What insurance do I need to buy an apartment building in LA?

Your lender will require replacement cost on the building, loss of rents, a mortgagee clause and flood coverage if the building sits in a flood zone, all bound before funding. Start it on day one of escrow, because the seller's policy does not transfer to you and the one thing that reliably delays a closing is insurance started late.

303 apartment buildings changed hands in LA County in the last six months. Every one of those buyers placed coverage on a deadline. Here is the whole insurance side of the purchase on one page.

What your lender will require before funding

• Replacement cost on the building, not actual cash value.
• Loss of rents. Lenders ask for 12 months. Carry 18 to 24 in LA (why).
• Mortgagee clause naming the lender exactly as it reads in the loan documents.
• Flood insurance if the building is in a FEMA special flood hazard area. The tool checks this.
• Earthquake, sometimes required, always worth a quote on a pre-1978 building.
• Evidence of insurance delivered to escrow before the funding date.

The timeline that works

Most first-time buyers start this at day 25. That is when deals slip.

What the seller's policy usually gets wrong

• Actual cash value instead of replacement cost.
• Twelve months of loss of rents, or none at all.
• No ordinance and law coverage on a pre-1978 building (explained).
• A replacement cost number set years ago and never revisited.
• A water damage deductible nobody noticed.

What the underwriter will ask you

• Year built, and dates for roof, plumbing, electrical and panel updates.
• Wiring type. Knob and tube, aluminum branch wiring, Federal Pacific and Zinsco panels are questions with consequences.
• Plumbing. Galvanized supply and cast iron drains drive water claims.
• Soft-story status and retrofit certification.
• Fire zone, flood zone and rent regulation.
• Claims for the last 3 to 5 years, including the seller's.

Questions first-time buyers ask me

• How much is insurance on a 5 unit apartment building in Los Angeles?
  Budget $1,500 to $2,500 per unit per year on an older building, so roughly $7,500 to $12,500 on five units, before you know the wiring, the roof age and the claims history. Those three items move it more than anything else.
• Can I keep the seller's insurance policy?
  No. The seller's policy cancels at close and does not follow the building. You need your own policy bound and the evidence to escrow before funding, which is why the address should reach your agent on day one.
• When should I start the insurance in escrow?
  Day one, with the address. A preliminary indication early tells you whether the building is a normal placement or a hard one, and that is a number you want before your contingencies run out, not after.
• Do I need earthquake insurance on an apartment building?
  The lender decides whether it is required. On a pre-1978 building I quote it either way, because the owner should see the price before deciding to go without it.
• What insurance documents does the lender want?
  Evidence of property insurance showing replacement cost, the loss of rents limit, the mortgagee clause exactly as written in the loan documents, and a flood policy if the building is in a special flood hazard area.