The Silent Cash Flow Killer in Commercial Real Estate

Insurance is not optional. The property has to carry it. Every year.

If that number is higher than expected, there is no easy fix. That extra cost comes straight out of the income the property produces.

And when income drops, investor distributions drop too.

In many deals, insurance looks like just another number in the budget. It might even look small compared to rent or the loan.

So people assume it is accurate.

But insurance costs have been changing a lot in recent years. In many areas they have gone up fast because of

1. More severe weather
2. Higher construction and rebuild costs
3. More claims across the country
4. Insurance companies pulling back from certain regions (ie. Florida)

So the number used in the deal might be based on old data, or a rough estimate, not a real quote.

Let’s keep this simple.

If insurance ends up costing much more than planned, the property now has less money left over each year.

That means

1. Lower cash flow
2. Smaller distributions
3. More pressure on the deal overall

There is no magic solution that suddenly replaces that lost money. Rents do not automatically jump just because insurance did.  Rents are tied to market conditions, insurance is not.

You do not need to become an insurance expert. But you can ask a few basic questions.

1. Was this insurance number based on a real quote or just an estimate?
2. Is the property in an area where insurance has been rising quickly?
3. Is there room in the budget if insurance goes up again?
4. Are deductibles very high?

These are reasonable questions.

Insurance is often overlooked but it can make or break any investment. Ignoring it can end up being a very expensive mistake.