Get A Quote For Insurance
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
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
- make sure that you get a few quotes during the due
stage of your financial analysis and
- 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.
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
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
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
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