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Theo Hicks: Hello, Best Ever listeners and welcome to another episode of the Syndication School Series – a free resource to focus on the how-to’s of apartment syndication. As always, I am your host, Theo Hicks. Each week, we air our syndication school series that focuses on a specific aspect of the apartment syndication investment strategy, and for a lot of these episodes we’ve been releasing free resources that’ll help you along your syndication school journey. A lot of these documents were released with the first chunk of syndication school series, where we went through the apartment syndication process from A to Z. So if you want to check out those episodes, the more recent episodes and get those free documents, go to syndicationschool.com. And today, we are going to talk about insurance and what you need to think about when you are obtaining a quote when underwriting an apartment deal.
Now before I go into these tips, a little bit of context. So I was interviewing someone a few weeks ago from when I’m recording this, so early August… He is essentially an insurance broker, and he was saying that insurance rates and therefore insurance premiums have been increasing recently in the apartment multifamily realm. He says that you can expect anywhere between a high single-digit up to 20% increase depending on what market you’re in, and he said that’s because the insurance market is usually going to be delayed by about a year compared to the overall sales and buying market.
More recently, the insurance market has gone from a soft market, he says, where insurance companies were competing for business, meaning that the syndicator, the investor could shop around and get a lower rate and therefore, a lower premium. Whereas now it’s the opposite, where it’s a lot more competitive for the investor. So multiple investors are now fighting for one insurance company. So he says that not only are the rates higher, but they’re also not even getting insurance on certain types of properties. So with all that being said, all of these are things to consider now with insurance rates going up and with insurance companies being a little bit more picky about the types of deals that they provide insurance on.
First and foremost, I guess this is not gonna be considered part of the eight things, but this is maybe a bonus one, which is, make sure you talk to your insurance broker or whoever your insurance agent is, ASAP to get an understanding on what rate changes have been and what types of deals they may or may not be providing insurance on, because you don’t want to spend all this time underwriting a deal, getting it under contract just to realize that you’re not able to secure insurance because of some reason that we’ll talk about here in a second. So that said, let’s go through these tips.
The first one is how to set the insurance assumption when you are underwriting. So traditionally, for the past ten years, let’s say, they’ve been setting the insurance premium to the T12 insurance premium. So whatever the current owner is paying, the underwriter assume that they’ll pay something similar or the same. Whereas now, with rates going up and the premiums going up, you no longer want to simply assume that the insurance rate is going to be the exact same because as I mentioned, it is now a hard market and insurance rates can go up in the double digits in certain areas. So it is more important than ever to now speak with your insurance agent during the underwriting process so that you have an understanding of how much the insurance is going to increase. So give them some information about the deal and ask them what they expect the premium to be, or at the very least, what they think the rate increase is going to be. So that’s number one. Do not use OM insurance premiums anymore.
Number two is about the history of losses. So in order to provide you with an accurate insurance quote, your insurance provider is going to need the history of losses from the current owner’s insurance provider. So if the property has any past claims during the past how many years the owner has owned the property, your insurance agent needs to know because the history of the property is going to determine the rate, and it might even determine whether or not they will give insurance at all on the property. So if you do not provide them with the history of losses, then they’re going to assume that there is no history of losses, there have no claims, and will create an insurance code based off of a clean property history, which is okay if the claims history is actually clean. But if your insurance agent gets their hands on the history of losses during the due diligence period and there is a history of losses, then it’ going to change your insurance rates significantly and your premium is going to also increase significantly.
And as I mentioned, they may not even provide insurance at all, at which point you’re scrambling to get a new insurance provider. So to avoid all of those difficulties, reach out to the broker or the owner and ask them for the history of losses so you can send that to your insurance agent. The guy that I interviewed said that this is not very long process. So it’s just a button they click to generate it. So it’s not like they’re writing this out from hand or anything. It’ll be very helpful in helping you underwrite the deal properly.
Next is understanding the difference between the deductible and the premium and which one you want to have higher because they have an inverse relationship. So the premium is what you pay each month or each quarter or each year, and then the deductible of what you pay when you file a claim. So if you pay up to the deductible ceiling and then once that ceiling is passed, the insurance company covers the rest. But as I mentioned, there’s an inverse relationship between the deductible and the premium. So when you are getting an insurance quote, the higher the deductible, the lower the premium. And then the higher the premium, the lower the deductible.
Now since we’re buying for cash flow and not appreciation, then you want to get the insurance quote that has the lowest premium and then the highest deductible that you are comfortable paying. This will result in a lower premium, a lower ongoing operating expense, and higher cash flow. So when you’re asking for quotes from your insurance provider, ask them to provide you with multiple quotes with varying deductibles and premiums. So say, “Hey, what’s the highest deductible, what’s the medium deductible, and then watch the lowest deductible, and then what’s the associate premium with each?”, and then decide whether you want to go with the highest, the medium or the lowest.
Now on a similar note, number four is going to be understanding the actual deductible because you’re going to see two types of deductibles for commercial apartment communities. There’s going to be a deductible per occurrence and a deductible per building. So as the names imply, the deductible per occurrence is one deductible pay per occurrence. So if three buildings are affected by a fire or whatever or a hurricane and you file a claim, then you need to pay your deductible one time if it’s a deductible about per occurrence before the insurance kicks in. If it is a deductible per building, then in that same situation, you’re going to have to pay that deductible three times before the insurance comes in. So obviously, the deductible per building is going to be lower, but if multiple buildings are hit, it’s going to be higher than the deductible per occurrence. So you’re gonna want to make sure you know what types of deductible is in the insurance quote. Is it per occurrence or is it per building? And then you’re gonna have to decide which one you want to go with. Probably the per occurrence or the one that results in the lower premium.
Next is going to be about loss of income coverage. So apartment insurance doesn’t just cover the physical asset. It can also cover loss of income as well. So you want to determine if you are going to receive any reimbursements from a loss of rent if the property is damaged by a covered loss like a storm or a fire or a hurricane or a tornado or whatever. And then if you do, you want to know what the terms are. So is it just all of the income for the damaged buildings for a certain period of time? Is it up to a certain amount? Is it a percentage which is dependent on what the covered loss is? So you want to know exactly what types of claims will allow you to continue to generate income on those down units.
Another type of coverage you can get is a liability insurance. So this covers you legally if someone at your property, whether it be a tenant or a visitor of a tenant is injured. So if they slip on ice or they tripped on the stairs, they get hurt and they sue you, well, this could be hundreds of thousands, if not millions of dollars in legal fees and settlements. So you can get commercial general liability insurance, and a good rule of thumb here is $1 million per occurrence and $2 million overall in general liability coverage. So just say, “Hey, I want commercial general liability insurance included on my quote, and I want the $1 million per occurrence and then $2 million in general liability coverage.”
Next is going to be the replacement cost for the insurance. So this is just something not super important, but it’s also– well, not super known; this is a specific detail of the insurance. But you won’t know how the insurance company is calculating the replacement cost of the property. Are they just basing it off of the purchase price? Are they basing it off of some sales comp or comparing it to other assets in the area? What you want to have had is you want the replacement cost to be based on the price per square foot to actually rebuild this specific property. So wherever the replacement cost is included in your insurance policy, make sure it says, “Replacement costs based off of price per square foot to rebuild.” Again, that way, if something were to happen and the entire property were to be destroyed, you actually have the money to have the option to rebuild the property in full.
And then the last thing that I wanted to say that you should consider is to join REAPA. So we have no affiliation with them whatsoever, but it is a website where you can join for a couple hundred bucks per year. They partner with a variety of industry leaders in the real estate realm, and through these partnerships, their members are able to get discounts on certain things, including insurance. So it’s like– I can’t remember what the exact terminology is, but when you have a master policy with insurance company, or if you bring them enough people, you can get a discounted rate. So it’s like a bulk discount in a sense. So by going through this company, you can get a reduced insurance rate. So this is very helpful, especially since as I mentioned at the beginning of this, insurance premiums, insurance rates are increasing.
So those are the things to think about when you are getting an insurance quote. Again, this doesn’t cover every single thing, which is why I have the coverall, which is talk to your insurer. You can make sure you are adequately inputting the correct insurance amount when you are underwriting your deals. So that concludes this episode. To check out some of our other episodes as well as those free documents, visit syndicationschool.com. Thank you for listening. Have a best ever day and we will talk to you tomorrow.
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