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Is a home warranty a good idea for my rental?
This is to help educate some of our investors that are considering buying a home warranty as a way to offset some of the costs that they would have in maintenance. Let’s explore this a little bit.
Who are home warranties meant for? They’re meant for home owners. They’re typically sold with the purchase of a home. When that home owner purchases a home warranty, it protects the seller against any other future claims. But it also allows that buyer to have some peace of mind that if the furnace were to go out in the first year, or the water heater, a lot of the costs would be covered.
They’re not meant for rentals. Sometimes warranty companies will roll out a rental program, but a lot of the same challenges exist that they do for home owners, and I’ll explain that a little bit more.
There’s a slow response time. The reason for that is, when a home owner buys his policy, oftentimes they are very patient with the home warranty company, with the repair company that’s subbed out to take care of it, because they are saving some money. They are saving say, a few hundred dollars to have something fixed or replaced. A tenant on the other hand, if the water heater goes out, the furnace, other issues, they want it done now, they need response time. And we have seen home warranty companies take two, three, four, even six weeks to fix a broken air conditioner in the middle of the summer, or a heater or furnace in the middle of the winter. They can take a long time, which will create more vacancy. Tenants who are considering renewing leases, they look at response time and repairs through home warranty companies. It can be very, very challenging.
The third one is, they use cheap labor. Obviously home warranty companies are trying to get it done for the least amount as possible. So oftentimes these companies don’t care about the outcomes, as far as the subbed labor. They know that they’re going out, they’re getting paid by the home warranty company much less than they would get from other sources, and so oftentimes I’ve seen their work being sub-par, and continue to have challenges and other things that become an ongoing problem.
There’s minimal charges, so it’s not free to have something repaired. At a minimum you’re going to have a service charge. Typically, 65 to $100 per item, and if multiple things are wrong with that say, furnace or water heater, you could have multiple service charges that you’re charged right up front.
If they go to replace a water heater, or a furnace, unless you’ve purchased an additional package, most of the time the fittings and a lot of the things to bring up to code are not included in the warranty. And so you can see additional charges for those sort of things.
Number five is, they’re in it for a profit. They’re not just trying to break even, they want to make money on this. So when you’re paying your four or five, $600 a year, if you don’t use that you lose it. They’re making money on home warranties, of course.
Is a home warranty a good idea for my rental? We would say a resounding, “No, that a home warranty is not a good idea.” What do we recommend? It’s important to make sure that you’re prepared for maintenance. A home warranty oftentimes is seen as a way to prepare, a way to budget, a way to plan. But we recommend a better way, which is to self insure, budgeting 10% of your rental income to go towards maintenance, and so that four or $500 a year, whatever you’re budgeting. $1000 rental of course, $1200 a year you are going to be putting aside to cover maintenance. If you don’t use that $1200 in the year, it’s still your money. You didn’t lose it, it wasn’t expensed out in that year, and you can bank that and use it in the next year.
So that’s what we recommend. Hope this has been helpful. If you have questions on this or anything else regarding investment properties, property management rentals, we’re happy to help out, feel free to reach out to us. Thanks so much.