How to Understand Insurance in Multifamily Strategy

Episode Transcript:  

 Everyone's talking about rising rinse, tighter returns, and why it's so much harder to make multi-family deals. Pencil in 2025. Now here's something though that not everybody is saying out loud. One of the biggest reasons for this is insurance, and specifically it all ties back to something called reinsurers, which is actually when global problems impact your local investments.

We're gonna unpack that and more on today's episode.

Hey guys, my name is Jeannette Friedrich, director of Investor Relations here at Blue Lake Capital, and today we are talking about reinsurance. What is that? So it's exactly like it actually sounds, it's very simple. Believe it or not, when insurance. Companies issue a policy to a borrower. They actually turn around and actually get an insurance policy for the policy that they just issued.

And this is called reinsurance Now, reinsurers are usually global firms that cover catastrophic. Risk such as hurricanes, wildfires, floods. Now after years of a lot of crazy climate events plus inflation, reinsurance premiums exploded in 2023 and 2024 by anywhere from 30 to 50%. These costs ultimately are passed down to the local carriers and ultimately to owners, and even down to the renters.

So specifically when you're looking at multifamily investments, you wanna take into consideration how this ultimately is gonna impact your returns. Well, in Florida, Texas, California, and a lot of other coastal markets, premiums have doubled or tripled in just the last three years. Insurance now consumes up to 9% of growth.

Income in some multifamily deals, whereas it used to be 4%. Historically, that's a lot of money that is actually taken out of the deal for investors and eaten up by the insurance companies. It makes new acquisitions more difficult to underwrite where it pencils for any type of solid return that would be of interest to investors.

And with older assets, it really makes cash flow basically just erode. So for passive investors, this means that. Basically you're gonna end up with lower returns unless sponsors are underwriting conservatively and adapting. So what can investors look for sponsors to be doing to ensure that insurance is being taken into the equation in a realistic way?

So first of all, sponsors should be shifting their focus from, uh, high risk markets to lower risk markets. So, for example, the Midwest or inland metros or newer builds. Another thing that sponsors should be doing is renegotiating policies, bundling coverage, or setting higher deductibles in order to ensure that the cost of insurance is not eroding all the potential distributions and returns for investors.

In addition to that, you wanna make sure that sponsors are reserving buffers and limiting their leverage. To offset any type of cost volatility, especially when it comes to value add plans, you wanna make sure that there are actual, uh, strategies that are there to mitigate focused CapEx improvements that can mitigate these insurance factors or these disaster factors such as roofs, windows, energy upgrades, and anything along those lines.

Now. Last but not least, don't assume that every deal is equally exposed. Make sure that you are asking sponsors if premiums are locked, if they are forecasted realistically in the underwriting. And if a sponsor isn't talking about insurance, then they are leaving out a critical piece of information that you as an investor want to be able to understand.

It's not just a coastal problem, it's a national portfolio risk. Nowadays in 2025. So at Blue Lake, what we are doing is we're building that into every model and every risk assessment, and it's helping us stay one head, one step ahead of the curve when it comes to mitigating investment

at Blue Lake. We're building that into every model, every risk assessment, and it's helping us stay one step ahead of the market when it comes to the volatility of insurance rates. If you'd like to learn more about what we see on the horizon, feel free to check the show notes for a link to our H 2 20 25 multifamily outlook that is loaded with all kinds of valuable data graphs and analytics for investors that want to know what they can expect for the rest of the year.

Thanks guys. I hope you find this helpful, and I'll see you on the next episode.