First 8 unit and Insurance is really hurting cash flow

[Mackal Smith]

I posted this in the multi-family discussion topic then found this forum. Oh, and btw, the apartment building I'm talking about here is in St Louis MO. Apologies for duplicating...

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 there is a watershed in the commercial insurance between 4 and 5 units.  There are many insurance programs and providers for 1-4 units, but they do not do 5.  Then there are the ones that can 4 and greater, but nothing less.

You will find your best option with a different provider.  Chances are your current agent has the "Hottest" insurance market for 1-4 units, but does not have access to the best program for 4 and greater.