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Inflation and Property: What You Need to Know

November 7, 2022/in News

Inflation is one of those economic concepts that everyone has heard of—especially today—however, few people understand what it means.

In essence, inflation is a rise in prices across the economy. This phenomenon can have several consequences for property owners and investors. This considered, it’s important to understand how inflation works and how it affects property owners.

Below, we’ll discuss:

The relationship between inflation and property values
Why property owners need to be aware of each (that is, if you want to make smart decisions about your investments!)

What is Inflation? What Causes It?

First things first, what is inflation, and what causes it? Inflation is defined as the rate at which the prices of goods and services increase over time. This can be caused by a variety of factors, such as an increase in the cost of raw materials, or a decrease in the supply of certain products.

While inflation is caused by several factors, the most important one is simply too much money chasing too few goods. When there is more money in circulation than there are goods and services to buy, prices go up.

This is because people have more money to spend, so they are willing to pay more for things.

One of the most important things to understand about inflation is that it is not evenly distributed. Some prices will go up faster than others, and some might even go down. This means that while your rent might go up by a lot, the price of bread might not change much at all.

How Does Inflation Affect Property?

Inflation can have several different effects on property values.

The most important one is that it erodes the value of your money.

This is because, as prices go up, each dollar you have buys less and less. So, if you own a property that you bought for $100,000 and inflation is running at two percent per year, then after five years, your property will be worth $110,000 in today’s money.

In other words, you’ve made no real gain on your investment—inflation has just eaten away at the value of your money.

Of course, this doesn’t mean that property values never go up. They can, and do, go up in nominal terms (that is, in the actual dollar amount). However, if inflation is high, then these nominal gains might not be worth very much in real terms (that is, after taking inflation into account).

Secondly, inflation can affect your mortgage.

If you have a fixed-rate mortgage, then your monthly payments will stay the same even if inflation goes up.

But if you have an adjustable-rate mortgage, then your monthly payments could go up if inflation increases. This is because your interest rate will be tied to an index, like the Consumer Price Index (CPI), which measures the overall level of prices in the economy.

How Does Inflation Affect Property Insurance?

When inflation goes up, so do property insurance rates. This is because insurers must account for the increased cost of repairs and replacements when setting premiums.

The cost of rebuilding your property goes up due to the cost of materials and labor increasing from inflation. As a result, your property insurance rates will likely go up—and if you’re not prepared for this, it could have a serious impact on your finances.

Moreover, inflation can lead to higher deductibles on policies. For example, if you have a $500 deductible on your policy and inflation increases by 20%, your new deductible would be $600.

Ways to Minimize Inflation on Your Property Insurance

So, how can you minimize the impacts of inflation on your property insurance as a building owner?

Luckily, while inflation can have a significant impact on your property insurance rates, there are some things you can do to minimize the impact:

Make sure you have an insurance policy that covers inflation. This way, your coverage will automatically adjust to keep up with the rising cost of rebuilding your property.
Consider raising your deductible. This will lower your premium, although you’ll have to pay more out-of-pocket if you need to make a claim. Make sure you have enough savings to cover the deductible.
Don’t forget about discounts! Many insurers offer discounts for things like installing security systems or being claims-free for a certain period. Make sure you’re doing everything you can to mitigate your risk.

Read on to learn more about risk mitigation.

A Final Word

Of course, there are a lot of other factors that affect property values, such as the state of the economy, interest rates, and demographics. Inflation, however, is one of the most important—and least understood—factors that property owners need to be aware of when making decisions about their investments.

By understanding the relationship between inflation and property, you can take steps to protect your finances and ensure that your property is properly covered.

Interested in learning more? Contact us today to speak with one of our insurance professionals about what inflation-related changes you should make to your policy.

After all, with a little strategic planning, you can safeguard your property against inflationary increases! Learn more in our article “Top Three Tips to Recession-Proof Your Business.”

Property Owners: What Commercial Insurance Do You Need?

May 29, 2022/in General Business Insurance, News

As a commercial property owner, do you know what types of commercial insurance you need to keep yourself and your building protected? Let’s discuss the five types of coverage you should consider.

Five Types of Commercial Insurance Property Owners Need

At the minimum, there are five types of commercial insurance a property owner should be carrying.

Property Insurance

This one most likely came up as a no-brainer.

Commercial property insurance, according to Nationwide, protects “physical assets [i.e. building, equipment, tools, inventory, personal property, furniture] from fire, explosions, burst pipes, storms, theft, and vandalism.”

It’s good to note that natural disasters like earthquakes and floods aren’t typically included in commercial property insurance policies; however, they can be added to a policy.

So, how much will property insurance cost you? It depends. Some factors that might contribute to the premium you pay include:

Location
Building materials used to construct your property
Industry
Your building’s level of theft and fire protection

Liability Insurance

As a property owner, you also need liability insurance. This type of coverage protects against “claims resulting from injuries and damage to people and/or property [and] covers legal costs and payouts for which the insured party would be found liable,” according to Investopedia. Intentional damage, contractual liabilities, and criminal prosecution are not covered by liability insurance coverage.

Rent Loss Insurance and/or Business Interruption Insurance

Rent loss insurance, also known as fair rental value coverage, is for landlords and “covers a loss of rental income if your property becomes uninhabitable to a current tenant due to covered damages beyond your control.”

An example of this damage might include perhaps a tree falling on the roof of your property or a burst pipe.

Business interruption insurance, on the other hand, is coverage that can replace “business income lost in a disaster.” This disaster might include a fire or natural disaster.

Business interruption insurance, however, is sold as an add-on; not as a standalone policy.

Flood Insurance

Heavy or prolonged rain, melting snow, coastal storm surges, blocked storm drainage systems, or levee dam failure… Oh my! All of these scenarios can cause flooding in your commercial property.

(And secret’s out… Water damage isn’t as cheap to repair as you think it is! Water damage can cost a business owner anywhere from $5,000 to $50,000…)

The solution? Flood insurance is a type of property insurance “that covers a dwelling for losses sustained by water damage specifically due to flooding,” according to Investopedia.

Premises Liability Insurance

Premises liability coverage pays claims for accidents that involve guests that take place on a business property. Regardless, a property owner, by law, is responsible to make appropriate efforts to ensure those visiting their property are entering a safe environment.

Of course, this is not a comprehensive list of all the commercial insurance you might need as a property owner. The coverage necessary will vary depending on your industry, location, etc.

What Happens If You’re Underinsured?

So, what happens if your coverage doesn’t cover what you need? Well, here Brenda Jo Robyn, Founder of Competitive Edge Insurance provides an example.

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According to Brenda Jo, some individuals are having difficulty placing property coverage for a building. Why? Because many buildings today now have solar panels.

Interestingly enough in some of these cases, the property inside the building is actually worth more than the building itself.

“So, now you have solar panels, which introduces a possibility of a leak. The panels may be installed perfectly; but in California, you have earth movement and water can intrude over time.

“I see many companies approaching California building owners who have flat roofs, selling them solar panels because then they can self-generate electricity for the building and gather back income.

If you have a manufacturing unit inside a building that has property that’s worth more than the building itself, that’s now an issue in California because of the potential for earth movement and therefore, weather intrusion.”

This weather intrusion poses an issue for a building owner looking to get insured. It’s important to consult your broker prior to investing in commercial property, or commercial property enhancements, as it could lead to greater issues down the line.

Want to find out if you need to up your coverage? Read on in “How Does a Business Owner Know If They Are Underinsured?”

How Does a Building Owner Know if They Are Underinsured?

May 8, 2022/in News

As a building owner, the consequences of your building being underinsured can be detrimental. Even so, 75% of commercial buildings are currently underinsured. As a building owner or property investor, how can you make sure your building is adequately insured?

Today, we have Brenda Jo Robyn, founder of Competitive Edge Insurance, on camera to answer this question. What elements can you look at to identify if you’re underinsured? What steps can you take to stay adequately insured?

Let’s see what she has to say.

Elements That Can Show a Property is Underinsured

Picture this: You have a building, but don’t know the last time it was evaluated in terms of a replacement cost. The building has most likely had some renovations in the last five to 10 years.

This considered, what elements do you need to look at to see if your building is underinsured?

Increase in Building Costs

As many have well noticed, the average cost of buildings has gone up. In our community, where the Competitive Edge office is housed, prices have jumped from $275 a square foot to $325 a square foot.

When you’re insuring your building, it’s really important to take this shift into consideration. Moreover, consider appraising the building for the replacement to rebuild from the ground up (but more on this later).

Water Damage Claims

Secondly, most building owners have little or no protection for water damage claims. Hold on… Don’t roll your eyes yet!

While most building owners have fire on their radar, many don’t think about water. However, they should—considering over 44% of homeowners or property investors have experienced water damage inside the residence.

Water damage can cost a business owner anywhere from $5,000 to $50,000. Today, we’re seeing more $50,000 to $75,000 claims being paid. And why is that?

There are many ways this can happen. Imagine this scenario: A building owner goes away for the weekend, and there’s been a leak he or she doesn’t know about. Or, maybe it’s in a commercial building and a toilet is leaking into the floor below. Again, the owner is three to four days out, and all of a sudden now there’s mold. It may be in the walls and have to be remediated. It can be quite costly to repair that.

Regardless, many people have a mere $5,000 worth of water damage on their policy. It’s not enough.

What Can I Do to Make Sure My Building Is Properly Insured?

There’s one primary thing a building owner can and should do to ensure that their building is adequately insured.

Property Valuations

The first place Brenda Jo recommends starting is ensuring every building owner has a currently valued property.

Having a currently valued property looks at a replacement cost estimate, which no, it’s not intended to replace the original asset (unless it’s a reproduction), but the valuation is intended that the new building would be able to serve in the same purpose that the old building existed for.

Every building is unique. So, how do you calculate this cost estimate?

A building’s cost estimate is based on:

Similar designs
Construction standards
Quality of workmanship
Uniqueness or complexity (i.e. standard building vs. a super custom building)
Building age
Common elements
Current building codes
Hard construction costs (i.e. materials)
Soft construction costs (i.e. design plans, demolition costs)
Location (Is the building in the city or rural?)

Conducting an annual insurance review is also key, and takes little to no time.

It can be difficult to arrive at this figure yourself, which is why our team at Competitive Edge Insurance is here to help.

Now, we’ve talked about water… Let’s chat about protecting your building from fire. Read on to find out why you need fire insurance as a property investor.