You should get insurance on every building that you own. For a relatively small annual premium ($4,000 for a $1,000,000 Building) you can insure yourself against a total loss ($1,500,000 Loss – replacement cost).
Multifamily Apartment buildings purchased with a loan are required to have insurance. 2-4 units are covered by residential insurance. 5 units or more are covered by commercial insurance.
How much coverage you want is up to you, the more coverage the more expensive, and the less coverage the less protection. Talk with your insurance agent to decide what’s best for you.
Policy term is 1 year, and you can change or cancel the policy at anytime.
Building Insurance Coverage
Building insurance pays to replace the structure if it is damaged or destroyed. The building replacement cost is estimated as dollars per square foot. For apartment buildings $125/sqft or less is probably not going to be enough. $150/sqft would be the minimum coverage an insurance agent would recommend. $200-$250/sqft is more than adequate.
Example, you own a 5,880 sqft building that you purchased for $950,000. If you insured the building at $150/sqft the amount of building coverage should be: 5,880X $150/sqft = $882,000.
Building insurance also covers demolition costs- Demolition can be another $30,000 to $50,000 tacked onto the building cost to demolish and remove the debris from old building.
Building Insurance covers: Wind, Fire, Collision damage, Civil commotion, Hail, Aircraft, Vandalism, Mischief, Explosion, Riot
Building insurance does not cover earthquake, flood (flood includes mudslides for hillside area).
Liability Insurance Coverage
Liability Insurance pays for your legal costs if you are sued and pays the judgement up to the policy limit if you lose. If someone gets hurt on your property they may decide to file a lawsuit. People can sue for any reason and they will ask for a huge amount. Death is the least of your worries, it is the person who get seriously injured at your property and needs to be taken care of the rest of their lives that will cost you the most.
I don’t want to scare you with horror stories, because multi-million dollar lawsuits don’t happen every day, in fact they happen quite rarely, but they do happen, and you are not covered by insurance- they can bankrupt you.
As a commercial property owner you have a big target on your back because personal injury lawyers assume you have bags of money laying around and they will grab for it. I heard a story of a tenant who wanted to commit suicide by jumping off the roof of her apartment building one night, but stumbled and tripped in the dark and seriously injured herself instead. She sued the building owner for $1,000,000 because the roof of the building wasn’t lighted properly…
A personal injury lawyer will happily take a $250,000 or more premises liability case on a contingency basis (contingency cases cost nothing for the injured person- the cost of the lawsuit is born by the attorney, and in exchange- if the attorney prevails in court or negotiates a settlement, the attorney keeps 50%. The injured party pays nothing, even if they don’t win). In addition to free attorneys, there are providing free legal service- tenants have many resources for free legal advice through LAHD and non profits while landlords have virtually nothing. They always advise tenants to go to court and have a jury trial, which is very good advice for the tenant, because as a landlord you don’t stand much of a chance in court when there is a jury deciding- they have a huge bias against property owners.
One thing to consider, when thinking about liability protection is whether you should incorporate and hold title as an LLC versus upping your Liability insurance. An LLC costs $800/yr in California annually. The first $1M in Liability insurance costs about $1,000 to $1,200 and then each $1M increment beyond that is ~$200/yr. So for the LLC protection that costs $800- you could up your $1M Liability policy another $4M to $5M instead.
How much Liability coverage do you need? It all comes down to how much you are worth and what you are comfortable with. Total coverage should match your networth plus five times your annual salary.
Example: lets suppose you have $750,000 networth and make $150,000 per year. You should have liability insurance of $1,500,000.
Additional Liability insurance can be added with an umbrella policy.
Loss of Rent Coverage
When you suffer a loss to the building from fire or water etc, there is a good chance your tenants will have to move out while you make repairs and you might not be able to collect rent. You might be relying on that rent to pay your mortgage. Loss of rent insurance insures you for this. Get at least 1 year, but you can also choose to get 18 months or 2 years. With delays from claims adjusters and the building department, it will probably take two years before you are collecting rent again if you building was completely destroyed. Sorry, loss of rent does not cover lost rent from evictions or normal vacancy.
Personal Property Coverage
You might have a large amount of personal property on the property that you would like covered. This can be appliances like HVAC, dishwasher, washer dryers, Stoves, computers, Gym equipment, Pool Equipment, Fridges, lobby furniture . Your equipment Is not covered by the building insurance coverage. Landscaping?
The current building codes are much stricter today than in the past. Chances are if you have an older building, it doesn’t meet today’s code. This might make it more expensive to rebuild in the event of a loss (extra design fees for compliance with American with Disabilities Act, grandfathered in low parking requirements and setbacks no longer apply to new construction). The older the building, the more you need building ordinance coverage. Anything 1970’s or back I’d definitely want some of this in my policy. Building Ordinance coverage typically can be purchased for 15%, 25%, 50% of the property’s replacement value.
Your building insurance covers everything that is attached to the building, but it doesn’t cover any of your personal property. Examples of personal property you might have are: Appliances (HVAC, Dishwasher, Washer/Dryers, Stoves, Fridges), Computers, Gym equipment, Pool Equipment, Lobby furniture, Exterior Signs, Window Coverings, and Landscaping.
Backup of Sewer & Drains Coverage
In multistory apartment buildings, sewerlines back up all the time (especially on the first floor). An overflowing toilet can easily cost $40,000 to $60,000 if left unchecked.
Money and Security
Don’t need this coverage- never accept cash.
Not sure what this covers
How High Should my deductible be?
Deductibles on Multifamily buildings are typically between $5,000 and $10,000. You want your deductible large enough that you would actual use the insurance if you have a claim. A lot of owners will eat a small $1,000 or $2,000 loss because its not worth the hassle and they don’t want a claim that will raise their premium. Having a skilled maintenance crew/ handyman is invaluable. If your handyman can get a small job done for a couple hundred dollars he can take the sting out of smaller losses.
For Apartment Buildings in Los Angeles, Capital Insurance Group (CIG) is my favorite insurance company. They offer the best coverage at the most competitive prices. Need a CIG insurance agent for a quote? Send me an email and I will send you referral
Standard and Poors ??
Am Best A
Farmers insurance is one of the biggest insurance companies in the US. Investors like Farmers because you can get a very low annual premium, however, they might be light on coverage so be careful and make sure you understand your policy.
Standard and Poors AA-
Am Best A