In my former life in private equity and real estate, underwriting assets was a key component of my day. Insurance is a fickle mistress and the ebbs and flows of insurance premiums can have a fundamental impact on the performance of your assets as well as the types of debt products that may be available to you when acquiring a new deal or going through refinancing.
What you don’t know can hurt you. Overpricing or underpricing an asset during acquisition are both horrible situations to be in when going hard on a deal. This presumption of accuracy can be dangerous when you are evaluating a big-ticket line item like insurance.
It’s important that, as an owner, you make sure you understand the historical costs of insurance, who your seller is, why the premium is priced the way it is, and who your lender is. These factors are all incredibly important to understand your insurance expense assumptions.
Getting an indication is key to understanding how much you will pay for your premium. It’s easy to take a look at the trailing 12 and assume that you will get the same or a better rate than the previous owner or even if they will give your asset a blanket price per door or price per sqft.
This is why it’s important you understand the previous loan type against the loan you plan to get. For example, a multifamily Freddie Mac or Fannie Mae loan often requires special coverage that you may or may not see with other lenders. These include special types of flood coverage or terrorism insurance which will often drive up your rate.
Things to consider (topics we will discuss in this series in the coming weeks):
Are your proforma year over year growth rates in line with the true historical growth rates of the insurance industry and will that affect your DSCR, Cash on Cash, and IRR?
Carrier risk tolerance changes over time and markets harden and soften with the change in risk. Insurance pricing adjusts accordingly.
Remember: not all policies are created equal. We will cover how to mitigate risks in underwriting insurance costs in your proforma and help to provide some context on pricing.
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