Commercial real estate can be incredibly lucrative, but it also has inherent risks. Many of these risks can be mitigated with the right real estate insurance coverage. Jake Stacy specializes in this specific niche, and he works for an established, successful firm located in Seattle, Washington. More than that, he personally invests in commercial and multifamily properties. With this in mind, he offers real estate insurance advice to commercial property investors that is rooted in personal and professional experience alike. We met with Stacy to share his insight with others who may benefit from it.
Factors That Affect a Commercial Property’s Premium
Historically, the process that an apartment or commercial real estate owner or manager endured when shopping for new coverage has been time-consuming and stressful. For each quote requested, the individual had to provide between five to 10 pages of concrete data on the property. This covered everything from the age and square footage of the building to the construction type, the number of units, the average market rental rate for comparable units, and more. In addition to these factors, property location plays a major role in the premium. For example, the property’s location will impact what types of inclement weather and environmental factors it is subject to. The crime rate in the area also drives the premium.
Over the last several years, Jake Stacy’s firm has seen double- and triple-digit growth year over year because of its streamlined way to provide quotes. Specifically, it draws on various databases to access digital data. Then, it does not wait for new clients to reach out. Instead, the firm actively mines data to look for communities that would meet its criteria. It provides potential clients with a faster, easier way to set up more affordable coverage.
The Impact of Age on Insurability
Older properties are increasingly difficult to insure, according to Stacy. Specifically, he states that a property that was built prior to 1990 or 1980 may have limited options for carriers interested in insuring it. At the same time, the rates offered by the interested carriers may be much higher than the rates for a comparable yet newer property. This holds true even if the property is in great condition and has no significant claims in its history.
However, there are mitigating factors that providers look at. For example, if the property’s wiring has been updated from aluminum to copper and if it has a newer roof on it, it may be much more affordable to insure. Because these are factors that impact exposure to risk as well as the cost to insure the property, investors should pay attention to them when selecting a new investment property.
Another mitigating factor that may be considered is the age of other properties in an investor’s portfolio. Assuming that the investor’s other properties are insured by the same carrier, that carrier could make an exception with regards to the older property if all other properties are newer. This exception can be related to insurability as well as rate.
The Effect of Geographic Location
While the property’s location will specifically be used to research the crime rate for coverage purposes, the location’s environmental risks and weather conditions are also taken into consideration. For example, in California, the risk of wildfire damage can result in increased rates compared to a property in Michigan. The risk of wind, hail, and tornado damage in Texas can result in a higher real estate insurance premium than a comparable property in Washington may have. Properties along the Atlantic and Gulf of Mexico coasts are subject to hurricane damage and flooding. While all properties may be subject to some level of environmental risk, properties in some locations may be more likely to experience costlier damage. In fact, you could pay double the premium in some areas in Texas than you would pay to insure a comparable property in Seattle.
To offset these risks, providers look at specific factors. For example, in New England and in the Midwest where deep freezes are common, one of the biggest risks is related to water damage from ruptured pipes. Because of this, coverage may be more affordable and easier to obtain if the property’s plumbing system has been updated.
The Importance of Replacement Cost
When you insure a commercial or multifamily property, the policy will have a per-unit or per-square-foot replacement cost. Essentially, this is how much the carrier will pay out in the event of severe damage or a total loss. In some cases, building costs are increasing rapidly, and policies may not be aligned with the most current costs. With this in mind, the property owner may only receive a payout that covers a fraction of the cost to replace the property. This creates an unnecessary financial liability for the property owner through investing activities.
The Affordability of Deductibles
Investors have some wiggle room with regards to their deductible. By increasing the deductible, they can enjoy a lower premium. This equates to improved cash flow on a monthly basis. However, a higher deductible may be more challenging for some investors to pay in the event that they need to file a claim. Keep in mind that some situations may require the investor to pay the deductible at the drop of a hat on multiple properties. The investor should establish a deductible strategy across his or her full portfolio that is manageable and that optimizes profitability without creating unnecessary risk.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.