Solved! Should I Get a Home Warranty for a Rental Property?

Q: I have both homeowners insurance and a home warranty on my primary residence and require that my tenants carry renters insurance for my rental properties. Does a home warranty for rental property make sense, or is it an unnecessary expense?

A: The security deposit you collected from your tenants and the renters insurance they carry will protect you financially from damage caused to the unit while the tenants are in residence, but just like in your primary home, a home warranty for landlords covers different expenses than homeowners insurance does. Think about why you carry both on your primary home: The homeowners insurance covers damage and loss that result from weather, water, fire, theft, and other covered events, while a home warranty is essentially a service contract that covers repair and replacement of major home systems and appliances that fail due to age or normal wear and tear. Together, they form a kind of security system for your investment and your business. As a landlord, you know that one of the bigger expenses involved in rental properties is maintenance—unless you’re very knowledgeable and managing your rental properties is your only job, the near-constant need for plumbers and electricians for blown circuits, leaky water pipes, and bigger problems such as broken washing machines and HVAC issues can be crushing both financially and in terms of the time it takes to choose and hire qualified technicians. As long as you’re on top of regular maintenance and read your contract carefully, choosing to home warranty rental property you own might save you quite a lot of money, especially if you find yourself wondering “Does renters insurance cover appliances?” and realizing that the answer is no.

A home warranty covers appliance and system repairs or replacements—to a certain extent.

Home warranties come in several different packages. Normally home warranty companies offer one package that covers whole-house services, such as electrical, plumbing, heating, and cooling; one package that covers major laundry and kitchen appliances; and one that covers both. If you own a number of rental units that are all about the same age, the ovens, refrigerators, dishwashers, water heaters, clothes washers, and dryers in those units—all of which are your responsibility to keep in good working order—may begin to fail around the same time, from basic hard use. Financially, this could mean that you’ll experience a disastrous sequence of expenses as one appliance after another needs repair and/or replacement, and that in some cases you might pay for a repair and then a replacement of the same appliance. A home warranty purchased for each unit you rent can cover the majority of those repairs and replacements for roughly the cost of one or two repairs or replacements.

The landlord has to purchase the rental home warranty for renters; because they aren’t responsible for the upkeep of the property and don’t own it, the renters can’t opt to purchase a warranty on their own. You’ll pay the cost of the warranty contract, usually for a period of 1 year. Written into that contract will be the appliances and systems covered, the maximum payouts, and the cost of each service call. A plus here is that the service call, while an added expense, will cover the entire cost of the assessment, attempted repair, and if necessary, the replacement of the item. You won’t have to pay a plumber to try to repair the water heater, only to find out the problem is electrical, then pay an electrician to check it out and tell you that the unit needs to be replaced. The service charge will cover the repair or replacement to the extent the contract allows.

One reason some homeowners balk at buying a home warranty is that they’re concerned that they won’t be able to choose the style or quality of the appliance that they prefer and have it covered by the warranty. As a landlord, you’ll certainly want to keep the units modern and up to date, but you might not be as worried about the style or color as you would be in your own home, so the warranty is an even more sensible idea.

If you have a rental unit in the same place as your primary residence that is less than 750 square feet, you can cover it with a Guest Unit add-on to your own home’s warranty.

This can be a great savings for the landlord renting out a part of their home or a small apartment in a separate unit on their home property. If the unit is small (especially if it’s the only one you have), paying full price for a home warranty contract might not be cost-effective. Luckily, if the unit is less than 750 square feet, you can add it to the home warranty policy you carry on your own dwelling as a Guest Unit line item for significantly less cost than purchasing a separate policy just for the unit.

Cost considerations will depend on a number of factors, including the age of the property and its systems. 

If the rental unit is older and the mechanics and appliances haven’t been updated recently, a home warranty is a straightforward protection of your investment; these units are more likely to have age-related issues that a an insurance policy won’t cover. But don’t discount the benefits of a home warranty for newer homes as well. While a newer home with more recently installed systems and appliances is less likely to suffer from age-related wear and tear, newer units are often built with computerized control panels, automated systems, and smart-home integration, all of which can fail if a single component fails. These technologically advanced units offer convenience and efficiency, but they can also be extremely expensive to repair and are less likely than older appliances and systems to stand the test of time. You’ll want to weigh the cost of the warranty and service calls against the repair and replacement costs of the units you currently have in place to see what financial benefit the warranty would provide.

A home warranty for a rental unit is tax deductible. 

Depending on how you’re registered as a landlord, your entire premium and service charges may be considered an operating expense. These expenses can be claimed on a tax return as a deduction from your total income, thus reducing your tax burden. Especially if you have a large number of rental properties, this total can add up quickly and add to the money you save on repairs and replacement by reducing how much tax you owe. State tax deductions will vary based on where you are registered as a landlord, but it’s likely that you’ll be able to save some extra money through federal and local deductions.

A home warranty on a rental unit can save you a lot of money on repairs and maintenance. 

By covering repairs, maintenance appointments, and replacement, a home warranty prevents you from having to shell out cash on demand whenever something goes wrong at a property you’re renting out. If you make one or two claims against the warranty, it will have come close to paying for itself (one significant system replacement might more than cover the tab), and when the tax benefit is added to that, you’ll start saving real money.

In addition, though, the warranty will save you time. A landlord is always on call when a tenant’s toilet clogs or bathtub backs up, the AC goes out on a hot summer day, or the dishwasher won’t drain. The tenants might feel bad about calling and potentially disrupting a family birthday party or vacation, but they’ll call, and it’s your responsibility to make the necessary arrangements for a service call and repair, or to go check out the problem yourself before you incur a charge from a professional. The best home warranty companies take care of that for you; either you or the tenant make an initial call, and then the home warranty company takes it from there, arranging for the professional repair person to contact your tenant for scheduling and handling the rest of the repair in exchange for a service fee. If you live far away from your rental properties, this service is even more valuable, potentially saving hours on the phone and making it less likely that you’ll end up hiring a contractor who takes advantage of your distance by doing shoddy work. That peace of mind is provided to you, not to mention the return of potentially full days of coordination and shopping for replacement parts or appliances (or even whole systems). And, you’ll save money.

When choosing a home warranty for a rental property, be sure to read the fine print. 

This is a critical point, because failing to read the contract carefully can result in unpleasant surprises at the worst moments—surprises that are often the reason people are suspicious of home warranties in the first place. They don’t cover everything. First, the warranty only covers the systems and appliances listed in the contract, and nothing else. Second, the cost of the service visit is also set in the contract, along with how many individual visits (or what length of time) is included in each visit. Third, every warranty has coverage limits. There are two kinds of limit: a maximum payout per event, usually specific to the system or appliance, and a maximum payout per policy annually. This can cause distress if you haven’t read the policy carefully and are expecting that an entire failed HVAC system will be replaced free of charge, only to discover that the replacement will cost $10,000 and the policy states a maximum payout of $7,000. That’s still $7,000 you don’t have to come up with and very much worth the cost of the home warranty, but the remaining $3,000 due can be upsetting if you’re surprised that it’s not covered. Similarly, some policies will cover insect infestations—but only for certain kinds of insects. It will be a rude awakening when you file a claim for a huge termite infestation and find out that termites are excluded from your warranty—and that it was right there in black and white for you to see.

In addition, most home warranties have requirements that must be met in order to remain valid. If you’re a landlord, you’re probably accustomed to making quick fixes yourself to save the cost of a professional, especially for easy things. Or perhaps you trust that your tenants will take care of common maintenance tasks and cleaning. Unfortunately, those DIY fixes or potentially delayed maintenance can invalidate your warranty and allow the company to deny claims. And perhaps the home you purchased to rent out had been in disrepair for some time; while some home warranty companies have an amnesty program that doesn’t penalize new owners for maintenance failings of previous ones, not all do, so you could find that the years of no maintenance or upkeep before you even owned the property render your claims invalid. Again, these conditions will be clearly spelled out in the contract (and if they are not, you should ask about them to make sure you haven’t missed something).

If, however, you’ve carefully read the contract and are aware of the conditions and limitations, a home warranty can offer financial savings and peace of mind to what many see as the most onerous part of being a landlord: the time and expense of maintenance and repairs.