Before answering the question of, “is a home warranty on your rental property worth the cost,” discussing the following is needed. What is a home warranty, What does the warranty cover, and will it be financially beneficial?
What is a Home Warranty?
A home warranty is a contract between a homeowner and a third party to provide service to the homeowner should certain components of your house fail while you own the property. Typically, the home warranty will cover the repair or replacement of items such as the furnace, air conditioner, plumbing system, and major appliances. The warranty is not always clear on its face, so inspect the warranty documents before you purchase. It is common for a warranty provider to sell a base plan and a “total” or “Complete” plan. The plans will have different costs and different coverages.
The warranty does not cover normal wear and tear of the house and should not be confused with homeowner’s insurance. Homeowner’s insurance covers things like fires, hail, or other major perils that cause damage to the home. The warranty will typically cover systems and appliances in the house when they break.
How a warranty works
The third party, or warranty provider, collects a monthly fee from the homeowner to provide the warranty coverage. The monthly fee typically ranges from $30.00 to $50.00 per month depending on the coverage and individual property. If a component of the house breaks and is covered by the warranty, the homeowner calls the warranty provider to fix the broken component. Typically the warranty provider will charge a fee between $50.00 and $100.00 per visit to come and inspect the broken issue.
Upon inspection, if the warranty provider determines that the item is covered, they have the option to fix or repair the component. Typically, the warranty provider will select the cheaper option, which generally results in repairing the item. Often with older items, the item can’t be repaired and the homeowner will receive a new or refurbished replacement item.
The Cost Effectiveness of a Home Warranty Depends on the Individual Property
In general terms a home warranty on your rental property is worth the cost, provided that during the course of the year you will spend more on repairs to items that would be covered by a warranty, then the price of the warranty and associated service call costs. The following tables illustrate a few common scenarios for home warranties.
Home Warranty cost is not effective
| Cost of Warranty | $400.00 | Cost of no warranty | $0 |
| Service Call for Dishwasher | $75.00 | Replace Dishwasher | $300.00 |
| Total Cost | $475.00 | Total Cost | $300.00 |
In the example above, having the warranty cost the homeowner an extra $175.00 for the year. There were minimal capital expenditure costs so the warranty provided no value to the homeowner. As a rental property owner, you never know what your capital expenditures will be for the year, but as you become more experienced, your ability to estimate these costs will improve.
Home Warranty cost is neutral
| Cost of Warranty | $400.00 | Cost of no warranty | $0 |
| Service Call for AC | $75.00 | Service Call for AC | $250.00 |
| Service Call for Dishwasher | $75.00 | Replace Dishwasher | $300.00 |
| Total Cost | $550.00 | Total Cost | $550.00 |
In this example the out of pocket costs to the homeowner are the same with or without a warranty. In this instance, having a warranty in place makes sense as it provides piece of mind, and per the example below the homeowner was only one service call away from the warranty providing significant savings.
Home Warranty cost is effective
| Cost of Warranty | $400.00 | Cost of no warranty | $0 |
| Service Call for AC | $75.00 | Service Call for AC | $250.00 |
| Service Call for Dishwasher | $75.00 | Replace Dishwasher | $300.00 |
| Service Call for Hot Water Heater | $75.00 | Replace Hot Water Heater | $600.00 |
| Total Cost | $625.00 | Total Cost | $1150.00 |
When a home has significant issues during a year, the warranty provides its top value to the homeowner on two fronts. First the total out of pocket costs to the homeowner is less (in this example the homeowner saved $525.00 during the year) and second the homeowner is better able to absorb costs as there are not large outlays of cash at any one time.
Final evaluation of the cost effectiveness must be determined on a case by case basis.
As a property owner, knowing the condition of your property is vital to making an educated decision as to the need for a warranty. The three examples above show homes in varied states of deferred maintenance. If you have a new home, or a recent renovation where all of the major systems and appliances have just been replaced a home warranty is a lot less likely to provide value to you. If on the other hand, your home has a lot of deferred maintenance, a home warranty can be an effective hedge against large unplanned capital expenditures.
Benefits of the Home Warranty
The benefits of a Home Warranty are not purely financial. There is peace of mind that comes from knowing you will not have any large capital outlays during the year and most costs will be covered by the warranty. Additionally, if you self manage your property or are a long distance owner, the warranty team becomes your first line of defense with regards to many tenant issues. Ultimately the use of a warranty comes down to the money and whether or not it makes financial sense.
How to Select a Warranty
Selection of your home warranty requires extensive research and analysis of the costs and coverages of the individual programs, the quality of the warranty provider and the quality of the repair contractors used by the warranty provider.
Online analysis will help you determine the quality of the warranty provider. There are many reviews and recommendations that may found on the internet by searching the name of the warranty provider you are looking to use.
Coverage provided by the warranty is done by laying out the costs and coverages of each of the provider’s programs. When the programs are compared the similarities and differences will quickly become apparent. If the programs have similar coverages then the value is also readily discernible.
The most difficult part of warranty selection is finding out what repair contractors are used by the warranty provider. I have found that this is nearly impossible; unless, you have experience with the provider in that geographic area or you have an experienced property manager who knows the market well.
Warranty Provider Examples
Select Home Warranty
First American Home Warranty
Conclusion
If a home warranty on your rental property is worth the cost is a house by house and individual property owner decision. If you decide to purchase a warranty, shop around and find yourself the warranty that fits the needs of the property as the little nuances between the warranties can make a big difference. I typically have warranties on my older properties or the ones where the major systems and appliances are approaching the end of their useful life.
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