Much like the real estate industry as a whole, the home warranty sector has seen a steady rise in capital in recent years. Forbes reports that the home warranty industry saw a rise from $3.3 billion to $3.6 billion from 2020 to 2022, despite only 4% of homeowners in America having these warranties.
As a property owner and landlord, you're in a unique position. You want both your own home as well as your rental units protected fully, but doing so looks different between the two. You might be asking, is a rental home warranty a good idea for safeguarding my investment and my tenants?
While it might be a good idea for some homeowners, we strongly believe that home warranties are not worth it for landlords. Let's talk about what home warranty companies don't tell you to give you a better understanding of your options as a landlord.
Understanding What a Home Warranty Company Does
So what exactly does a home warranty company do for you? Just like with a car warranty, it's going to do different things for your property than a typical homeowners insurance policy will.
It's important to understand those differences to decide if this home warranty coverage is even something you'd be interested in in the first place. The three main types of protection for a rental property are:
Homeowners Insurance/Landlords Insurance: Broadly, these policies cover property owners from structural damage, liability, and financial loss. This keeps the landlord's risk of financial loss to a minimum in case of things like natural disasters, injuries to tenants, or burglary on the rental property.
Renters Insurance: Often overlooked by landlords, this type of insurance is designed to protect the tenant's interests. The tenant pays for this policy and then they are protected financially if any of their possessions are damaged or lost due to damage they aren't at fault for. We always include renters insurance with our leases due to the myriad of problems it can solve for tenants.
Home Warranty: One thing neither type of insurance covers is normal wear and tear to appliances and systems. That is what home warranty companies offer. They provide discounts on repair and replacement costs when the rental property has normal issues with things like plumbing and electrical systems.
The Cost vs. Benefit Analysis
The basic benefit of a home warranty is to save money on costly repairs and replacements of household items, appliances, and systems. But unfortunately, these warranties aren't a one-time cost to you and this is where it gets sticky for landlords.
Home warranties are a monthly bill that adds at least hundreds of dollars to the annual expenses of your rental properties. This service contract is renewed annually and cuts into the money that the warranty company is supposed to be saving you.
But that's not at all, the monthly bill is only the start. Deductibles also come into play each time you need to call a contractor out. If a contractor does a bad job, you don't get your money back for poor service. And you'll have to pay a service fee a second time to get another contractor out.
The monthly bill with a home warranty and the service fees you have to pay quickly add up, and become worse the more rental properties that you own. The savings on these routine repairs end up shrinking. With the other drawbacks to your rental property business that we'll get into, the little bit of cost it does cut doesn't end up being worth it.
Frequent Issues with Home Warranty Companies
There are three key reasons why a home warranty doesn't make sense for rental property specifically.
Coverage Gaps and Exclusions: Just like with insurance, home warranty plans will have very specific coverage limits. You might enter into a contract expecting to get certain routine maintenance jobs done through the warranty company only to find out the job isn't under their covered repairs. Now you're stuck with a monthly bill that isn't even addressing the problems you need it to.
Service and Repair Delays: Efficient and timely maintenance work is one of the most crucial aspects of keeping tenants happy. Unfortunately, a home warranty is known to have slow response times and delays to work that should be completed much faster. There's little wiggle room here. If the tenant can't be there to meet them when the warranty company requests it, the process gets even longer. This can frustrate your tenants who are left without help and lead to increased tenant turnover with your rental property.
Quality of Work: You'll have no choice in who works on your property if you rely on a home warranty for repairs. This means if your home warranty uses a subpar contractor, you're stuck with it. This can lead to higher repair costs than you would've had without the warranty due to having to call out a worker over and over for the same problem.
Alternative Strategies for Managing Rental Property Maintenance
Instead of purchasing a home warranty for your rental property, your plan for property maintenance should be comprehensive and flexible. It should include:
A reliable network of trusted maintenance contractors. This will ensure every maintenance job is met with the expertise and responded to promptly to keep your tenants happy. It's also why we suggest against in-house maintenance with property managers.
An emergency fund that is built up over time from a percentage of your rental income. This will keep you covered in case of unexpected repair costs.
A full-service property management team like Chambers Theory can help manage maintenance for you and ensure a cost-effective solution for repairs to your property. Property management companies can do much more for you beyond what a home warranty can.
Real Life Experience with Home Warranties
We've had our fair share of home warranty nightmares with the clients we manage rentals for. The worst of which was on account of the delays in work from warranty service calls. One such property had an HVAC system go out, leaving the tenant without air conditioning. It took weeks for the warranty company to fix this vital system, and the rental unit was too hot for the tenant to live in. The owner was left to pay for the tenant's hotel room until the repairs were completed, a disastrous unseen cost of the warranty.
While we would never turn down an owner's preference to use a warranty for rental property, we strongly recommend against it from our own negative experiences.
Protect Your Rental Property the Right Way
If you're on the fence, make the wise choice for your investment property today. Come prepared with a maintenance plan rather than relying on a home warranty.
If you're looking for a property manager to help you cut costs and maximize your rental income through a comprehensive strategic approach, then look no further. Chambers Theory is the premier property management team in Northern Virginia that you need for your rental business.
Learn more about everything we can offer you in property management today.
