To Get or Not to Get Home Owners Warranty for Rental Property's?

Question

What is everyone's opinion on getting HW for Rental properties? I know the obvious pro's to it, but what are the cons?

Thanks in advance for the insight!

Anthony Wick · Answer

@Ian Francis  I  own duplexes. So far, I have asked and received the seller to purchase a 1 year home owners warranty. It gives peace of mind for that first year of ownership that you most likely won't have huge capital expenditures. It's worked out well. I have also chosen to not renew when that year is up. By then, I have set aside maintenance and capex dollars to cover things that could go wrong. I guess it all depends on how old your property is and if you anticipate things breaking in the near future.

That being said, it is a tremendous pain to deal with the home owners warranty company. They send the low bidders to fix your problems, and I've had companies fail to show up, fail to actually fix the problem, etc. My properties are close by, and my day job allows me flexibility. If you don't have either of those things, using a home owners warranty could be more pain than it's worth.

David Zheng · Answer

I got American Home Shield for 1 rental....TOOK THEM 4 MONTHS TO REPLACE A DAMN FURNACE.

Matthew McNeil · Answer

Don't do it!  Its not worth it and will cost you more in the long term.  I consider getting a warranty one of the worse decisions I've made as an investor.  $600/asset/year x 10 years!  Could have gone into my bank account and I'd still have been ahead paying for the maintenance myself rather than depending on the warranty company.

Matthew McNeil · Answer

Ditto David!  I couldn't get out of my AHS policy - although I tried everything - until I threatened that my next letter was going to the state's Attorney General's office.  AHS immediately cancelled my policy and refunded me the balance.

Randy Janoe · Answer

Would rather just add the $600/year to my budget. Plus deductibles are $75-125.

Often they have an approved vendor list so you're at their mercy. Plus a lot of the big repairs such as furnace or AC have a hard cap on there repair.

Really a poor illusion of coverage. Self insure.

Stephen Jeffers · Answer

@Erik Whiting

As me motioned here I’d look into the detailed capital expensing. Identifying the age and condition of key components and putting it into your calculation is key in identifying if you’re truly cash flowing. Something that can truly come back and burn you. Making $100 a month cash flow and having to spend that $1200 from multiple years in a 4K roof eats ALL your returns and essentially isn’t true cash flow.

Erik W. · Answer

Over the long term, Home Warranty companies can't pay out more in claims than they collect in premiums, which makes them more akin to insurance than a warranty.

A warranty is a guarantee from a manufacturer or service-provider that the product or service they provided was done correctly and will last for x-amount of time, and if not, that person/company will fix it/replace it.

A home warranty company did not build, renovate, and has probably never even seen the house.  Therefore, the only way they can "warranty"/insure something when they have no clue as to the quality is to repair as cheaply as possible, exclude the expensive repairs/replacement, and "limp the system along" until your contract ends.

They have to pay their salespeople, overhead, claims, etc. and still make a profit.  Finance guru Dave Ramsey has stated that the average payout of home warranties is about 17% of premiums collected, though I do not know where he gets that info.  Any claim they would potentially pay out you can afford to insure yourself.  If you can't, chances are you shouldn't be buying rental property.

Yes, it can be good to offer one when selling the property, but overall it's a gimmick.  Just start out with $1,000-$2,000 set-aside in savings and add 5% of your rent to it each month to self-fund your capital expenses from contractors you trust and you will end up many $$$ ahead over the long-run.

Stephen Jeffers · Answer

Basically when you look into home warranties you want to check their fine print.  Are they a exclusion, or inclusion type company.  Exclusion referring to coverage excluding the following items, or coverage for or including the following items.  Understanding what is likely to fail, your access to reliable contractors, and your risk tolerance are the factors that help drive the decision.  Its insurance,  if you get stuck with out it, it burns, if you have it and don't use it...welp its there just in case.

I definitely think that its a benefit, I'd make sure that you express to your tenants that you are using a home warranty company and that it may delay how fast and the process for repairs.  Also how repair deductibles are paid and contact with the contracted companies is managed for access to homes.'

I did get burnt recently on a rental where the water heater went out and the plumber that they sent out said the the failure occured before the home warranty was purchased.  I ended up having to spend money to purchase and install my own water heater, and still have a $600 home warranty on the home. :/

Jay Hinrichs · Answer

@Anthony Wick  YUP  insurance is insurance and home warranties  generally are very difficult to deal with.

plus they charge you a 75 dollar fee or something just to come out.   We tried it on our portfolio when i had one and its not worth it..

although people want them and it does give them piece of mind on owner occ stuff.. its a cheap closing tool I never refuse to throw it in for the buyer..

Ian Francis · Answer

@Anthony Wick Thanks! That's what I'll start requesting in the offer

To Get or Not to Get Home Owners Warranty for Rental Property's?

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