One of the most frequently asked questions by my new property management clients concerns home warranties. A home warranty is an insurance policy purchased to cover repairs to various systems and appliances throughout the home. Costs and coverage vary, but for the purposes of this discussion, we will assume an average sized home with a warranty cost of $400 annually.
Should I Invest in a Home Warranty for my Rental Home?
Purchasing a home warranty is a financial decision. The homeowner needs to weigh the costs and benefits in order to determine whether or no to make the purchase. In this case, the cost side is easy. The cost of the policy in our example is $400 per year.
The benefit side is another story, and this is where the problem can become tricky. If I were a warranty salesman, I would tell you that a new furnace or air conditioning unit could easily cost you $4000 dollars - TEN TIMES the cost of the warranty. I would tell you that if your water heater breaks it will almost certainly need to be replaced and that replacing a water heater is a thousand dollar job. I would ask you if you have shopped refrigerators or dishwashers lately and caution you against gambling that a tenant will take care of your appliances. And then, when I had you thinking about all the horrible things that could happen in your home, I would pull out my sales contract and say "sign here."
Since I am not really a warranty salesman, let's take an honest look at the benfits of owning a home warranty. We will start by answering some questions. In the last five years, how many times have you had an appliance serviced? Think back to what the problem was and how much it cost to repair. I can tell you that in my own homes, I have only had two problems. The first was with the auto igniters on a gas range. They would not ignite the gas. The second was last year when my oven stopped working. The computer chip that ran the oven failed. The igniter problem was solved by disassembling the igniters, cleaning and adjusting them, and putting them back together. The total cost for the visit and service was $150. The oven control problem was more expensive. The part was $350 and the labor was $100. So using me as an example, my benefit over the last 5 years would have been $600 or $120 per year. When you add the trip charge that most warranties require (usually about $50 per repair), my benefit would have been $500 and my cost would have been $2000 (5 years @ $400 per year).
Right now I am managing 16 rental homes. They all have problems from time to time. This year I have replaced 2 dishwashers, an oven, and a water heater. If all 16 homes had a warranty, the total cost of the warranties would be $6400. The 2 dishwashers cost $700 total. The oven was $500 and the water heater was $1000 (all including labor). The total benefit to the owners would have been $2000 with a $6400 cost.
Most systems and appliances in your home are built to last. The oven we replaced was twenty years old. Dishwashers last ten or more years in most cases. Water heaters average eight years or more. Furnaces and air conditioners can last thirty years if properly maintained. Take care of your appliances and when the time comes to replace them, you will know you got your money's worth.
I suppose it is conceivable that an owner could have thousands of dollars in covered repairs in a year, but I think it would be like hitting the lottery. Most of the time, insurance should only be purchased in situations where not having insurance could be ruinous. If you drive a car without insurance and total another person's Rolls Royce, you could be liable for hundreds of thousands of dollars. If you don't have health insurance and get hit by a bus, you could quickly be bankrupted by medical bills. If your water heater blows you will be inconvenienced and annoyed, but probably not ruined.
My advice is don't purchase a home warranty. Instead, have your furnace and air conditioning units professionally serviced once a year ($79), replace your filters 4 times a year ($12), and put aside the other $309 for repairs that will certainly come up from time to time. In the long run, I think you will be pleased with the decision.
On the other hand, if you are the sort of person who is more comfortable with a fixed annual cost and a more limited risk, I would be happy to put you in contact with a reliable warranty company.
Its not always easy to find an honest answer to questions like this one. Most of the folks with the answers are too busy trying to sell you the product to help you decide if it is right for you. Remember, if you have any questions concerning property management, landlord/tenant issues, general real estate concerns or just need the best possible team managing your North Georgia Property, call me personally at 770-682-7735.
