A looming hike in insurance premiums has exposed another chink in the "flipping" strategy of many property investors, say opponents of that popular model.
“For investors depending on capital appreciation as their primary strategy, they’re definitely going to be more sensitive, or at risk, if property insurance costs do go up,” investor Marcel Greaux, managing partner at Dream Fund Holdings in Ontario, told CRE. “That’s less so for investors who are using the cash flow strategy, or buy-and-hold strategy.”
The analysis follows a warning from Canadian insurers this week, suggesting property and home insurance premiums are set to climb by as much as 10% to 20% over the next two years.
The growth is being driven – at least in part – by global warming, now catching the blame for a spike in natural disasters. The associated claims have squeezed insurer profits, along with thinner returns on their own investments as stock markets are rocked by global uncertainty.
“It’s not just an increase in the number of claims but an increase in the value of claims,” Robert Tremblay, director of research for the Insurance Bureau, told reporters this week. “What is causing it is not our area of expertise but we agree the climate is changing.”
Severe storm-related water damage now accounts for as much as 44% of claims compared to the 22% they contributed in 1992. It spells bad news for property investors relying on capital gains and grappling with already-thin cash. A slowing economy, with price depreciation in some markets, has also slowed the flipping process for some investors. Many are now having to sit on property longer than expected.
Increased insurance costs will further narrow their cash flow, argue brokers. In some cases, it may also force changes to their acquisition strategy.
“It may affect the strategy of others with less cash flow, but I don’t know that it would slow down my acquisition strategy,” said investor Ed Renkema, principal at CFI Properties, based in Hamilton. “I always factor in hard costs, and higher insurance premiums will tighten up the cash flow, but I select properties based on high-yield cash flow.”