Should I get a warranty on my rental property?

Question

Hi,

I was wondering what everybody thought of putting a warranty on their rental property? Do most people have a warranty on their property, or do you just put insurance on it? Thanks!

Shital Thakkar · Answer

Hi,

I have Home warranty from BPG but their technician never come quickly. They never come in weekend... so I feel it is useless or I can search for better home warranty.

When I work without warranty, HVAC guys are not responsible enough...doing wrong diagnosis and need to call them multiple times...and they charge for everytime...

Don't know it is better to keep Home warranty or go without them...

Advice....

Mike Palmer · Answer

It seems the concensus is to put the cost of the warranty away in reserve and find a reputable and economical handyman as needed. I bought my first place and lived upstairs and rented the other unit. Came with a $400 warranty when I bought it. Had one issue that cost me $60 service call fee, and they paid me about $200 for the bad stove. Since I didn't pay for the policy directly I did not renew. I have since bought another home and moved out, and I rent both of these units. The first year after not renewing I had no issues, so I came out $400 ahead. 2013 is the second year, and I just recently had $1,200 in repair expense (A/C fan and a water heater). Had I renewed the warranty I would have been into it $920 ($800 for 2 years of warranty and $120 in service call fees). So I am out $280 by not renewing the warranty. That property has 2 furnaces, so I am now trying to decide if I want to get back into a warranty for that, the A/C compressor, and other appliances...

My new place I bought without a warranty. It is about 25 years old and on the original boiler. Has 2 water heaters that are both 15-20 years old. I know the boiler needs work--it worked last year but was putting out very excessive levels of CO. I am considering getting a warranty before having it checked/tuned up, because i know it needs work and possibly replaced. The warranty companies all seem to have a $1,500 coverage cap on boilers, but for the $60 service fee they will do the tune-up, which seems to run about $100-150 elsewhere. So IF the boiler needs major work or replacement, I will come out a few hundred ahead to get the warranty, and then will be covered for the rest of the year for everything else. If not, it is still a toss up.

Would it be worth the gamble to get one now on this place, knowing that I need at least a $100 tune up anyway and likely much more than that, or am I still better off taking the chance and paying for the boiler if needs be? I did know the boiler was questionable when I purchased the property and have budgeted for replacing it, but would obviously rather keep those funds to get into my next property with. I also think a water heater could go any time, but could also last for several more years. What to do...?

Darren Sager · Answer

Many landlords, including myself, have in their lease that its a requirement of the tenants to get insurance coverage on all major components in the house, such as the boiler, hot water heater, range, dishwasher, washer & dryer, etc.  At first the tenants put up a big fit about it however pretty much all the landlords around my rentals are doing it.  It amounts to about $30 per month.  For that they get 24hr coverage.  So if the heat doesn't turn on they call the number and the service guy comes.  Its great.  I never get bothered.   If they do call or text me I remind them about their service plan and they take care of it.

Matt Morgan · Answer

I believe you can put verbiage in the lease agreement to make the tenant responsible for, lets say, the first $50 of any repair. This should help deter the abuse of the warranty by the tenant. Never used this method myself so I can't speak to it's real life effectiveness.

Andres Piedra · Answer

Bottom Line: I think it's a waste of money.  However, if you can get a seller to buy you one when you're purchasing the property…..why not.  If you're already in the barn, you might as well milk the cow.  (I've been trying to use that analogy all day!)

Jon Holdman · Answer

That's a more extreme example, @Mark  Ferguson, but that's exactly the idea.  My day job self insures for rental cars.  If you travel, and sign up for insurance that the car rental companies always push, you won't get reimbursed for it.

This sort of probability analysis is useful for many real estate related decisions.  Its easy for games of chance where the rules are well known, like most casino games but not slot machines.  It can be harder for real estate because it can be hard to evaluate the probability.  For instance, what's the probability in any particular year of a tenant wrecking your place.  Others are easier.  For example, I evaluate the probability of a tenant moving out to about 100% for every unit for every year.  So, that gives me a way to calculate the cost associated with a turnover.

And, anyone who says "I'm not a gambler" and buys rental properties is kidding themselves.

Taylor Green · Answer

Thanks for all the responses. All very good points. The feeling I'm getting is, if the property is in decently good shape my best bet is to just have regular insurance and pass on the warranty...

@Jon Holdman Your point about companies making a profit off of me buying a warranty basically makes my decision right there! I guess it's common sense! Thanks to everybody who helped out...

Mark Ferguson · Answer

@Jon Holdman

That was an excellent response!

I know an investor around here with about 50 properties all paid off and he self insures, meaning he doesn't carry any insurance.  He figures he is ahead paying for any damage out of pocket then premiums.  Of course, you can only do that when you don't have a loan, since banks will require insurance.

Jon Holdman · Answer

Warranties are a form of insurance.  Insurance should be used to cover risks you can't afford to cover yourself.  Insurance companies make money on their policies, so that fundamentally says the bet you make (your premium) is more then the expectation value of a claim.  Expectation value, like the winnings from a bet, is the value of the payout times the probability of that payout occurring.  A good bet is one where the expectation value is higher than the bet.  Such as blackjack if you're counting cards.  A bad bet is like most casino games. The expection value of a win is less than the bet.  Slot machines, for example that say "98% payout" mean that, on average, they pay back 98 cents for every dollar bet.  The casino keeps the remaining 2 cents, which you can see displayed up and down the Las Vegas strip.

However, when you gamble you're really playing for the variability.  Most bets lose completely.  A few pay off big. Some pay of a little bit.  Insurance is like that.  A house probably won't burn to the ground.  But if it does, the payoff is huge.  Or, more correctly, the huge loss you would suffer if an uninsured house burns is reduced.

These home warranties are the same sort of deal.  The possible payouts are much lower, though.  And the company will fight you tooth and toenail to avoid making a payout.  As a landlord, you have signed up to take on the risk of irregular but entirely expected expenses.  By signing up with one of these companies, you are shifting some of that risk to them.  That creates a higher cost for you because they are making a profit.  Because these warranties are very profitable for the companies that sell them, you are paying quite a high cost for shifting a small risk.

Alberto Furet · Answer

It depends on on the age of the property. If it's a new construction, everything should be under warranty and working fine for years. If the property is 10 yrs or older, the high value appliances such as the central A/C, furnace and water heater could go at any moment. @ Michael Siekerka is right, there's a monthly fee of about $46 a month and a service fee of $60 when they come out to check on a problem. Both fees can be deducted from your taxes. You can find a good contractor to do the work cheap, but you still have to pay for the appliance.

I recently had to have the water heater in my property in Chandler replaced. The water supply line had to be updated and I had them put put in a drip pan. The total came out to $310 (service fee included).

Certain things aren't covered, such as tree roots in your sewer line. Do some research on the plans, fees and service fees then price how much it would cost to replace the big ticket items and make the choice you feel is best for your situation.