Over-Insuring is Killing Your Profits
How One Landlord Saved $86,000 in Premiums Insuring the Market Value Wastes Your Money 
“What property owners need to understand it that there’s a big difference between market value that lenders use and the replacement cost carriers use,” says Patrick Nugent, CCIM, JD, with Commercial Insurance Solutions out of Dallas. “A property insurance policy is intended to make an insured whole and will not act as a profit center.” With that in mind, Nugent recommends that a property owner take a hard look at the insurable values with an eye toward replacement costs because this will lower premiums. Lower Premiums Saves You Even More in the Long Run Patrick explains about a client who was buying a 400 unit complex in Hawaii. The property was built in 1965. The lender wanted the owner to insure the full loan value, or $150 per square foot for the frame construction, but they did not factor in the land, which is highly valued in Hawaii. After hearing an explanation from the insurer on proper valuation, the lender agreed to go with replacement cost, which lowered the premiums to $80 psf. That was a savings of $86,000 in property insurance premiums alone. At a 7% cap rate, that’s $1.2 million savings on the investment. Over-insurance is a common mistake, for both lenders and brokers, especially brokers who do not specialize in real estate. Find out if you are over-insured. Contact Commercial Insurance Solutions. American Apartment Owners Association offers discounts on products and services related to your commercial housing investment including REAL ESTATE FORMS, tenant debt collection, tenant background checks, insurance and financing. Find out more at www.joinaaoa.org. See info on Renters Insurance. To subscribe to our blog, click here.
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