Do you usually buy Home Warranty policies for your rentals?

Hi - When I met with my broker on Tuesday he mentioned this as an option. Buying a Home Warranty policy that would cover all the repairs and including in the leasing a clause requesting the tenant to pay for the service calls (usually $45). are you guys doing this? Have you thought or tried this? Any thoughts?

Have a nive evening!

PS: by the way - he said that a policy would go for about $450 per year.

No. Check the details on these policies. Almost no insurance policy will cover damage done by the tenants, which is a major cause of problems with rentals. These insurance companies only sell these policies because they make money on them, meaning they pay out less than they take in. Finally, in most states, the landlord is required to do the maintenance to meet a habitability standard. Charging the tenant for this maintenance is ILLEGAL and can get you in a lot of trouble.

Good Luck,

Mike

There used to be a guy on here named Frank Chin who wrote about how his leases were structured for the tenants to pay for the first couple hundred dollars of repairs. In return, his rent amount was lower. The way he structured it meant the tenants covered most of the things that went wrong unless it was a big system problem. I don’t think I’d be interested in pursuing a policy like you talk about. The main problem we’ve had with our building has been some plumbing issues that we were aware of upon purchase. Outside of that, we’ve only had to replace a light switch, some trenching outside, and a quick service on a refrigerator. Outside of the plumbing repairs and the rehab we performed to bring a couple of the units up to modern times, we’ve been pretty fortunate so far.

Outside of the plumbing repairs and the rehab we performed to bring a couple of the units up to modern times, we've been pretty fortunate so far.

Oops! I wouldn’t have said that outloud! (especially on Friday, the 13th)

Mike

I do. For me the biggest help is with HVAC. When the AC breaks in the summer time $50 is all it takes. When you have older systems, having to replace the entire AC unit out of pocket more than justifies the purchase for me. Also, I don’t have time to go and fix the stuff myself so it works great for me.

Also, I DON’T pass on the cost to the tenant, keeping everything in working condition is the landlords job.

The problem I have is the $500 per year…It usually doesn’t justify the cost. I inherited one when I bought a place though, and the repair was prompt and effective. Often times when you have a contractor come in, they try to get you to do more work (spend more money) than necessary. A home warranty company will not do that.

I have the home warranty on my condo rentals since large communities get a big discount at times. I am paying around $200-$250 a yr and they fix it all. Even replace the garbage disposal at no cost including the unit (worth $100 bucks there). I have found on the condo’s it has paid off since you can get them to come out and service the A/C unit at least twice a year for free, sometimes more if you have a nice service tech for your area and I live in FL, so A/C preventive mateince is a major issue. Plus fixing the fridge and W/D has paid off. And we know renters with little kids (babies) love to throw diapers and such down toilets and they come out for free. I actually provide in the rental contract the account number and telephone number for the company so they do not even have to call me for landlord issues like these.
As for homes, I have found it does not pay. $500 a yr and then being billed $50-$75 per service call is dumb. Basically a small discount for them to come out, but you need several repairs in the year to cover that $500 you just paid. So it is a waste. Plus I find on homes, they do not cover as much as condo’s. Your better off taking the $450 and putting it aside so you have money already saved for your first 2 or 3 service issues that will come up. Also, majority of appliances breakdown in the first year of ownership, not in yr 2-5 which is why extended warranties are not even the best but still can pay for itself with one service call on each in a 4 yr period.

Thank you all for answering… I am still on the fence on this one… I will check it out when I find my first investment property. I guess I will decide based on the costs and exclusions. The idea of having some sort of warranty to protect the property seems interesting… However on my own experience owning a house - I never had any major expenses. If I was paying it for my own home I would be wasting my money…

Have a nice evening!

Read the policy carefully. I’m sure they vary from company to company, but the ones I’ve looked at didn’t really cover what I would have liked to have covered, and they didn’t cover “existing conditions” on a used hiuse.

Well, everything is an “existing condition” on a used house.

If you are buying new, there is sometimes a good warranty from the builder.

With the exception of a new heat system and a new roof, there isn’t too much that can need repair that costs more than the policy costs.

They aren’t going to cover a new roof, and probaly not the heat system if it goes out soon after purchase.

I have done it both ways. I used to buy them on each house. I used it about 4 times. At $500 per house, 10 houses means you have paid $5k for policies. You can do a lot of maintenance for $5k.

Also it is not illegal to charge tenants for maintenance. You are still responsible for a house that is habitable (which it was when they moved in) but if they tear it up you can charge them for it. My lease requires them to notify me if anything breaks. If it does and it is under the limit then they pay to repair it. If they try to sue me for not maintaning the house in a habitable state then I would evict them for violating the lease by not notifying me of a maintenance item, it they do notify me and won’t fix it I evict them for violating the lease and fixing an item of nominal value ($300). I have not had to do either. I haved had a tenant pay a $300 plumbing bill because the plumber presented the bill to her and she thought she was supposed to, and I went in and paid her back. I paid it because the plumber was sent in by me to correct a bad installation on a toilet not a repair.

Bluemoon - can you still ask competitive rents and charge the tenants for small repairs? I guess they would probably prefer to go someplace else where they wouldn’t have that risk… Would you agree?

What is the amount you ask them to pay? I have seen $50…

Thank you.

Tatertot - got it… read the policy… Will do!

I start off with everything new. I tell them that new things don’t break. If they do they are under warranty or you broke them. That being said in the section of the lease that says tenant pays first $___ of repairs, I put in $300. Nobody has not signed the lease because of that clause.

Bluemoon - thank you. That’s seem to be a better approach than paying home warranty… :O) I wonder if you need to put new stuff everytime you lease. Would this work also if you had used appliances or appliances that you bought 2 or 3 years earlier?

Thank you.

Good question,
What I traditionally had done is buy new, after about 3 to 5 years refinance the property and take out cash to refurbish the property. That way I always keep the property highly leveraged, always keep everything new and that helps tenant retention, as well as if I ever decide to sell (which I am doing now) I don’t have big make ready to get buyers.

BlueMoon. Alittle off from the topic but I have to question why you would refi every 3-5yrs to provide property upkeep. closing cost still run 3-5% on avg depending on locations which is a waste of equity. Even if your still in cashflow mode on the property, your losing your equity. I do not like to keep properties highly leveraged since you can not dump if needed for emergencies.
I much rather get my rentals paid off and hold if possible for solid monthly income.

What a refinance does is take money out tax free. It allows me to take the “profit” out every 3 to 5 years. Also I don’t use cash flow for capital expenses. Capital expenses are paid for by the property itself. Make readies and expenses are paid from cash flow and capital expenses are paid for by financing.

I keep my properties at about 80% of its value. That gives me cash flow and if I have to sell, I can sell at a 85% to 90% discount for a fast sell, but I already got the sales “profit” out when I last refianced.

I must also warn you that I don’t live off my rentals. I live off my day job.

Bluemoon - have you analyzed your strategy? If you refinance every 3 to 5 years you will never own the property free and clear. As a result you will always have a small cash flow. Closing costs alone would kill more than 1 year of cash flow (considering closing costs of $1,500 to $2,000 and cash flow of $100 per month). In addition, in the first few years of the mortgage most of your payments go towards interest - very little goes toward principal - so you build equity through payments very slowly. If you refinance every 3 to 5 years, you will always paying huge interest. Have you ran the numbers to see if your approach makes sense on the long run?

Hey I am not saying that your strategy doesn’t work. I am only curious to understand if you have considered all the implications…

Have a nice evening!

j1dias,

I don’t know the specific details of bluemoon06’s strategy, but here is how it could work to his advantage.

Let’s say you purchase a $50K property with 80% financing. You have $12500 equity in the property, and a $37500 mortgage. You hold the property for rental income (and positive cash flow) for five years. Let’s assume that you have had a steady, appreciating real estate market for the past five years with a 7% average annual appreciation. Your property is now worth about $75K.

Assuming that market rents have also enjoyed a steady increase over the past five years, you may be able to refinance to maintain 80% leverage and still have a positive cash flow. You refinance for a new $60K mortgage which converts $22500 of equity to cash. Now you have recovered all of the $12500 you have initially invested in the downpayment and have put another $10K in your pocket on top of that. Over five years, your original $37500 mortgage balance has been paid down some, but let’s say that the amount of the principal reduction is the same as the closing costs for the refinance, so you don’t really come out of pocket for closing costs when you refinance.

The property still generates a positive cash flow. You have recovered all of your initial investment, so you can say you have none of your own money invested in this property. From this point forward, your return on investment is infinite. At $100 per month, the $10K “profit” you just put in your pocket is equivalent to seven years of cash flow.

With $10K in tax free cash, go buy another property and repeat the process. By leveraging your equity, you can accelerate wealth accumulation providing you keep reinvesting the loan proceeds. The idea is to let your assets generate the money you use to purchase more income producing assets.

When this happens, you are not working for your money – your money is working for you. This is the real message in Kiyosaki’s “Rich Dad, Poor Dad” book. Now you don’t have to read it for yourself.

When the real estate market is contracting, bluemoon06 may have to lengthen his interval between refinancings. When bluemoon is finished accumulating properties, that is when he lets his tenants pay off the mortgages and his properties become free and clear.

Just how I see it.

BlueMoon… I do not refi properties unless is it really needed for leverage. I actually am close to paying off 4 properties which are each worth over $250K each. As for refi being tax free money, yes it is, but costly in the form of closing cost. I have been in this business for about 7 years now. About 5 years ago I meet an incredible CPA who has a system to lower the tax treshold greatly on REI since he is an investor himself and he buys over 200 homes a year, but assigns about 150-175 of them a yr for quick profits.
Thru his methods, I end up paying less than 5% or no tax each year.
The key is to utililize a Holding Co and a Property Mgmt Co. The basis is to have the PM pay all the expenses and collect all the rent. The Holding Co holds title, and collects the the capital gains money only. But end of yr, the PM bills Holding CO for its profits in form of a Mgmt Fee (it is legal) and therefore Holding Co has no profits at all. NO PROFITS = NO TAXES
The PM company has profits but in the form of services rendered which I believe is a 15% tax rate as a C-Corp (NV LLC). But before we pay taxes I have my business deductions which is all my mortgage payments, advertising, maintance, utilities, personal bills, ins, everything. I pay for basically nothing out of my own pocket these days. So by the time I am done, I have actually lowered my taxes to maybe 5% or less of the original debt. Slow years when I am not flipping, it can be zero debt. I still earn money just it is hidden in the balance sheets because of personal expenses as well.
BTW… I was audited for 2003-2005 and we won… So I know this is safe. The audit lasted 3 months and the IRS said I owe nothing. IN fact got around $200 back when he changed some things in the audit.

Andrew

What he said.