While real estate is a great investment opportunity, there are downsides that are not always exposed at seminars or in-person training sessions. Damage can happen to interior or exterior elements in any home including an investment property. Some people are on the fence about buying a home warranty for a rental house in the U.S. This guide for investors will highlight the pros and cons of buying warranty coverage.
The Home Warranty Real Estate Contract
Like all forms of insurance, a contract is signed between homeowner and servicer of a short or extended term warranty. This contract will often vary by state although can include similar protections. Someone investing 401(k) or life savings into a rental house often uses a warranty as a safe guard against forms of loss during property ownership.
There are two ways to purchase protection in the form of a warranty. These ways are broken down into the following two groups:
1. Warranty Brokers
2. Warranty Underwriters
A broker usually works with more than one underwriter of a policy. This can be an advantage to a homeowner due to the mixture of rates that can be achieved. A typical policy costs between $300 and $700 a year based on the value of the home. Older houses can actually cost more to insure due to the higher risk of internal or external problems.
Underwriters are actual insurance companies that can supply protection to single investors or corporations. The rates can be competitive and will be based on credit, home value, past insurance records and crime rate data. Obtaining home warranty insurance for a rental property is a smart decision, but this decision will come with a regular annual cost.
Warranties as a Long-Term Investment
While some investors will have a problem paying residual annual expenses for a warranty, some will benefit from the tax savings available. There are many people who ask if warranties are worth it when evaluating rental home cap rates. As a monthly or annual expense, most warranty fees can be written off at the end of the year to lessen the tax burden for investors. This provides a long-term investment with the assurance that problems will be fixed in a timely manner.
Quotes can be obtained before or after the purchase of a rental property. A person who performs due diligence can often include the expected cost of extended insurance before laying out the cash for protection. Both renters and landlords can benefit from different coverage options that a warranty will provide. Someone who buys into a JWB investment property should be aware of what a home warranty will and will not cover.