First 8 unit and Insurance is really hurting cash flow

[Mackal Smith]

Hey all,

Up to now I have only bought 2,3, and 4 unit buildings. I have 15 units total and have had a lot of success so far. I just got my offer accepted on my first 8 unit apartment building. I ran my numbers including an estimate on my part about what the insurance costs would be. I mistakenly doubled the insurance costs I was paying for my 4 plex to use as the number for insurance on the 8 unit. (the 8 unit cost is 179.9K, my 4 unit was about 90K so I thought this would be fairly close)

After the offer was accepted I found out that (wow!) true commercial property insurance is much higher (about triple) what I have been paying for my smaller properties. The property still cash flows (and really still cash flows well) even with the increased cost of the insurance so I haven't made a huge mistake. Let's just call it a disappointment and a learning lesson.

My question for the forum however is this:

Is this typical for >5 unit buildings (true commercial buildings). Is there a way to get creative with the insurance? Just to give you some rough numbers:

Typical insurance rates for my 4 plex here in St Louis is 519.00/yr. This is with a 1,000 deductible and the insurance covers my actual cost of $90K (not replacement cost)

The quote I got for the 8 unit is $3600/yr. This is with a 2500 deductible and the insurance uses some kind of complicated (Marshall and Swift) formula to come up to 40% of the replacement value (which gets it to about double what I'm paying for the property). The property price is 179.9K. I got a long email from my insurance guy explaining that > than 5 unit buildings are just more risky and are more prone to partial losses. His replacement cost figures for the building are some like $442,000 (with 40% depreciation because of age).

Sorry, I know this is a long post. Just wondering if this is typical for insurance on commercial properties or if anyone has other ideas?

Thanks!

[Jason Bott]

@Mackal Smith Everything your agent is saying is true, if you want a policy that gives you maximum coverage.  The real question is, 

Do you want this type of policy?

The policy and building valuation your agent is offering puts you in a position of very little risk. If you go with a policy similar to @Hanbin Y., you pay much less premium, but take on much more risk. Most landlords roll the dice and go with option # 2.

Bottom line, you need to find the policy/coverage that fits your risk tolerance.  Once you have that, then go with that option. 

Once you have that policy option, then you can get multiple quotes on that policy option.  If you just start calling agents, you will get multiple quotes, each with different coverage terms.  This will be very difficult to make a decision.

Good luck