California multifamily investors are used to navigating a complex market. But right now, two forces are hitting simultaneously in a way that’s putting real pressure on cash flow, and it’s showing up in deals at every stage from acquisition to refinance to renewal.
The combination of elevated interest rates and surging insurance costs isn’t new news. But the compounding effect of both hitting at the same time is something many investors are still underestimating.
Two Costs Moving in the Wrong Direction
Interest rates have remained elevated longer than most expected. While there’s been some movement off the peak, financing costs today are meaningfully higher than the environment in which many California properties were originally underwritten.
At the same time, insurance costs have escalated sharply. Carrier exits, wildfire risk pricing, and general market tightening have pushed premiums significantly higher across much of the state.
Individually, either one of these shifts would be manageable for a well-run property. Together, they’re changing the cash-on-cash reality for a lot of investors.
What the Math Looks Like
Consider a property that was generating solid cash flow in 2021. If that owner is now refinancing into a rate 200 to 300 basis points higher and absorbing an insurance increase of 40% to 80%, the NOI available to service debt has shrunk substantially.
In a market where rents have also flattened or grown modestly, there’s no revenue tailwind to offset those cost increases. The result is tighter cash flow, lower DSCR, and in some cases, loan proceeds that don’t cover the existing balance.
Where Investors Are Feeling It Most
The pressure isn’t uniform. Properties that are feeling it hardest tend to share a few characteristics:
- Loans originated at peak values in 2020 or 2021 coming due now
- Locations with high wildfire or flood risk driving insurance costs up sharply
- Value-add plays where projected rent growth hasn’t materialized on schedule
- Higher leverage deals with less cushion to absorb cost increases
Well-located, conservatively leveraged properties with strong in-place cash flow are holding up, but even those owners are watching margins more carefully than they were two years ago.
What Investors Can Do
Managing through this environment is possible, but it requires being proactive rather than reactive.
That means:
- Reviewing actual vs. projected cash flow across your portfolio now
- Understanding how your lender will treat current insurance and rate costs in a refinance scenario
- Exploring fixed-rate and agency options that provide more payment certainty
- Building realistic assumptions into any new acquisition model
The Takeaway
The double pressure of rates and insurance isn’t going away quickly. California investors who understand exactly how these costs affect their specific deals, and plan accordingly, will be in a much stronger position than those who are surprised by it at refinance time.
If you want to walk through how these pressures affect your current portfolio or a deal you’re evaluating, reply to this email and I’m happy to dig into the specifics with you.
Until next Thursday!