Keeping Your Investment Property an Investment
Current market conditions have opened the doors for property investors of all shapes and sizes. Whether you are a seasoned investor who owns and operates everything in-house or a passive investor who is joining a group or syndicate, there is a place for you somewhere in this market. Buyers are still seeing a significant upside as rents continue to increase, interest rates remain low, and property values continue to rise. And yet one struggle for property owners or potential owners in this field remains….THE INSURANCE.
As the multifamily sales market has been flourishing, the multifamily insurance market has started to harden. This means insurance carriers’ profitability related to multifamily properties is at an all-time low. This trend has led to increased premiums, more stringent underwriting guidelines, and in some cases, carriers pulling out of insuring multifamily properties altogether. All of this is happening due to the amount of money paid out on losses over the last two and a half years. Prior to 2018, our country did not see too many hurricanes, tornadoes, wildfires, snowstorms, etc. Because of this, institutional finance was investing heavily into reinsurance companies, as an investment tool…and these investment firms were seeing great returns from their investment as there were not many issues with claims.
Fast forward to the end of 2018 and beyond… Now we have seen California wildfires, gulf hurricanes, midwest tornadoes, northeast snowstorms…. oh yeah, and a pandemic. In addition to the catastrophic events mentioned, there has also been an influx of lawsuits brought against property owners. This has led to case precedence being set and carrier settlements being paid out to the injured parties for a variety of different reasons. Because of all this, institutional finance has not been seeing the returns they expected based on previous experience. To an investor, this market has become volatile. So, what does any financial institution do when the returns are unfavorable and an investment has become risky…. they take their money and put it somewhere safer. This has led to carriers with their hand in the cookie jar so to speak. Now without the backing of large financial organizations, they are left to carry the risk by themselves. This means that carriers must now tighten the screws to make sure they remain profitable. As an investor, you are directly affected by this through your insurance policy being more expensive and stipulations and guidelines for each carrier being more stringent.
You can combat these conditions, but you must be proactive in the risk management of your property. The safer the property appears to a carrier, the more flexibility they give in pricing credits and underwriting guidelines. In addition to the front-end pricing being better, if your property is risk adverse, the likelihood of a claim decreases. This means over the life of the investment your overall insurance costs will remain lower than if you were to file claims. Once you acquire a property (or are underwriting or under contract), you and your insurance agent should devise a risk management plan for the property. Below are some of the big items we try and discuss with our property owners when we are making sure the property is as safe as it can be:
- Sidewalks and Parking Lots: Always walk the property and assess the condition of the sidewalks and parking lots. With foot traffic being higher in these areas, you run a risk as a property owner of a potential lawsuit. If someone slips or falls, the first thing they usually do is get an attorney. Once an attorney is involved, their main goal is to get the insurance company to settle out of court. Most insurance carriers oblige to the smaller payout, as going to court is an expensive ordeal which most carriers want to avoid.
- Fire Suppression: Just over 40% of apartment claims arise out of a fire. The bulk of these fires are started in the kitchen. It is highly recommended that every unit have fire extinguishers and a fire suppression system over the stove. We recommend fire stops.
- Stairways and Balconies: This is very similar to the sidewalks and parking lots. If the condition of the stairways or balconies is less than ideal and someone falls, you will more than likely be receiving a letter from an attorney about the potential liability claim on your hands
- Pool, Playgrounds & Fitness Facilities: All three of these are great amenities for a tenant and will help with rent increases, but all three are considered a potential hazard from an insurance carrier standpoint. Make sure pools are maintained and properly cleaned regularly. Make sure all gates are working properly and up to the most recent code. Make sure playgrounds have proper ground covering and are fenced to keep trespassers off the equipment. The same applies to the fitness facilities. Access for all three should be for tenants only.
- Renters Insurance: This makes sure the tenant has skin in the game. If a tenant causes a fire or has a dog that bites another tenant, your insurance will be on the hook for a claim. If that same tenant has a renters insurance policy, there is a liability portion of that policy which would be primary in this claim situation, as the fire or dog bite was due to the negligence of that tenant.
These are a just few of the things we go over when assessing the risk management profile of a property for an owner. I could go into greater detail, but this gives you a place to start. An insurance carrier is much like an investor in that they are investing into you as an owner. The best way to make sure your NOI is at its best is to make sure the expenses are low. In making your property risk adverse and becoming business partners with your insurance agent and carrier, you will optimize your insurance policy and your investment!
Clinton Orr, CLCS
Agency Vice President & Commercial Lines Specialist