In the last couple of years, the cost of insurance has increased exorbitantly… and in some states, losing coverage entirely is now a real risk.
As someone who has spent years evaluating property acquisitions and managing risk exposure, I have learned that insurance is no longer just a line item on a spreadsheet – it is one of the biggest deal-shaping variables we face today.
Real estate investors often obsess over interest rates, cap rates, and rent comps but ignore insurance until it is too late. That is a costly mistake. The reality is: insurance risk can quietly erode your returns if you do not factor it in from day one.
Insurance Risk Is Not Just a Possibility — It Is a Probability
Insurance risk boils down to the potential for financial loss due to inadequate coverage, policy exclusions, or even the insurer’s inability to pay claims. And it is more common than you think — especially in high-risk states like Texas, Florida, and California, where natural disasters are becoming more frequent and more insurers are pulling out altogether.
If you are not preparing for that, you are not preparing at all.
Validate Premiums — Or Pay for It Later
One of the smartest moves to make during due diligence is validating insurance premiums through third-party brokers — not relying solely on seller or broker provided figures.
You’d be surprised how often actual premiums come in 10–30% higher than what is shown in the offering memorandum.
Even more important: modeling expected premium increases into your pro forma. If you are assuming flat premiums or the traditional 2-3% growth date, you are setting yourself up for a surprise … and not the good kind.
Not All Properties Carry the Same Risk
Insurance premiums — and the risk of coverage loss — often correlate with property characteristics. Want to reduce exposure?
Start by selecting lower-risk properties:
- Newer builds (less structural and code risk)
- No aluminum wiring
- No history of major losses
- Low crime areas
- Away from water basins
You cannot eliminate risk entirely, but you can certainly stack the odds in your favor.
Actionable Ways to De-Risk Your Insurance Exposure
Here is a short checklist that can protect your NOI and preserve investor confidence:
- Validate insurance premiums with third-party brokers before closing
- Model realistic premium increases into your underwriting assumptions
- Include loss of rent and force majeure scenarios in your coverage
- Establish adequate reserves for potential premium spikes or deductibles
- Choose properties with favorable risk profiles
- Choose insurance companies that are highly rated by AM Best
This Is Not a “Nice-to-Have” Anymore
I have seen deals fall apart post-close because of unexpected insurance hikes — or worse, sudden drops in coverage. This is not just a back-office detail; it is frontline risk management. And it can make or break your investment.
Breaking down multifmaily underwriting one step at a time to create educated and empowered investors
P.S.
If you are evaluating an investment and need a second set of eyes, I am here to help. Send me a message and we’ll schedule a complimentary call.
P.P.S. And if you are ready to do a deeper dive and learn how to analyze deals on your own from beginning to end with confidence and ease, go to masteringmultifamilyunderwriting.com or message me on how to get started today.