Should I use a home warranty on my rental investment property?

sketch of family before house

Today we discuss about the home warranty, a popular product for insuring appliances, components, and large systems on your property. A home warranty policy may bring some peace of mind to homeowners,  but is it a feasible solution if you own a rental property? We think it is NOT a good idea, and below we discuss why.

Let us start with the basics. Home warranties are annual contracts that insure systems, components, and appliances in your house. Depending on your premium, home warranty companies will pay for the repair/replacement if the piping, HVAC, stove, washing machine, and the like stop functioning. It sounds good on paper but in practice, there are serious drawbacks. 

Coverage Gaps

Irrespective of whether you choose to insure appliances, systems, or both, home warranty policies have numerous coverage limitations. The non-mechanical parts of your home, such as windows or the house structure, are never covered, and HVAC systems only rarely do. It is best to check out the exceptions on the policy before signing your contract. 

High costs 

Another aspect that is often overlooked is how much you pay at the end of the day with or without a home warranty. A typical home warranty policy may cost anywhere from $350 to $1000, or even more, per year. For every service call you make, you spend between $50 and $125, depending on your premium. If we consider the scenario in which your microwave and dishwasher break down during the same year, in addition to the yearly premium, you will spend anywhere between $100 and $225 to just have a professional sent to you. In total, that amounts to anywhere between $450 and $1225 or more. Or a typical vendor price for an appliance or system repair is in the range of $100-$200. Without a home warranty, you will spend $200-$400 for the same services! 

Naturally, it makes sense to insure something if you cannot effectively do it on your own. A good example is a homeowner’s insurance against the entire value of the home. Paying a home warranty premium often does not make sense in financial terms, as you will likely end up paying more for repairs and replacements than without the policy.

You may think at this point, ‘what is my HVAC needs replacement?’ If your HVAC breaks down, you must be ready to pay anywhere between $5000 and $10000 for the replacement, but do not think that a home warranty will automatically save you money. HVAC replacements are rarely covered in fact. If your HVAC breaks, it is best to act in advance and save up money for that situation, so you can pay for the replacement yourself.

Appliances and systems