For those of you who follow my blog, you know that I’ve recently been questioning my strategy of having an active home warranty policy on each of my (single family) rental properties.
As you can read here [insert link], I’ve had several challenges with my home warranty service that have caused to me to reassess their value.
With a little help from an appliance lifecycle guide I received from [insert website name], I created the following tab which calculates , for a given home, whether it is better to have a home warranty or not. It compares paying for the home warranty vs. maintaining and replacing the appliances on a frequent basis.
The Cost Of A Home Warranty
A home warranty will typically cost between $500 and $600 per year. The factors driving this cost include how many homes you have under warranty (you can receive a multi property discount), the price of the call out fee (which ranges from $0 to $150 or more), and the number of claims that you’ve made in the past.
For the purposes of this calculation, we’ll assume an annual policy at $525. My leases state that the tenant must pay the per incident call out fee , which is typically about $125.
What The Home Warranty Covers
While each policy has its own “exclusions”, the home warranty typically doesn’t cover normal wear and tear (a recent example is an old dryer where the bearings went bad), and has certain allowances which may require you to pay an additional fee. For example, if your air conditioner requires freon, the home warranty company may only cover a small portion of that cost.
What Is The Alternative
The alternative is to apply the money that would have been spent on the home warranty to a fund that covers the repair of appliances in the home.
This would be in addition to any similar allocation you maintain for the general upkeep of the property (roof, exterior walls, landscaping, etc. ).
Given that savings rates are effectively at zero, I am not calculating any interest that may be earned on that money while it is sitting in the bank account. Nor am I calculating any potential inflationary pressures on the cost or installation of the major appliances.
How Do You Calculate This
I listed all of the major appliances that the home warranty covers in each home. I took a list of average appliance lifespans, and the average cost for the appliance installed. I also included any annual maintenance that I might pay for, if I didn’t have a home warranty.
I then summed the average cost for the appliance with the annual maintenance cost, and then divided that total by the lifespan to come up with an annual number. These gave me an annualized replacement cost of each appliance, and the summarized annual number for all appliances.
It looked like this:
|Major Home Appliance Life Expectancy Chart|
|Item||Life Span Low||Life Span High||Average||Cost (New)||Yearly Maint.||Cost Per Year|
It Seems Straight Forward, But It Isn’t
On the face of it, my company’s out of pocket cost of $525 for the home warranty seems like a good purchase.
But, if you take into account some other factors the economics shift:
- The home warranty doesn’t pay for the replacement of the item. So that becomes a neutral cost which is similar whether you purchase the warranty, or not.
- The manufacturer covers a warranty for the appliance for the first year. Most major credit cards extend that warranty (albeit for personal use, but we’ll leave that point aside) one to two years more.
- The out of pocket expense for a repair person could be less.
- You’re not getting any better rate by going through the home warranty company.
Calculating The Cost Of Repairs
Across our several rental properties with home warranties, we see between zero repairs and two repairs related to the home warranty per year.
With a call out fee of $125 per visit, and $525 per year per policy, in the worst case that equals $387.50 ($775 / 2).
Putting aside major repairs like air conditioners, most other repairs can be done for less than $775 per year.
Hedging Your Bets
All situations are not equal. If you recently purchase an older property that has the potential of having numerous problems (two or more per year), or you haven’t identified resources in the area of your rental property such as appliance repair people who can fix the issue, then perhaps a home warranty might be a good investment.
It’s Just Like Any Other Insurance Policy
At the end of the day, home warranties are just like any other insurance policy. While they offer some protections, they have numerous exclusions, and at the end of the day you should measure your risk against the costs. If you enforce a “first fee” with the tenant, where the tenant pays the initial cost of any repair, you can further de-risk and mitigate the need for a home warranty.
Each case is different. My best advice is to run the numbers each year, and adjust your strategy accordingly.