Anyone active in or investigating an entrance into the multifamily housing industry knows there is definitely an air of uncertainty in the market. A number of factors including concern around interest rates, building and labor costs, tariff impacts and insurance non-renewals are weighing heavily on owners and developers in this space, which includes units like duplexes/triplexes, condo complexes, small, medium and large apartment buildings.
When it comes to owning or selling a multifamily property, the standard measure of profitability is ‘cap rate’ – or the capitalized rate of return you get on your investment. For some owners, you might measure your cap rate in a per door metric — meaning your rate of return per individual unit or as an investment as a whole.
Several issues are having an impact on cap rates and profitability across the board right now and the biggest ones with the greatest uncertainty are insurance availability, rising insurance rates and carrier requirements. Many carriers are actively updating their physical property requirements before writing or renewing any policy with dramatic new metrics when it comes to electrical panels and circuitry, roofing, plumbing and HVAC systems. These key issues have a direct affect on property value.
What is an owner to do? As a trusted advisor when it comes to asset protection, your broker teams at Snapp and Associates have gathered a list of tips and considerations when it comes to your property and ways to mitigate losses:
1. Be sure you know all your coverage limits, accurately— Know your true building replacement cost values and rental loss figures if you lost your property. Review this regularly with your broker to ensure you have adequate coverages; going for the ‘least’ coverage can absolutely backfire.
2. Have a proactive property manager — Whether this is someone who lives on property or offsite, make sure they follow a regular schedule to check your property and monitor issues.
3. Repair issues before they become a major problem — One of the advantages of an engaged and active property manager is the chance to identify areas of concern and repair or replace as needed, lessening the chance something escalates to a major repair or insurance claim.
4. Document, document, document! — Make sure to keep a record of all updates and upgrades you do. If you bought the building in last five years, try and get all the repair or improvement records you can; fill in all the holes. This is essential as an insurance underwriter may interpret a ‘blank’ response when it comes to things like roof age or plumbing history as the same as ‘unupdated.’ The key requirements for policy renewals and approval are updates to electrical panels and circuitry, roofing, plumbing and HVAC systems.
5. Know your zoning, wildfire and flood risk and property history — It is essential to have an accurate description of all factors relating to your investment. Even a brand-new building that has never been subject to a fire or flood may face policy challenges because of existing classifications. You need to know what you might be subject to before buying or retaining an inherited property.
Ask to see any historical Loss Runs (insurance claims against the building). Are there trends related to potential deferred maintenance issues? These will be key to know before taking ownership. Also ask for a current Certificate of Insurance to see how the propriety is insured, with which carrier and what levels of coverage.
6. Require renter’s insurance — If you are an owner and not currently doing this, it is an excellent requirement for tenancy in order to help mitigate your overall risk and minimize major property claims. If a tenant damages the structure or creates a liability issue, having them work with their own carrier for resolution can help detour a potential claim against your carrier.
7. Be Proactive — This might be one of the most crucial areas when it comes to protecting your asset. Be sure to speak with your broker or agent every year to review all your coverages, ensure you are up to date on new requirements and current industry costs for repair or replacement needs, including increased expenses when it comes to rebuilding an older property to current code requirements. If you haven’t done so, also maintain an accurate reserve study to ensure adequate funds to cover all routine maintenance as well as a budget for those preemptive repairs and upgrades mentioned above to keep your property safe and functional and ahead of the game!
Snapp and Associates has a number of team members that specialize in the dynamic multifamily housing industry and can assist with any coverage or asset protection needs. Call (619) 908-3100 today to schedule a consultation.
