SS72: Why are Real Estate Insurance Premiums Skyrocketing?

U.S home insurance rates are rising fast and not slowing down anytime soon. In this episode, Charles discusses how investors should rethink their underwriting when purchasing investment properties.

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Talking Points:

Over the past year; we have had our real estate insurance premiums increase by 4%-12%; over the past year; Americans have seen their homeowner’s insurance premiums increase by over 8%.
Where I live in Florida; our rates have been increasing at an even higher rate since Florida Insurance companies lost $1.6 billion in 2021; largely due to fraud and litigation costs (76% of lawsuits filed in the US against insurance providers are from Florida); mainly roofing fraud.
But throughout the U.S., the cost of building materials and labor has been increasing at a rapid pace.
A few of the main reasons why insurance rates have increased so much is inflation:
- The most common reason is the cost to rebuild your property has increased. (Lumber is up 300% over the past 3 years).
- Labor costs have increased substantially; there is a lack of skilled labor which is dramatically increasing costs; it is even difficult to find someone to return your call; let alone come out, provide a quote and show up to do the work.
With true inflation north of 10%; real estate investors need to rethink their underwriting when investing. Years back, when I would initially review underwriting; I would essentially skip over the insurance line in the expenses portion of the underwriting to review the property taxes; since that is where most investors get into trouble and it was a given that insurance would increase 3%-4%. Not anymore. When I am reviewing underwriting and hit the expenses; I am looking for the percent increase the underwriter is anticipating, and you are really looking for higher single-digit annual increases; double what it used to be.
When you are purchasing real estate in an inflationary environment like we are in today; you utilize the fixed debt to devalue your debt; but it is important to make sure your expenses increase accordingly with inflation. The benefit is that we can increase rents every year and our largest outflow, which is our debt service; is fixed.
Find a good independent insurance agent/broker; preferably from a referral; and have them quote your policy every year.
When purchasing property; it is very important that you are anticipating higher insurance rates if the roof is old or the electrical has not been upgraded or there are other major changes required. If you are planning on making these repairs; do them as soon as you purchase the property and then contact the agent.
I don’t understand why most new investors don’t do this, but call and get insurance quotes before they put in an offer on a property.
Insurance increases are not going away; just make sure you are aware of them and factoring them in when submitting offers.

Transcript:

Charles:
Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing why are real estate insurance premiums skyrocketing. So over the past year, we’ve had our real estate insurance premiums increased by 4% to 12%. And over the past year, Americans have seen their homeowner’s insurance premiums increased by over 8% where I live Florida, our rates have been increasing at even a higher rate since Florida insurance companies lost a 1.6 billion in 2021, largely due to fraud, mainly roofing fraud and litigation costs. 76% of all lawsuits filed in the us against insurance providers is from Florida, but throughout the us, the cost of building materials in labor have been increasing at such a rapid pace. A few of the main reasons why insurance rates have increased so much is inflation. The most common is the cost to rebuild. Your property has increased. I mean, lumber is up 300%.

Charles:
Over the past three years, labor costs have increased substantially. There’s a lack of skilled labor, which is dramatically increasing costs. It is even difficult to find someone to return your call, let alone, come out, provide a quote and then show up to do the work with true inflation north of 10% real estate investors need to rethink their underwriting. When investing years back when I would initially review underwriting, I would essentially skip over the insurance line in the expenses portion of the underwriting to review the property taxes. Since this is where most investors get into trouble. And it was a given that insurance would increase three to 4% a year will not anymore. When I’m reviewing underwriting and hit the expenses, I’m looking for the person sent to increase. The underwriter is a anticipating and you’re really looking for a higher single digit annual increase, double what it used to be when you are purchasing real estate in an inflationary environment like we are today, you utilize the fixed debt to devalue your debt, but it’s important to make sure your expenses increase accordingly with, with inflation, the benefit being that we increase rents every year and our largest outflow, which is our debt service is fixed.

Charles:
Now find a good independent insurance agent, preferably from a referral of another landlord or property owner, have them quote your policy every year when purchasing property is a very important that you’re anticipating higher insurance rates. If the roof is old or the electrical has not been upgraded, or there are some other major changes required to keep up the code. If you’re planning on making these repairs, do them as soon as possible, as soon as you purchase the property and then contact your agent, I don’t understand why most new investors don’t do this, but call and get insurance quotes before you put an offer on our property. Insurance increases are not going away. Just make sure you’re aware of them and factoring them in when you’re submitting offers. So I hope you enjoyed. Please remember to rate review, subscribe, submit comments, and potential show topics at global investors, podcast.com. Look forward to two more episodes next week. See you then

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