Home Warranty vs. saving cash reserves for CapEX (or both??)

General Landlording & Rental Properties
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Home Warranty vs. saving cash reserves for CapEX (or both??)

Miles Stanley
Realtor · Schertz, TX · Member since 2015 · 226 posts · 53 votes

To preface, i wholeheartedly believe in having cash reserves for surprises.  I'm just looking for opinions.  That said...

I'm sure there is some debate around this (like everything else), but i recently met with a local buy and hold investor/realtor. In his strategy, he doesn't save much for Cap Ex, but he swears by this home warranty he uses on all his properties (4 SFR's). He said he pays a service call fee (like $70) when an appliance or something fails and the warranty replaces it for free (just having to pay the service charge of $70).

My concern with this was what happens when the roof (for example) just wears out (not damaged by hail...or something else that would be covered by insurance or warranty).  i would think that replacement would have to come out of pocket.  So any cash flow that he has accumulated to date would be wiped out to replace said item.

Am i correct? 

Are home warranties worth it?  

has anyone used them?  

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Rocky V.
Rental Property Investor · Arlington, TX · Member since 2012 · 788 posts · 640 votes
9y

I own a residential service company and receive many service calls that the home warranty company would not take care of.  The companies sent out want to charge a ridiculous amount for items not covered.  Also service companies taking care of the work here in DFW are not timely.  I'd pass and like a previous poster mentioned find a good handyman. 

FYI -  I also own over 30 rentals and have never used a home warranty company

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  • Chris T.
    Investor · Downers Grove, IL · Member since 2015 · 1k+ posts · 955 votes
    9y

    @Miles Stanley

    Personally I feel home warranties are more tailored towards first time home buyers - to make them feel better with the biggest purchase of their lifetime. 

    You're correct. Most insurance companies will not cover pre-existing conditions such as wear and tear. Their goal is to make money. Charge more premiums, have less payouts. Another reason why their contracts are several pages long when you buy. 

    Replace what is needed in your rentals, and find a good handyman if you don't have 1 already. That $70 "service fee" is better spend on someone you can count on. 

    1Reply
  • Mike R.
    Investor · PO, WA · Member since 2015 · 197 posts · 95 votes
    9y

    I wouldn't waste my time with a home warrenty..more likely than not, if there is a problem the backer of the Warranty will find a way not to pay for the issue

    1Reply
  • Rocky V.
    Rental Property Investor · Arlington, TX · Member since 2012 · 788 posts · 640 votes
    9y

    I own a residential service company and receive many service calls that the home warranty company would not take care of.  The companies sent out want to charge a ridiculous amount for items not covered.  Also service companies taking care of the work here in DFW are not timely.  I'd pass and like a previous poster mentioned find a good handyman. 

    FYI -  I also own over 30 rentals and have never used a home warranty company

    2Reply
  • Miles Stanley
    OP
    Realtor · Schertz, TX · Member since 2015 · 226 posts · 53 votes
    9y

    @Rocky V.

    Thanks Rocky. Let me ask you, since it sounds like saving up for CapEx and maintenance is the way to go, would you mind sharing how you determine how much money you set aside for these expenses? I have tried the analysis where you determine the replacement cost and life expectancy of each CapEx thing and work it down to a monthly cost, but this number seems really high and all but wipes out cash flow. And maintenance/repair amount estimation seems like a shot in the dark if you don't have experience with knowing how much you average on your current rental properties. I have none yet, but i plan on buying one in the next couple of months.

    I really want to get this right!

    Thanks,

    0Reply
  • Rocky V.
    Rental Property Investor · Arlington, TX · Member since 2012 · 788 posts · 640 votes
    9y

    I know many on BP would frown upon this but I never over analyzed a deal.  I would strictly buy based on the 1% rule (many of my properties generate more), calculated after all rental make ready repairs have been made.  I have always been a big saver so when surprises do occur I can manage easily.  Just last week I ended up replacing an entire 5 ton AC unit which costs over $5K, had a pool issue cost $500 and bee removal $350.  For me the more units you have the easier it gets because you have additional rents coming in which can be used for those unexpected expenses.   When I first started I would personally take care of the majority of maintenance request (you tube can save you money).  If your not very handy I would recommend saving at least $5K for capex/maintenance on your first property then an additional $2,500 for each additional property until you have about $25K in savings.  I would also recommend concentrating on newer homes for your first rental. 

    1Reply
  • Jonathan G.
    Investor · Marietta, GA · Member since 2015 · 382 posts · 258 votes
    9y
    Go to the Facebook page of American Home Shield and start reading all the comments from their current customers below each link from the company. Share your thoughts with us afterwards. You will see similar comments hour after hour, month after month, year after year.
    0Reply
  • Miles Stanley
    OP
    Realtor · Schertz, TX · Member since 2015 · 226 posts · 53 votes
    9y

    @Jonathan G.,

    OK OK point taken...i was just asking lol

    Thanks for all the input!

    0Reply
  • Jonathan G.
    Investor · Marietta, GA · Member since 2015 · 382 posts · 258 votes
    9y

    I had a warranty company in the first years on an out of state property but the consistency of poor service and excessive fees was ridiculous.  Much happier without 

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  • Mindy JensenPro Member
    BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes
    9y

    I've never had a satisfactory experience with a home warranty company. I don't ask for them when I buy, I don't offer them when I sell, and I don't use them if they've already been purchased. It is never worth the time and aggravation. NEVER.

    [email protected]Podcast Guest on Show #261
    BiggerPockets
    0Reply
  • Matthew Hipp
    Columbia, SC · Member since 2015 · 29 posts · 5 votes
    9y

    @Miles Stanley

    I had one on my personal home that came with the loan package we got through our bank and thankfully we had it b/c our HVAC unit went out 4 months after we bought the house.  The unit was 15 years old and the home warranty paid for an entire new unit and we only had to come out of pocket a few $100 dollars for some parts that werent covered under the warranty plan.  After that though, we had awful experiences with the plan and never renewed it.  Also, it sounds like the local investor you spoke to forgot to mention on top of the service call fees, the warranty companies will charge you a premium for the year.  These premiums can range b/w $350-$600 depending on the different packages they have available.  As others have stated, I would stay away from them as a buy and hold investor.

    0Reply
  • Justin Fox
    Software Developer · Vidor, TX · Member since 2015 · 922 posts · 639 votes
    9y

    I've been bought out for a fridge by AHS ($0), had my entire upstairs HVAC unit replaced ($180) and my disposal replaced ($75).  I pay the $52/mo premium and put away 1% of the purchase/build price per year for repairs.  You can either stick it out and essentially have a systems repairman on call that only charges a $75 fee and provides parts for free, for ~600/year.  Or, once the older systems have been replaced, cancel.  

    If you try and get warranty after the HVAC goes down, you have to wait one month before you can make a claim.  Good luck explaining to your tenants that they have to wait a month for heat/cooling haha.

    I seem to be the exception though. 

    1Reply
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