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Why real estate investors are seeing a rise in costs

On Behalf of | Aug 7, 2023 | Commercial Real Estate |

Real estate investing is changing. Michigan investors are seeing this firsthand as they face increased property insurance rates. This increases costs, which may force some landlords to increase rents.

Increased rates

Global property insurance premiums have risen 4% during the first quarter of 2023. That’s an unfortunate number, but it’s much worse in the United States where the first quarter saw a rise of 17%. Commercial real estate investors who’ve been doing this for decades have seen costs surge. In fact, it costs twice as much to purchase property insurance in the United States today compared to twenty years ago.

Why costs are increasing

Rising property insurance rate costs are largely due to weather-related events. As the weather continues to change, there have been more insurance claims of a higher value than previously seen. Events like extreme cold cause expensive damage to a building’s pipes or lead to structural damage. Other major events include storms, extreme heat or wind. Many of these weather events lead to incidents like fires and floods.

Insurance companies are seeing an increase in maximum-value claims. Insurance companies are raising their rates to cover their payout costs, representing a major expense for investors. On top of this, there are often more expenses for repairs than the maximum-value claim covers. This means even more costs for investors.

Another significant change is in the coverage itself. One of the ways insurers have chosen to lower their costs is by offering less coverage. These changed policies lower their risks and the amount they must pay out when weather-related events happen. Property owners can then buy additional specialty insurance to cover these events or risk the consequences.

For investors, this means taking additional precautions. Investors can ask about a property’s protection against weather-related events. A closer look at insurance coverage and the risks in particular areas can go a long way toward avoiding major costs over the long term.