Home Warranty for rental properties

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Home Warranty for rental properties

Allen L.
Rental Property Investor · Chicago and mainly invests in KS remotely · Member since 2018 · 360 posts · 314 votes

Hi guys,

I just purchased a home warranty plan for a property that I own as a rental. I think many people here would think this is a terrible idea but I think the benefit is in the nuance so let me explain.

First, home warranty details:

1. $276 a year for 3.5 year totally $967

2. Covers all systems (HVAC, plumbing, electric, duct work, water heater) and free roof coverage

4. $60 dispatch fee

5. Fully transferable to any property within the country with 15 day grace period

6. Cancellable any time and they will pro-rated the remaining and refund

7. $276/year is locked in for life if I decide to continue to use them after 3.5 years.

My property has antique HVAC system that is now > 20 years old, so I'm fully expecting them to break down in the next 24 months, and apparently home warranties will replace the unit if they cannot repair it, which means there's a chance that I will get a new furnace and air conditioning unit (~$5000 value) or at least a cash out value.

The other benefit is that I own a few properties, and since the warranty is also transferable, so at any time if I feel like another property has weak systems, I can transfer the warranty over to that property and potentially lower my maintenance and capex cost. 

I have had a home warranty in the past given to me by the seller of another property, and reaped the benefit of that within the first year. The heat pump (>15 years old) broke down and the home warranty company said they can either repair it (they said that my out of pocket expense was $2500 because they didn't cover certain part of the AC lol) or give me a cash out for approx. $1800. I took the cash out and got a new heat pump unit. Since then I've always looked at home warranty as a great tactical optionality play, if you get the timing right, you can save more than it costs. Maybe this is the trader in me seeing this as an arbitrage. Anyways just want to share a heterodox opinion!

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Nathan GesnerBusiness Member
Moderator
Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
6y

You'll hear success stories but there are far more horror stories. Most property managers I know will not manage a home with a home warranty.

They are structured in favor of the warranty company. It's the only way they make money. When a repair is due, you have to pay a deductible. They pay pennies on the dollar, which means you get a poorly qualified technician that knows they're making far less than they would working for an individual. They are slow to respond and do crap work.

The house always wins.

The DIY Landlord Book4.7247 Reviews
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  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    6y

    You'll hear success stories but there are far more horror stories. Most property managers I know will not manage a home with a home warranty.

    They are structured in favor of the warranty company. It's the only way they make money. When a repair is due, you have to pay a deductible. They pay pennies on the dollar, which means you get a poorly qualified technician that knows they're making far less than they would working for an individual. They are slow to respond and do crap work.

    The house always wins.

    The DIY Landlord Book4.7247 Reviews
    WebsiteView Page
    6Reply
  • Allen L.
    OP
    Rental Property Investor · Chicago and mainly invests in KS remotely · Member since 2018 · 360 posts · 314 votes
    6y

    @Nathan G, I totally agree with you on this. Fortunately I don't think home warranty companies are as sophisticated as they would like to think, and I definitely don't think most buyers of home warranties are as smart as black jack players. Companies just has to win on the average contract, not win on every contract. Which is what I would think for most people, buying home warranties are a loser. But perhaps someone who has calculated their risk and reward has edge over the average case. For example, most people take on home warranty as part of purchasing a house, and there may or may not be anything wrong with the property. Therefore, most home warranties are a selling tool, with utility < cost on average. However if a landlord has calculated life expectancy of certain systems such as water heater, HVAC, electric, etc, then it may make sense to purchase home warranty once those system exceed typical life expectancy. Just my 2 cents. 

    Regarding the quality of technicians I can see that this would be an issue, and if I cannot work with this home warranty company I would cancel the warranty and get prorated refund. This is a favorable risk imo. 

    1Reply
  • Darius Ogloza
    Investor · Marin County California · Member since 2018 · 1k+ posts · 2k+ votes
    6y

    Heterodox opinion? Depends. If you are eking out $100/month "cash flow" on a C class rental house, then, yeah, the cost of a policy is an issue, but if you are renting SFR's for $5,000/month, then home warranties are a small price to pay for substantial peace of mind. We use home warranties on our California rentals, and ten years into the practice we are satisfied with the results. We pay about $700/year in premiums and $75 per service visit. With this coverage we see no need for professional management, which would set us back $5,000 -$6,000 per year in fees + actual cost of maintenance and repairs.

    2Reply
  • Chris London
    Property Manager · Raleigh/Durham NC · Member since 2015 · 210 posts · 293 votes
    6y

    @Allen L. Your plan may work, but...make sure to have a plan for when it is 0-degrees in Chicago in January and the heat goes out and it takes 30+ days for your unit to get fixed. That plan should entail renting portable heaters, possibly putting the tenant up in a hotel or being prepared to not receive rent from the tenant based on the property not being habitable.

    I just closed on an SFH rental here in NC that also had a 20-year-old HVAC system. The seller included a home warranty from Cinch w/ a $200 deductible. I toyed with the idea of doing what you mention but I want to take good care of my tenant so they stay longer and pay rent, so I just bought a new HVAC instead (I had an HVAC in my budget when I bought the place anyway).

    2Reply
  • Allen L.
    OP
    Rental Property Investor · Chicago and mainly invests in KS remotely · Member since 2018 · 360 posts · 314 votes
    6y
    Originally posted by @Darius Ogloza:

    Heterodox opinion? Depends. If you are eking out $100/month "cash flow" on a C class rental house, then, yeah, the cost of a policy is an issue, but if you are renting SFR's for $5,000/month, then home warranties are a small price to pay for substantial peace of mind. We use home warranties on our California rentals, and ten years into the practice we are satisfied with the results. We pay about $700/year in premiums and $75 per service visit. With this coverage we see no need for professional management, which would set us back $5,000 -$6,000 per year in fees + actual cost of maintenance and repairs.

    Unfortunately a majority of my rentals are 700 miles away, otherwise I think self-management may fit my obsessive compulsive personality :). Interesting to hear about $5000/month rentals! What's the typical property value that would rent for $5000 in California?

    0Reply
  • Allen L.
    OP
    Rental Property Investor · Chicago and mainly invests in KS remotely · Member since 2018 · 360 posts · 314 votes
    6y
    Originally posted by @Chris London:

    @Allen L. Your plan may work, but...make sure to have a plan for when it is 0-degrees in Chicago in January and the heat goes out and it takes 30+ days for your unit to get fixed. That plan should entail renting portable heaters, possibly putting the tenant up in a hotel or being prepared to not receive rent from the tenant based on the property not being habitable.

    I just closed on an SFH rental here in NC that also had a 20-year-old HVAC system. The seller included a home warranty from Cinch w/ a $200 deductible. I toyed with the idea of doing what you mention but I want to take good care of my tenant so they stay longer and pay rent, so I just bought a new HVAC instead (I had an HVAC in my budget when I bought the place anyway).

    I guess I don't agree with your assumption that it takes 30+ days for the unit to get fixed. The property is also not in Chicago but also in a cold winter state. My last experience with home warranty has been good, someone called me on a Saturday to offer the cash out value after the technician was dispatched a couple of days prior. I had to scramble though, to get a HVAC guy to install a new heat pump, and this property was in Texas in the middle of August, the tenant was melting. In the end I think she was super thankful that I got a new AC, and she's still staying at my property after 2 years *knock on wood*. I was also not charged for the dispatch fee, although I can never be sure they didn't deduct it from the cash out value! haha

    1Reply
  • Steven Griffith
    Rental Property Investor · Chapel Hill, NC · Member since 2019 · 120 posts · 119 votes
    6y

    @Allen Li

    Good for you! What company did you use? I wanted a home warranty for the same reason - 16yr old HVAC system in a rental I was purchasing, on its last leg but still passed inspection. I called 6 different home warranty companies, including the big name ones and 2 local companies. ALL of them had fine print saying one of the following:

    1) The warranty doesn't cover HVAC over 10yrs old

    2) Damage/Replacement to the coil is not covered by the warranty

    3) For systems over 10yrs old, they would max out replacement of hvac at $500

    4) For systems over 10yrs old, if it needs to be replaced theY will only pay fair market value of the system today... so in my case, they'll only pay whatever a 16yr old system is worth.... so less than $1000.00

    Replacing the system cost ~$6000. I did have 1 company that the salesman told me 'yes, it's covered' after I explained what I was looking to have covered. But when I read the fine print of the contract, and called to talk to someone in the service dept, they confirmed it was NOT fully covered. I talked to a manager and was told the salesman would undergo 'retraining'. I do think that if you're self managing, home warranties can be a one stop shop for maintenance issues, but as others have mentioned they're heavily structured in favor of the warranty company.

    All that being said, I think it's a great idea. If you don't mind sharing the name of the company that you have successfully used to replace a 10+yr old HVAC system, I'd love to know for when I purchase my next rental! Thank you!

    2Reply
  • Darius Ogloza
    Investor · Marin County California · Member since 2018 · 1k+ posts · 2k+ votes
    6y

    Virtually every 3/2 SFR or up in my county (Marin County) rents in this range, larger homes go for much more. Fixers can be still found in the $750-850K range these days. The rental strategy only makes sense with fixers. Median home value with the recent run-up is $1.4 million.

    0Reply
  • Steven Griffith
    Rental Property Investor · Chapel Hill, NC · Member since 2019 · 120 posts · 119 votes
    6y

    @Joe Kelly

    Thanks for sharing! I really appreciate it. I looked through the website and as you mentioned could not find anything that would specifically exclude an old system. They also specifically mention covering R22 in older systems, which is awesome - that's another hidden exclusion by other companies. Next time I buy a rental with an old hvac, I'll give 2-10 a call and ask them if it's covered. Thank you for sharing!

    0Reply
  • Tyler Bains
    Realtor · Lubbock, TX · Member since 2020 · 144 posts · 80 votes
    6y

    My question is what company did you get the warranty through and what tier of plan did you purchase? I think it CAN make sense depending on the company and plan but again as stated above the warranty is always structured so they win. What concerned you and sparked the interest in purchasing the warranty? 

    0Reply
  • Crystal SmithPro Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2014 · 2k+ posts · 1k+ votes
    6y
    Originally posted by @Allen L.:

    Hi guys,

    I just purchased a home warranty plan for a property that I own as a rental. I think many people here would think this is a terrible idea but I think the benefit is in the nuance so let me explain.

    First, home warranty details:

    1. $276 a year for 3.5 year totally $967

    2. Covers all systems (HVAC, plumbing, electric, duct work, water heater) and free roof coverage

    4. $60 dispatch fee

    5. Fully transferable to any property within the country with 15 day grace period

    6. Cancellable any time and they will pro-rated the remaining and refund

    7. $276/year is locked in for life if I decide to continue to use them after 3.5 years.

    My property has antique HVAC system that is now > 20 years old, so I'm fully expecting them to break down in the next 24 months, and apparently home warranties will replace the unit if they cannot repair it, which means there's a chance that I will get a new furnace and air conditioning unit (~$5000 value) or at least a cash out value.

    The other benefit is that I own a few properties, and since the warranty is also transferable, so at any time if I feel like another property has weak systems, I can transfer the warranty over to that property and potentially lower my maintenance and capex cost. 

    I have had a home warranty in the past given to me by the seller of another property, and reaped the benefit of that within the first year. The heat pump (>15 years old) broke down and the home warranty company said they can either repair it (they said that my out of pocket expense was $2500 because they didn't cover certain part of the AC lol) or give me a cash out for approx. $1800. I took the cash out and got a new heat pump unit. Since then I've always looked at home warranty as a great tactical optionality play, if you get the timing right, you can save more than it costs. Maybe this is the trader in me seeing this as an arbitrage. Anyways just want to share a heterodox opinion!

    We think buying a home warranty on investment properties (Single to 4 families) is the way to go. While the cost for a warranty eats into cash flow, the potential benefits outweigh the cost. 

    312-681-7487
    1Reply
  • Jeremy WilliamsPro Member
    Investor · Novato, CA · Member since 2016 · 15 posts · 7 votes
    6y

    @Darius Ogloza

    Curious which provider you like? We have Fidelity warranties on our N CA properties which has been a lifesaver after rounds of fires. While outside the fire zones, the skilled labor shortage poses a challenge to individual homeowners. Warranty companies are "bigger fish" and have been able to dispatch repair personnel in 1-2 days, vs a week or more.

    0Reply
  • Emma Atanasoska
    Member since 2026 · 4 posts · 0 votes
    5mo

    I actually have a rental property too, and I’ve had a similar experience where a home warranty worked out in my favor.

    In my case, I didn’t expect much at first, but when the HVAC system started acting up, the warranty covered most of the repair, and I only paid the dispatch fee. That alone made it feel worth it for me, especially since it avoided a sudden $2k–$5k expense.

    I do think it really depends on the property, though, like age of systems, risk tolerance, and how hands-on you want to be. For older rentals, it can act like a kind of “buffer” for unexpected capex, but I also get why some investors avoid them because of delays and coverage disputes.

    For me, it’s not perfect, but as a tool for stabilizing short-term maintenance risk, it’s been useful so far.

    0Reply
  • Kar Sun
    Member since 2021 · 402 posts · 277 votes
    5mo
    Quote from @Allen L.:

    Hi guys,

    I just purchased a home warranty plan for a property that I own as a rental. I think many people here would think this is a terrible idea but I think the benefit is in the nuance so let me explain.

    First, home warranty details:

    1. $276 a year for 3.5 year totally $967

    2. Covers all systems (HVAC, plumbing, electric, duct work, water heater) and free roof coverage

    4. $60 dispatch fee

    5. Fully transferable to any property within the country with 15 day grace period

    6. Cancellable any time and they will pro-rated the remaining and refund

    7. $276/year is locked in for life if I decide to continue to use them after 3.5 years.

    My property has antique HVAC system that is now > 20 years old, so I'm fully expecting them to break down in the next 24 months, and apparently home warranties will replace the unit if they cannot repair it, which means there's a chance that I will get a new furnace and air conditioning unit (~$5000 value) or at least a cash out value.

    The other benefit is that I own a few properties, and since the warranty is also transferable, so at any time if I feel like another property has weak systems, I can transfer the warranty over to that property and potentially lower my maintenance and capex cost. 

    I have had a home warranty in the past given to me by the seller of another property, and reaped the benefit of that within the first year. The heat pump (>15 years old) broke down and the home warranty company said they can either repair it (they said that my out of pocket expense was $2500 because they didn't cover certain part of the AC lol) or give me a cash out for approx. $1800. I took the cash out and got a new heat pump unit. Since then I've always looked at home warranty as a great tactical optionality play, if you get the timing right, you can save more than it costs. Maybe this is the trader in me seeing this as an arbitrage. Anyways just want to share a heterodox opinion!


     home warranty is a waste of money. they only cover AC up to $1000 or something like that and not for every claim. If the fix is needed they claim the entire unit must be changed and tnhey will charge you premium. Home warranties used to be worth it. Not anymore. 

    0Reply
  • Ed O.
    Investor · Statewide, MO · Member since 2011 · 819 posts · 427 votes
    5mo

    Like others have said, home warranites are foolish. If you don't realize or accept this, that's your call. Many have experience with them and without them for decades, but think what you want, not everyone will get it.

    0Reply
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