In addition to an insurance policy, which typically covers fire, hail, and other major damage, you may want to consider purchasing a home warranty for your rental property. A home warranty can be purchased from many companies, and will cost about $600 a year. They will likely charge $75 or so per issue (and may tack on other charges to bring something like a hot water heater or air conditioner “up to code.”). These warranties cover a variety of issues, from plumbing to appliances. Typically these are issues that your insurance policy will not cover.
I have one strong opinion about this: buy the policy initially, when you purchase your home. Even with an inspection, you will feel better having this policy in place. I’ve learned that you can ask the seller to purchase the policy as part of the sales agreement. This has always worked for me. I haven’t had to pay for this yet.
The real question is whether or not you should continue on with the warranty after that first year. Although there’s no way to know ahead of time if it makes financial sense and will get used enough, there are a few key considerations that can help you decide. It’s really a matter of basic math and risk analysis.
First, how old are the systems and appliances? Although items can break down long before they should, you may want to pass on the warranty if the property is new, or totally redone. It doesn’t make much sense to spend $600 a year to insure new items. On the other extreme, if nothing has been replaced or updated for some time, one of these warranties could be an excellent investment.
How many systems and appliances do you have? My larger rentals each have two hot water heaters, two air conditioners, and two heaters. Those are the properties that I have warranties on. I figure that they’re twice as likely to have something go wrong! And these are expensive items. For me, it’s purely math.
Some people like these warranties because they have a low-risk threshold. In other words, they are very nervous about what various expenses could add up to each year! I can understand that. A warranty is also a way to control costs. You have a better idea of your expenses and budget, and are less likely to have a large, unexpected expense.
The flip side of this is that you could be paying for a policy that you rarely use. If nothing goes wrong, you aren’t using the policy, and you’ll feel like you’re wasting your money. If you have the self-discipline to put aside money into a “rainy day” fund, that could be a better way to go.
There are a few other considerations. For example, if you have outdated appliances but there’s nothing actually wrong with them, they won’t get replaced through a warranty (I had to make a heart-breaking and budget-busting decision a few years ago to replace all kitchen appliances in one rental due to appearances only. Worth it for that market, but still hard to deal with mentally!). Your hot water heater is making noise, but still working? Sorry, you’ll have to wait until it’s dead. They are also in control of who does the work (which can be good, since you don’t have to deal with finding someone).
A final note: not everything is covered in these policies. Typically, if the repairman gets to the point where he has to open up walls or dig, the policy won’t cover it. There are many other “fine print” exclusions. Also, you’re still on the hook for the trip fee (that $75 or so), whether or not the repair is covered and performed. And, of course, if you or someone else can fix the issue for less than that fee, it again doesn’t make sense to call for the repair.