Changes to South Florida’s Insurance Market Mean Changes to Your Investment Strategy
March 30, 2022
March 30, 2022
Your insurance policy is there to protect your investment in case of a disaster. But what is protecting your investment from the drastically increasing insurance premiums we’re seeing in South Florida?
If you’re a new multi-family property owner or are currently in the market to buy, you may not be aware that insurance premiums have doubled and sometimes tripled over the last few years. Getting caught off guard by these increases can have a huge impact on your financial projection and your entire investment strategy.
Here’s what you need to know:
It’s important that you speak to an insurance agent before signing any contract. You’ll want to be sure you have a clear understanding of insurance costs based on the requirements of your lender.
So many first-time investors focus solely on shopping for a loan from a perspective of getting the best rates. But what often happens is, in order to get those stellar rates, the lender will have very specific insurance requirements owners must meet. So you may get a terrific rate but will still wind up paying sky-high insurance premiums because the lender has onerous insurance requirements.
What do we mean by onerous requirements? Some providers ask for excess liability, as an example. A standard liability policy covers up to one million dollars, but there are lenders out there who require a $5 million policy.
Some may also require business income across all perils to protect against the loss of income resulting from a claim. This requirement can be incredibly expensive for the property owner.
So be sure to do your due diligence to make certain you understand everything that is required insurance-wise before signing onto that mortgage.
For years, the state and federal governments subsidized the cost of insurance. This was a way of offering more affordable solutions due to a lack of private providers available in the market.
Then Hurricane Sandy hit and everything changed. The federal government did not expect nor was it prepared for that level of exposure when the massive storm hit New Jersey. As a result the National Flood Insurance Program began to phase out their subsidy on flood coverage and began to force commercial property owners to look for coverage in the private market.
And guess what happened? Prices rose significantly.
As an example, someone 10 years ago who was getting subsidized flood insurance from the federal government may have been paying $1500 a year. Today, that same property owner is apt to pay $8,000 a year for the same coverage.
The same thing has happened for wind coverage. As state subsidized carriers have stopped issuing or renewing wind policies for commercial properties, owners are forced to look to private insurers. And with so few carriers, premiums keep climbing year after year.
Just as lenders sometimes have onerous requirements, we’re seeing more insurance providers begin to have them as well. For instance, with wind coverage, some providers now won’t insure a building if the roof is over 15 years old. The roof could be inspected and found to be in great condition, but some carriers won’t cover you unless you get a new roof installed.
Insurance providers are always looking for ways to lessen their exposure and you’d better believe the buck gets passed on to you when they do. Here’s just one example: many policies are now renewing with exclusions. That means a carrier might provide liability coverage against slip-and-falls, but that coverage won’t protect you against assault and firearms.
When we see all the civil unrest in the country the past few years, property owners are realizing they absolutely need this type of coverage. Well, you can get it, but you’re going to have to pay extra for it.
There was a time when, if you had an open insurance claim, you’d get on the phone with the provider, answer a few questions and they’d happily renew your policy.
These days, the majority of providers will not renew your policy if you have an open claim. Even if that claim is not very serious, i.e. no one was badly injured or the claim is not expected to result in a high payout, you’re still apt to get a “NO” and be forced to shop around for a new policy. You’ll find one, but you’ll be paying far more than you were. For instance, one of our clients had a policy renew at $5,000 a year for many years. Then, because of an open claim, they were forced to pay $20,000 a year!
The bottom line is, there are fewer insurance carriers in the South Florida market. And this means property owners will face bigger requirements and higher premiums.
When it comes to getting around these exorbitant insurance rates, you have three options:
Tear down your building and build a new one that adheres to all new, modern building code requirements for elevation, windstorm protection, etc. This would give you the best chance at finding cost-effective insurance.
Obviously this option is not for everyone.
Be a cash buyer. When you buy a property for cash, you don’t have to meet a lender’s requirements for insurance and can consider self-insuring the building. Should there be an event, you would pay for repairs out-of-pocket. This option can save you a ton each year on insurance premiums. But Mother Nature can sure throw us some zingers, so you’re really rolling the dice with this option.
Realize when you buy a property you are going to have to increase rents over time to offset the increase in insurance costs. And know that this may mean not just by the typical 10%, but by as much as 80%, 100% or even 200%. Property owners don’t normally expect to have to do this, but this is the current climate we find ourselves in.
The insurance landscape is changing rapidly. Fewer carriers plus more requirements equals more money coming out of your pocket – period.
Does your property manager know, really know, what’s going on in the insurance market? If your property manager isn’t discussing with you the impact these higher premiums will have on your investments, it’s time to look for a different property manager.
We understand the insurance market inside and out and we’ll guide you through the most important aspects of managing your property. We work with insurance agents to understand all of our options so we can plan properly to make sure you add a bit more space for your investment’s performance.
We’re also real estate brokers, so if you’re currently in the market to buy a multi-family property, we can work with you to make sure the property will perform so you can meet your intended targets.
Get in touch with us!