extremely difficult for first time home buyers to get approved for a mortgage. 

For that reason, starter home prices could fall as there are less buyers in the market who can afford them. However, home prices are unlikely to fall that much below replacement cost since they are likely to need to be replaced frequently due to the high insurance risk.

These first time home buyers will need to make a choice between being forever renters in high risk states or moving to low risk states, often away from their families, to become home owners.

Our prediction at Scholastic is you’ll slowly start to decide to make the latter decision. 

Cohort #5: Home buyers without a mortgage

Perhaps the only winner in this whole scenario is home buyers without a mortgage. 

Home prices will fall a little bit, which would enable those home buyers to buy at a discount in cash.

The challenge is these buyers will then immediately join Cohort #1, most likely, and take on self insurance risk.

Cohort #6: Investment funds & large scale real estate investors

At their core, investment funds exist to make a profit. 

If they can no longer generate a suitable Yield due to their insurance cost, they will need to exit the market.

The challenge is that investment funds prefer to sell their homes in bulk to other investment funds. If a selling investment fund is selling because of unprofitable conditions due to insurance, the buyers will also be in that same position as well.

So, it’s unlikely that other investment funds are buyers in that case.  

For that reason, it is very possible, if not probable, that investment funds will try to sell their homes to consumers who don’t appropriately price in that risk.

Investment funds are also likely to be the first to sell. They would try to sell quietly before consumers catch on.

Low Insurance Risk states

We talked about high insurance risk states in detail.  Let’s now talk about how cohorts in lower risk insurance states will do.

These low insurance risk states tend to be in the upper midwest and upper east coast. For example, Wisconsin or New Hampshire.

Cohort #1: Existing Homeowners

Earlier, we talked about how first time home buyers will struggle to buy in high insurance risk states. 

In that case, many may decide to move out from their existing states and go somewhere they can afford to buy a home. 

We’ve seen this story play out many times: when Austin had a huge pop of buyers move in, then home prices and rental prices skyrocketed.

If you have a steady flow of people moving from the South to the Midwest and Northeast, you could very likely see above-average home price growth for a decade.

This is a big win for everyone who already owns homes in the Midwest and Northeast.

Cohort #2: Aspiring Homeowners & renters

If home prices are going up because of an increase in population, then it becomes harder and more unaffordable to buy a home.

That also means rental prices go up as well. 

Why does Scholastic have a strong perspective on insurance?

We buy single family homes in great school districts and then rent those homes to families who want to be there for the school district.

On the surface, this has nothing to do with insurance.

However, there are really good school districts everywhere across the country. We can theoretically buy anywhere. Palo Alto California, Highland Park Dallas, Pinecrest Miami all look like they fit our thesis.

But, we have the ultimate luxury of picking where we want to buy around the country.

Scholastic is likely to own our homes for 10+ years. So, the key question we needed to answer was: where in the country is going to be most desirable to buy in 10 years?

Since we would be the sellers, we want to be in a place that is a desirable spot to buy and a buyer would over-pay for our portfolio.

When we framed the question this way to every real estate expert we could talk too, everyone began talking about insurance. 

For that reason, we’ve decided to stick solely to great school districts in the upper midwest.

If we’re wrong about the insurance nightmare we outlined above, then we have great homes in great school districts that have appreciated and generated profitable yield for our investors.

If we are right about the insurance nightmare we outlined above, then our homes might have been some of the fastest appreciating in the country.

Insurance is the most important story of real estate for the next decade

No matter what happens in insurance, this story is just beginning. We aren’t even halfway through the first quarter on the insurance story.

If you’re in real estate, it’s one to watch.

If you’re not in real estate, it’s worth thinking about insurance for your own housing.

And like we said earlier, it can get really messy here. We hope we are wrong.

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