Is A Home Warranty On A Rental Property Worth It?
As investors, we should do our best to make smart decisions in the present that will save us time and money in the future. Therefore, the idea of getting a home warranty may seem like a good idea, but is it truly worth it?
A home warranty usually helps cover some of the large ticket items on a property such as HVAC systems, refrigerators, or washers and dryers. However, since this service is not free, some real estate investors find issues with home warranties.
For rental properties, a home warranty is not worth the cost or service that it offers. Instead of paying for a service that you may not even use, a landlord can allot a portion of their property's rent for potential repairs or replacements. In addition, companies have various types of coverages for home warranties that dictate which items can be repaired or replaced.
Due to the recurring cost, and the variability in coverage, many investors simply opt-out of home warranties altogether.
What Is A Home Warranty?
A home warranty is typically an annual or semi-annual service contract covering both repairs and replacements for a home's appliances and systems that may break down due to normal usage.
The coverage for a home warranty can include a multitude of systems and appliances within a home. The policies can only cover electrical, plumbing, or heating systems, appliances like dishwashers, refrigerators, and dryers, or a combination of systems and appliances that you can specify as the customer.
To start the home warranty process, companies will request history or documentation of the previous repairs and replacements on systems and appliances within the home. Sometimes they ask for proof that regular service and maintenance has been completed on the home to gauge the life span for certain items.
Why It Isn't Worth Getting A Home Warranty As A Landlord
The Cost and Service, Doesn't Justify Its Means
On average, a home warranty can cost around $300 to $600 a year depending on the level of coverage you would like, the size of the property, and the property's location.
Just because you pay the premium for the service doesn't mean you won't still have to come out of pocket for a repair or replacement. Home warranties typically cover the depreciated value of an appliance or a system.
This means that you may not be getting the full value to repair or replace an item depending on its current value. For example, if your 2016 dryer needed to be replaced and was worth $1,000 when you bought the property, but now it is only worth $500, the home warranty company may only offer you $500 to replace the item.
Therefore, you would need to find a $500 replacement or use your own money to make up the difference. Instead of paying the premium to maintain a home warranty, you will be better off saving the money yourself for when you need to repair or replace an item.
You Should Incorporate Capital Expenditures In Your Property Analysis
As a landlord, you are responsible for when things break on your property. Because you are responsible, you should make sure that you have cash saved for when things break.
Investors usually have a cash reserve dedicated to big capital expenditures such as appliances, HVAC systems, or plumbing. So if you are continuously putting money aside for these capital expenditures, then you will have money to fix it if an appliance or system breaks.
Therefore if you are saving money for your capital expenditures, there is no need to have a home warranty. You should also consider the age of appliances and systems in a property and estimate when you may need to replace these items during your property analysis.
You Might Already Be Covered
You should first check your current homeowner's insurance policy to see if a home warranty should even be considered.
Depending on the homeowner's insurance policy you currently have, you may not need additional coverage for major appliances or systems because they are already covered within your current policy. With that being said, a homeowners insurance policy isn't the same thing as a home warranty policy!
A homeowner insurance policy is a mandatory purchase when buying a house where a home warranty is voluntary.
Homeowners insurance covers personal belongings on a property as well as the property itself, such as the roof, the foundation, and other structural elements of the property. This is usually the case for extreme situations like a house fire or flood resulting in structural damage.
So what is the difference?
Should You Ever Get A Home Warranty?
Suppose you are buying a primary residence as a new homeowner. In that case, getting a home warranty may be a good investment because home warranty companies can help you maintain the condition of the items you have covered.
As a first-time homeowner, you may not know how to maintain a property or which companies are reliable to call if something breaks. Home warranty companies try to make the process of getting repairs and replacements easy and stress-free by providing their customers with a list of reputable services in their community to address the problems they may have.
Therefore, it may be beneficial in this scenario to get a home warranty because of the knowledge the company can offer you, thus saving you time to do other things.
Now, as for landlords, you should not get a home warranty, but some investors have made the argument that there are some cases in which a home warranty may be justified.
For example, suppose you are buying an older property with out-of-date appliances and systems. In that case, a home warranty can help relieve some of the financial burdens when those appliances need to be replaced or repaired. It is also typical to have multiple repairs and replacements around the same time with an older property, therefore justifying a home warranty cost.
Home warranties can also help maintain regular maintenance for new landlords, similar to new homeowners. New landlords may not be comfortable with the responsibilities of owning a home just yet. A home warranty would then serve as a safety net for an unexpected repair or replacement.
In closing, if you are a landlord you do not need to get a home warranty for your rental properties. It is best practice to run the numbers and configure what portion of your rental income should be used for future repairs and replacement.
It is good practice to save 5-15% of your rental income for this purpose.
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