How to Manage Rising Insurance Costs in Real Estate

I spoke to an insurance vet who's written $500M in CRE business. Here were his three tips for multifamily buyers right now: ➡️Buy newer than 1980 vintage Fewer carriers are willing to insure old buildings, because of the outdated building systems (roof, plumbing, HVAC, etc) Less willing carriers = remaining carriers will charge more. On the flip side, newer buildings have more insurance options, and can get better rates. Remember- when you sell the building, the buyer is going to have to find coverage too. Whatever they pay for insurance will impact how much they pay you for the building. If they can't find coverage, you won't find a buyer. ➡️Scrutinize the CapEx during due diligence heavily There are 'forced sales' from rising insurance premiums happening right now. Once-profitable deals are now not-profitable because of insurance. As a result, owners are forgoing making capital improvements, which don't drive NOI. Instead, they're hoping that the building gets through due diligence without the buyer noticing. Those that can accurately do their due diligence on a building's systems and needed CapEx have the advantage. ➡️Keep air-tight records during your hold A detailed log of improvements makes underwriting much easier for the insurer, and will give you more options when shopping coverage. Keep logs on the big items- roofing, wiring, HVAC and plumbing.

Several conversations with owners in the multi-family space recently who are experiencing challenging insurance renewals. 25%+ for years in a row. This is happening not only in states like CA and FL but also in the Midwest as well now. I would recommend a few major things to consider. First, what is the source of the increases? Because not everyone is seeing this extreme increase still as the hard market begins to cool off in 2023-2024. 👉 Have you done due diligence on your broker? Do not send multiple brokers to market, but broker select carefully. 👉 Are all major building systems updated if the buildings are older [built 1970s or earlier]? HVAC, roofing, plumbing & wiring. If building systems have not been updated, it may be time to sit down and really do the math on what it would cost to update some of those items over the next 3-5 years vs. continue to pay 25%+ more for insurance every year. Reallocation of funds to capex from insurance spend may be worth it. At a certain point, those increases are not sustainable. Your broker should be working with you to be proactive instead of reactive. 👉 Does your scale and financial situation support consideration of an alternative risk financing i.e. captive? 👉 Are you in a high wildfire or hurricane/wind zone. If so, have you discussed creative solutions like carving out that exposure from your Property program and placing a separate Parametric policy to address that exposure? 👉 Are you being honest with yourself about the condition of the properties? Loss ratios [5 year loss history vs premiums paid?] or is it time for an honest reflection and adjustment of reserves if insurance increases are warranted for your situation? Not sure about one or more of the items above? Reach out. Let's talk.

Insurance costs have been crushing the NOI of apartment owners. For example in Florida, the cost per apartment unit is roughly $1,400. Extrapolate that out to a 200-unit building and you’re talking $280,000 a year. Nationally, property insurance rates grew 129% over the last decade before finally starting to come down in the last few months. Why is this happening? In a place like Florida and other regions prone to rising rates of natural disasters, a lot of insurance companies dropped out entirely rather than face the risk. Now those insurers are starting to creep back in and the competition has caused prices to dip down but it’s like saying gas went down 10 cents a gallon after it had just shot up a dollar. How do I handle this? 1) Like with every contract, we are always negotiating. Every time our insurance deals come up for renewal, our team shops around. 2) We have optimized the policy by changing some deductibles or removing coverage we were willing to take the risk on, which saves us money. There are many policy options with insurance. Look closely at what is covered and determine what is or is not necessary to reduce premiums without increasing risk. 3) You can work on raising rents on renewal. Offset the recent increases by raising rents $35 per month, if your increase was $400 per unit per year.