Home Warranties for Rental Units?

Question

Do any of you landlords purchase home warranties (i.e. American Home Shield) for your rentals?

Seems like it would make sense especially on older properties whose major systems are begining to show their age (electric/plumbing/hvac, etc.)

Any opinions either positive or negative would be appreciated.

Thanks.

Account Closed · Answer

Aaron, 
            
            The best advice I think anyone can give you is to do your homework and talk to people who have used them. Someone telling you they have never even considered them and they are a bad deal is like listening to someone tell you not to carry collision coverage on your car because the insurance company makes money on it and statistically you will save more in premiums than you will receive in coverage over your driving lifetime.

Yes, most do have a trip charge, so I wouldn't use them as a handyman the way Jason describes. Yes, they are going to choose the most cost effective option to make you whole for the repair. Which, btw, is EXACTLY the approach you should take if you don't have the policy.

You can buy coverage to manage the risk of the tenant trashing your units, but a better way is through screening and appropriate deposits and the obvious one, avoid low end properties that attract that type of element.
            
            Generalities are fine, but you don't live a general life or hold general investments. Specific situations drive specific needs.

Jason Hanson · Answer

I have home warranties on every one of my properties. The company I use and have been happy with is American Home Shield.

For around $400 a year I have a handyman whenever I need it.

Ryan Fielder · Answer

I purchase a home warranty for my rentals.  Some are older and it is a good hedge on your expenses.  For example, if your AC unit goes out which I have had happen, in Arizona you are looking at $5K, your returns would be shot for half a decade to make that up.  I feel better shelling out a little on the front end to ensure no significant expense on the back end.

For me it has paid off every year.  At on unit, the cost of the warranty was $450, for that I paid only $55 for a new water heater including installation, I paid $45 for a new garbage disposal including instalation.

I would reccommend doing this if you could possibly be facing large issues, it is just a safety net.

Bernard McRae · Answer

absolutely this the best what Arron said Thanks bigger pocket I see his account is closed

Michael Rossi · Answer

Yes, you're missing the fact that insurance companies make money.  They WILL take-in more than they pay out.  You need to read the individual policy carefully to see what they cover and whether they have a trip charge or not.  Insurance companies typically make you "whole", meaning that they get you back to where you were before something breaks.  Do you think that they will replace a 20 year old roof for you under warranty?  No, they might patch it or replace a few shingles, but making you whole does not mean putting on a new $5,000 roof because you have a leak.  The same is true for the furnace and other major items.  If the furnace goes out, they're going to fix it unless replacing it is the ONLY choice.

Finally, most of these insurance policies are not going to cover tenant damage.  When the tenant trashes your unit, it's not covered.  When the tenant knocks holes in the walls, it's not covered.

The point is that the insurance companies are making money on these policies.  It's like going to Vegas - you might win money playing slots on any given night, but over time, the house always wins!

Mike

Account Closed · Answer

Also, remember depreciation must be recaptured when you sell whereas operational expenses like insurance aren't.
                        
                        These policies are just that, insurance. In the same way insurance companies expect to receive more in premiums that they expect to pay out replacing hail damaged roofs.
                        
                        There are situations where they make sense. I have had one on most of the sfh homes I rented out and some of the smaller multifamily.
                        
                        It all just depends on your specific situation.

Brian Kraby · Answer

Okay please help me get this straight.  I'm on the fence with this but...

If you have an older unit and you think something is major coming up then get one.

If a new roof, heat, ac, etc., needs to be done then it qualifies as a capital improvement.  Right?

If so, then depreciation on those dollars is spread over 27.5 years. Right?

Insurance premiums are deductible as operating expenses in that fiscal year.  Right?

Sooo, to me a home warranty sounds like a great hedge even if it means putting up with the BS that may come with it.  I mean, it sounds like a get-out- jail-free card with tax friendly implications.  You can recapture the premiums ($400) through tax deductions in one year and less out of pocket dollars; versus a $5K capital improvement job, entirely out of pocket, only to see its depreciation spread over 27.5 years.

Is there something I'm missing?  Let me know...

Aly W. · Answer

From what I understand, in addition to the cost of the policy, there is also a deductible plus a materials charge. It may be worthwhile if something big breaks, but you should check the policy carefully to see what's included, what extras you still need to pay for, and how many service calls you're allowed in a certain time frame.

Michael Rossi · Answer

No, I do not purchase home warranties for my rentals.  The home warranty companies make money on these warranties, meaning that they generate more income than they pay out.  That means that over time, you are losing money by purchasing these home warranties.  Moreover, these companies usually do not include tenant caused damage and a lot of the maintenance you will do is caused by the tenant.

Good Luck,

Mike

Home Warranties for Rental Units?

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