Investing in multifamily real estate is one of the best ways to build enduring wealth, but it also carries some risk, which can be easily mitigated with the right insurance coverage.
For that reason, there are some key elements you need to have in mind so you’re getting all the benefits of proper insurance coverage, and making sure you’re making a good investment.
How age affects insurability
Properties that were built in the ’90s and ’80s are less likely to be insured by carriers. Also, in case that it gets insured, the interest rates are higher in comparison with newer developments. This holds true even if the property is in great condition and has no significant claims in its history.
Fortunately, there are ways to mitigate the costs. If you as an owner focus on keeping things up to date and cost-effective, like wirings, pipes, or the roof, it may be much more affordable to insure. Keep in mind that executing those types of improvements makes the property better suited to sustaining damage or something breaking, which in turn makes it cheaper to insure.
This is one of the most important factors. Not only the location will be evaluated for its crime rate, but also from any other source of risk, like the environment and weather.
California is a great example: it is well known as a location where seasonal wildfires are a factor and it produces lots of property damage, thus increasing the rates of insurance in the area. Texas is also a good example, since damage caused by wind, hails and tornadoes are risk factors worth considering
While all properties may be subject to some level of environmental risk, properties in some locations may be more likely to experience costlier damage.
You can mitigate the costs if you pay attention to what needs to be done in order to reduce the risk factors in properties you own. If, for example, a property is located in the midwest, you’ll find out that water damage caused by busted frozen pipes is a common occurrence. By having a recently updated plumbing system, the coverage cost might be more affordable.
Don’t forget about the replacement cost
When you insure a multifamily property, the policy will have a per-unit or per-square-foot replacement cost. Essentially, this is how much the carrier will payout 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.