Should I Buy a Home Warranty for My Rental Property?

On the surface this may sound like a no brainer, because on the surface a home warranty sounds like a GREAT deal. The unfortunate reality is there are huge trade offs to be made on this and you’ll have to make the decision on whether or not it makes sense for your particular case.

Most of our clients that have home warranties on their rentals or are inquiring about getting home warranties for their rentals have them for their own residences. Typically what I’ve found is that they haven’t ever filed a claim or have only filed claims for minor issues, but it being in place provides some peace of mind that they can’t really quantify, and they’re hoping to achieve that same peace of mind for their rental property.

While I totally understand that concept and viewpoint, it’s important to also look at it from the tenant’s point of view. If the water heater or AC breaks at the rental home, the tenant experiences all of the bad of the home warranty, while not benefiting from any of the good. By that I mean they have to deal with the delays, partial fixes, more delays while parts are on order and being shipped from halfway across the country to save $8, return trips, vendors who are being undercompensated and often do bare minimum work with terrible service as a result, and more. The only benefit is that you may save a little bit of money, but obviously your financial benefit doesn’t provide the tenant with any satisfaction.

A more important question is “Do you actually save any money?”. There is no straightforward way to answer that question, because if there were those companies would either get their acts together or go out of business. If you look at it wholistically I think the answer becomes abundantly clear.

A warranty policy cost $600 or more per year, which can vary dramatically based on what you’re requesting they cover and what your co-pay is. Options exist for only major system coverage (hvac, plumbing, electrical, etc) which excludes appliances, and potentially many other things. Other warranty options may include appliances and more substantial coverage for the systems included in the first option mentioned above. Most policies have a co-pay of $75-150 depending on the warranty level, and all policies that I’ve seen exclude coverage for freon, normal wear and tear, depreciated value, and beyond the useful life of an appliance. Basically, in my experience, they will deny the claim if at all possible. Additionally these under compensated vendors tend to overcharge for the things they can sell you directly ($80/lb for freon, wholesale cost is around $12).

Honestly, the policy, copay, and items not covered are just the beginning of the costs of these policies. The real costs come from bare minimum repairs, limping systems along for far longer and at much greater cost than it would be to just replace it initially, but the warranty company’s only priority is minimizing their costs, and you might think that customer service would factor into it, but sadly that doesn’t appear to be the case.

Another cost that many don’t consider is the increased vacancy due to the inconveniences of these repairs. A tenant may break a lease with or without notice because they’re tired of things taking too long to fix, then not being fixed properly and breaking again in a short period of time. The vendors set all day appointments which requires the tenant to take time off work, so eventually they determine it’s not in their best interest to keep living in your home and paying you rent. Vacancy is your biggest expense, and reliance on a home warranty virtually guarantees your vacancy will increase.

On top of all of this, your average repair bill is usually less than $100 when not using a home warranty if you’ve got good vendors that you have established a relationship with. So if your AC guy charges a $65 service call charge and gets your unit back working the same day it goes out, your tenant is very happy, and you’ve saved $10 compared to the lowest co-pay I’ve seen on any plan. Another hard to believe scenario that we recently experienced was a tenant that reported two minor problems, one related to hvac, the other related to plumbing. Since they were separate problems they had to pay $75 x 2. The end result is that our handyman service could have fixed both problems for around $60 total, instead he paid $150, and the tenants had to wait 4 days for the repairs to be completed.

While they may sound great on the surface, I highly recommend investing your time and money into building relationships with vendors you can rely on to get the work done right, in a reasonable timeframe, and for a fair price. Checking with your fellow local investors can help you identify the most logical candidates, and communicating your objectives clearly will help keep everyone on the same page.

I hope this has been a helpful article, I’m always willing to answer questions or lend a helping hand when I can. Godspeed on your journey to building assets and may those assets lead you to good fortune.