How can rental property owners expect to manage the rising insurance premiums and higher property taxes?
Rental properties in Northern California come with some unique challenges. Over the past few years, however, two major factors have been causing significant strain on property owners’ bottom lines: rising insurance premiums and escalating property taxes. These increases are making it harder to maintain profitability, especially in an area where high demand and rising living costs already put pressure on even the most disciplined financials.
While insurance and property taxes are both essential to protecting and maintaining an investment, the rising costs of these necessities are forcing many owners to reassess their business strategies.
At Bell Properties, we stay a few steps ahead of the curve, whether we’re talking about taxes or insurance or legislation. So let’s take a look at what these cost increases mean for property owners in Northern California, how they’re impacting profitability, and what can be done to mitigate the financial burden in the years to come.
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Insurance in California
The factors driving up insurance premiums in California are numerous, but the biggest contributors include soaring construction costs, natural disasters, and a shrinking pool of available insurance companies.
Fewer Insurers
Since 2023, several major insurers have made the decision to stop offering policies for new homeowners or property owners in California. In 2023, State Farm announced it would no longer offer new home policies due to what it described as “historic increases in construction costs, rapidly growing catastrophe exposure, and a challenging reinsurance market. Allstate soon followed and then Liberty Mutual and Nationwide ceased offering new policies or significantly reduced the number of policies they were willing to write. This exodus has made it much more difficult for property owners to find affordable coverage.
Construction Costs
Another contributing factor to skyrocketing premiums is the rising cost of construction and building materials. Inflation and ongoing supply chain disruptions have caused significant increases in the price of essential materials like wood, steel, and labor. As a result, the cost of rebuilding a home after a disaster has increased substantially.
For insurance companies, this means paying out more in the event of a claim, especially after large-scale disasters like wildfires. Property owners in Northern California are facing the risk of being underinsured because their current policy may not account for the increased costs of repairs or rebuilds.
California’s Wildfires
California’s wildfires are another major factor driving up insurance premiums. According to Cal Fire, the state averages over 7,000 wildfires each year, burning millions of acres in the process. In 2024, over 8,000 wildfires were reported. These fires have become more frequent, more intense, and, sadly, more deadly, resulting in devastating losses for homeowners and significant payouts from insurers.
The result is higher risk for insurance companies, and ultimately, higher premiums for property owners.
Not only do wildfires lead to direct losses in property value, but they also increase the likelihood of future claims. The cost to rebuild after these fires has escalated dramatically, placing an even greater financial strain on insurance companies.
What Do Statewide Insurance Challenges Mean for Investors?
California rental property owners are experiencing the compounded effects of all these changes. Investors may have trouble finding insurance options, paying higher premiums, protecting their investment properties, and making a plan for the future that protects both the value and the profitability of their assets.
While the challenges surrounding property insurance in California are real, there are steps investors can take to protect their investments and ensure that they are getting the best possible coverage.
Work with a Local Insurance Agent
Finding the right insurance policy in today’s market requires the help of a trusted agent who knows the ins and outs of the industry. A local insurance agent can help navigate the complexities of the California insurance landscape, ensuring that owners are able to find the best possible coverage for your property at the most reasonable rate.
Need help finding a good agent. Contact us at Bell Properties and we’ll make a referral.
Evaluate Coverage Needs
Given the rising cost of construction and rebuilding materials, it’s critical to reevaluate coverage levels regularly. Make sure that existing policies account for the current cost of rebuilding your property, including any improvements or updates. Without adequate coverage, financial trouble could follow if a disaster occurs.
Consider Increased Deductibles or Risk Mitigation Strategies
To lower premiums, it might be necessary to increase deductibles or invest in risk mitigation strategies. For example, installing fire-resistant materials, retrofitting the property to withstand seismic activity, or creating defensible space around a home can all reduce insurance costs and risk exposure.
Some insurers may even offer discounts for property owners who take steps to reduce the risk of damage from wildfires or other disasters. Be sure to ask your agent about any available discounts.
Prepare for the Future
The insurance landscape in California is likely to continue changing. In addition to staying informed about local laws and regulations, consider diversifying investments to include properties in areas with less risk of natural disasters or other threats. Over time, this strategy can help reduce your reliance on insurance and minimize your exposure to high premiums.
Insuring rental properties in Northern California has never been more complicated, and the landscape is only getting more difficult for property owners. With rising premiums, a shrinking pool of insurers, and the increased risk of natural disasters like wildfires, securing reliable coverage requires more effort than ever before.
Make sure you’re partnering with professionals who can help with your risk management. Contact us at Bell Properties for some help with insuring investment properties and rental homes.
Why Are Property Taxes Rising?
Property taxes in California are governed by Proposition 13, which limits the annual property tax increase to 2% of the assessed value of the property. However, property values have been on the rise, particularly in high-demand areas throughout Northern California. When a property changes hands, it’s reassessed at the current market value, often leading to a significant increase in the assessed value, and therefore, the tax bill.
For rental property owners, this means that as the market continues to appreciate, the amount paid in property taxes could increase substantially each year, even if the 2% cap is applied. The result: higher overall costs that can affect cash flow and profitability.
Additionally, local governments may introduce new levies or fees to fund schools, infrastructure, and other public services. These additional charges can increase the burden on property owners even further.
While there’s no way to control the general market trends or how much property taxes increase each year, there are several strategies a rental property owner can implement to adjust to rising property tax bills and protect the bottom line.
Review and Appeal Property Tax Assessments
If you believe your property has been overvalued, you may be able to file an appeal. The process of appealing property tax assessments varies by county, but it typically involves providing evidence that the assessed value of your property is too high compared to similar properties (also known as “comparable sales”).
If you’re not familiar with the process, contact us at Bell Properties and we’ll help you navigate it.
Explore Cost-Cutting Measures for Maintenance and Operations
Streamlining maintenance tasks, reducing unnecessary repairs, and taking a proactive approach to maintenance (such as preventing small issues from becoming costly repairs) can help offset some of the higher tax bills.
Take Advantage of Tax Deductions and Benefits for Property Owners
As a rental property owner, there are tax deductions that can help reduce overall tax liability. While property taxes are deductible as a business expense, it’s also possible to offset costs through other deductions, such as mortgage interest, depreciation, and repairs.
Consider Refinancing Your Property
Refinancing might offer relief to higher property taxes and extra costs of doing business. With interest slowly dropping, refinancing can help lower monthly mortgage payments and free up some of that extra cash to cover rising property taxes.
However, before refinancing, make sure to consider the costs involved, such as closing fees, and compare them against the potential savings. If you’re unsure, contact us at Bell Properties and we’ll help run the numbers.
Rising insurance premiums and property taxes are becoming significant challenges for real estate investors in Northern California. While these costs are largely driven by factors like increasing construction expenses, natural disasters, and a shrinking pool of insurers, there are steps investors can take to mitigate their impact. By appealing property tax assessments, adjusting rental rates, exploring cost-saving measures, and leveraging available tax deductions, you can better manage these rising expenses. Staying proactive and informed will help ensure your investments remain profitable, even in the face of these growing financial pressures.
Let’s talk about how to face financial challenges with your rental investments. Contact us at Bell Properties.
