Your weekly dose of apartment tips, tricks & information.
Today's tip: Fires happen, but they don't have to slow you down.
Unfortunately fires happen, but the good news is, they don't have to set you back for long. If you are working with a good contractor, units can generally be back online within 2-3 weeks. This is dependent upon a lot of factors, but the unit that you see below was back online in just over 2 weeks after a kitchen fire.
If a fire is contained to just one or a small handful of units, it may make sense to come out of pocket for the expense. If you opt to file an insurance claim, your insurance premiums are going to rise significantly and impact your NOI. This can hurt you on the exit when a new buyer has to factor in higher expenses for insurance on the property. Obviously, if the fire is large and did a significant amount of damage, it makes sense to have insurance cover it. We would still encourage always doing a cost analysis to see what the near term and long term impacts of your decision will be.
Ex. If your insurance rises from $450/unit/yr to 600+/unit/yr (DFW quotes we have received) that is a increase of $30,000 on a 200 unit property. At a 6% cap rate that is $500,000 (30,000/.06) worth of lost value. So if you have a burn unit that is going to cost $25,000 to repair, then the answer is pretty clear.
The Bad & Ugly
Dealing with a unit fire is never fun. A family is displaced, there can be a significant amount damage and you are losing out on revenue as a property owner. Down units will impact your bottom line and fires can get costly quick due to how rapid and intense fires can spread. Drywall can generally protect studs pretty well and I am always pleasantly surprised at the condition of the studs once the drywall is removed. Again, this is dependent upon a lot of factors, but I have seen a number of burn units at this point and have been able to see a consistent theme when the fires were relatively contained to 1 or 2 units.
Fires aren't something to be afraid of and there is a good chance that you will run across one at some point in your investing career. Large complexes have a lot of tenants and things happen. The most common causes I have seen are kitchen fires and overloading/old outlets that spark and catch fire. The cause of the fire above was due to a kitchen fire and it quickly spread up the wall into the second story.
Older properties that have aluminum wiring are also at a much higher risk of a fire than those with copper wiring.
*According to the U.S. Consumer Product Safety Commission (CPSC), aluminum wiring properties are 55 times more likely to have “fire hazard conditions” than properties wired with copper.*
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Hayden Harrington // Founder