Experts have indicated Canada will need to build millions more homes in the next 10 years to meet our growing needs. To the casual observer the problem is easy to solve: just build more homes. For those in the real estate development field, the problem is much more complicated than this.
Forgoing liability insurance on rental properties is akin to “playing Russian roulette,” claims a savvy investor with about 57 doors, and for good reason.
“It’s playing Russian roulette if you don’t have insurance on the property. If you have 20 units and two people living in each one, that’s up to 40 people who can sue you. It could happen because somebody slipped down stairs that had a small pool of water from somebody else’s boot,” said Niran Kulathungam, a financial life professional, real estate coach and owner of The Ascension Principle.
Unlike freehold properties, basic fire insurance is included in condo maintenance fees while other types, like liability—which, for example, covers the landlord in case a leak originating from their unit seeps into, and damages, a neighbouring unit—aren’t. A bad situation could become downright desperate for a landlord who owns an entire multifamily residential building, say a triplex, and it burns down, because lost rental income wouldn’t preclude their mortgage obligations.
“If the property that burned down was worth $600,000 but the rebuild cost is $450,000, make sure the amount you’re insured for is the rebuild value and not the market value,” advised Kulathungam. “You also want to have the loss of rental income insurance. If it brought in $3,000 in rent, just because the building burned down it doesn’t mean your mortgage stops. In good rental insurance, I look for fire, loss of use of the building, rental loss, and I also make sure I’m getting liability.”
In Ontario, condo insurance premiums have been rising steadily. In Q3-2020, premiums in the province increased by 3% year-over-year, with a recent report explaining that freak weather events are largely to blame. However, in a city growing as quickly as the provincial capital, insurance claims have upsurged.
“Some cities, such as Toronto, have rushed to build condos to keep up with a rapidly increasing population,” said a report from LowestRates.ca. “Condos being built so quickly increases the risk of lower workmanship, potentially resulting in building problems that may require an insurance claim later on. This could contribute to the trend of a rising number of claims.”
Kulathungam confirms his insurance premiums have increased on a per annum basis, and while that could make cheaper premiums more attractive to investors, he warns against the low hanging fruit.
“From an investment perspective, the challenge I see is that the government has capped rental increases from taking place, yet insurance has skyrocketed,” said Kulathungam. “In an apartment building, I was paying just under $5,000 a year ago and now I’m paying over $8,000. A number of insurance providers are leaving the commercial real estate insurance field, so there are higher costs with fewer players. My understanding is it’s because of a high number of insurance claims. But if you go with the cheapest provider, when you need them to back you, they often don’t.”
While there has been a deceleration in new home sales, we must keep the pedal to the metal and continue to train skilled trades workers for the future.
Many jurisdictions in the U.S. have been thinking outside the box to boost the housing supply. Here in Ontario, we’d be wise to follow suit.
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