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Get A Quote For Insurance For A Rental Property Before You Buy


Although insurance for a rental property may seem like a commodity (ie. little difference in the product and pricing from one provider to the next), it is not. Quotes from one insurance provider (or broker for that matter) to the next can vary widely. This leads me to the following two recommendations:

  1. make sure that you get a few quotes during the due diligence stage of your financial analysis and
  2. whatever you do, do not use the figure that the seller included on the income/expense pro forma that she provided you. I can almost guarantee it is way too low.


Rental properties that contain more than 4 suites are priced and sold based on the net operating income that they produce. Therefore, when sellers go to sell their properties they are tempted to make the numbers "work in their favor". In other words they tend to overestimate revenues and underestimate expenses (or not include them at all!) Insurance for a rental property is typically one of those expenses that typically gets underestimated.

And even if the seller is telling the truth about what she pays for insurance, again, that information is pretty much useless. Why? For one thing, many owners underinsure their investment properties. It is an easy expense to cut back on because it is so intangible.

Other owners just don't take the time to find out what the true cost would be to replace their property in the case of a total loss. Either way, you need to talk to several brokers and get "real life" quotes using "real life" numbers.

Does it hurt to get the seller's insurance information? Of course not. But don't rely on it.

Here is a final thought on insurance and how it will affect your cash flow and future revenue property value. Based on my experience over the past 15 years in the real estate investment business, there has been one thing that I can almost always count on... and it wasn't a good thing. The cost of insurance for a rental property continues to increase, year after year. So when you are budgeting and/or doing your long term projections on the cash flow of a rental property, keep this in mind and count on a steady increase when it comes to this expense.




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