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  • Writer's pictureMercedes Shaffer

The Dilemma of Rising Property Insurance Costs

Mercedes Shaffer l Published in AOA Magazine

The landscape of property ownership in California has undergone significant transformations in recent years, with the implementation of rent caps and the surge in property insurance costs. While the intention behind rent caps was to protect tenants from exorbitant rental prices, the unintended consequence has been the stifling of profitability for apartment owners. When coupled with the escalating burden of property insurance premiums, these restrictions present a considerable challenge for property investors attempting to maintain a sustainable business model.

Insurance Exodus

California's insurance market has experienced a significant exodus in recent years. Many insurance companies, facing mounting challenges and regulatory burdens, have decided to pack their bags and seek greener pastures elsewhere. The combination of escalating costs for construction and increased litigation, has forced insurance providers to reassess their operations in the state and many major insurance carriers have decided to leave permanently.

Additionally, changes in insurance underwriting practices have resulted in stricter criteria for insurability, forcing property owners to invest in costly renovations and upgrades to meet the new requirements. These changes include retrofitting buildings to improve resilience against earthquakes or implementing fire-resistant measures to mitigate the risks associated with wildfires. The cumulative effect of these expenses has placed a substantial strain on the financial viability of apartment ownership.

The Impact on Apartment Buyers

Navigating the process of securing insurance has become a tedious and time-consuming task. Gone are the days when obtaining insurance was a mere formality a week or even sometimes just days before the closing date on a sale. With the mounting risks and increased scrutiny from insurance companies, it now takes an incredibly long time to secure coverage so whether I’m the real estate agent representing the buyer or the seller, I always recommend that the buyer starts the process as soon as a purchase offer is accepted so that the closing date isn’t delayed.

The prolonged duration for obtaining insurance leaves buyers in a state of limbo, unable to proceed with confidence until they have insurance in place. Furthermore, the soaring cost of insurance for properties has reached such exorbitant levels that it can disrupt the delicate balance of a buyer's pre-approved debt-to-income ratio, potentially disqualifying them from obtaining a loan, or for the savvy investor, it could make the cap rate no longer attractive.

The Impact on Apartment Owners

The departure of insurance companies from California is set to have a profound impact on apartment owners. The reduced availability of insurance coverage will lead to a shrinking pool of options for housing providers to adequately protect their properties. The limited choices will inevitably result in higher premiums, making it more costly for apartment owners to secure insurance policies.

Rent Control Caps

While rent caps aim to protect tenants from excessive rent increases, they hinder the ability of property owners to respond to rising costs, such as property taxes, maintenance expenses, and now, inflated property insurance premiums. These restrictions impede a property owner's ability to offset increased operational expenses and make necessary investments in property improvements, thereby jeopardizing the long-term profitability of their apartment holdings. Housing providers, faced with limited potential for increasing revenue, may find it difficult to maintain and improve their properties, ultimately affecting the quality of rental housing available.

The Profitability Conundrum

The combined effect of the insurance exodus and rent control caps poses a significant threat to the profitability of California's apartment industry. With insurance companies reducing their presence or withdrawing altogether, property owners face challenges in securing affordable and comprehensive coverage. This leaves them exposed to potential liabilities and financial risks.

With insurance premiums soaring and rental income limited by rent caps, property owners find themselves in a precarious financial situation. Many housing providers are left with minimal or negative cash flows, making it challenging to cover expenses and achieve a reasonable return on investment.

As a consequence, some property owners may be forced to consider alternative measures to recoup their losses, such as reducing maintenance and repairs, deferring necessary upgrades, or even contemplating selling their properties. This, in turn, can have adverse effects on the availability and quality of rental housing in California, exacerbating an already strained housing market.

If you’re considering buying, selling, doing a 1031 exchange, or cashing-out while prices are high AND deferring taxes, I have partnered with a tax attorney who has done over $100B in closed transaction using a proprietary strategy helping sellers to cash-out and defer taxes. To learn about your options call 714.330.9999 or email I’m Mercedes Shaffer, a commercial real estate broker with Coldwell Banker, helping you build wealth one door at a time. DRE 02114448


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