Home Warranties Often Aren’t Worth It: How to Judge for Yourself
Often we are asked by our owners and investors “Are Home Warranties a good idea?” Please review this interesting article just published by MoneyTalks News , Marilyn Lewis on May 5, 2016
In the article, Marilyn describes the pros and cons of Home Warranty Policies. If you are interested in having a home warranty on your property please contact our office and we will be glad to provide you a variety of policy brochures from some of the Valleys providers!
~Lorrie Baker, Desert Wide Properties
A home warranty can help you repair or replace home appliances and systems. But don’t enter into a contract before asking these key questions.
If you’ve bought a home recently, you may have purchased or received a home warranty.
However, consumers frequently expect more from these plans than they deliver.
Home warranties aren’t insurance policies. They’re service contracts. Like a service contract that covers repairs to your computer, a home warranty is a company’s agreement to pay for fixing — and, if necessary, replacing — specified home components.
A home insurance policy, in comparison, covers losses if your home and its contents are damaged or lost to theft, fire or other causes.
A basic home warranty costs about $350 to $500 a year or more. A warranty typically covers kitchen appliances, plumbing, water heater, furnace, sump pump, whirlpool tub, and ceiling and exhaust fans, Angie’s List says.
“Enhanced” plans, purchased for another $100 to $300, provide added coverage for such things as a washer and dryer, air conditioning, refrigerator and garage door opener. Optional items can be added, including pools and septic systems.
You may be covered already
If someone gives you a home warranty, accept it — at least while it’s free. But understand that, even with someone else paying the premiums, you’ll likely pay a service fee — typically $50 or $75 — each time you need a repair, according to Angie’s List.
Before buying a home warranty, learn what coverage you may already have. For example, if you’re buying a newly built home:
- The home appliances and systems typically have one-year warranties.
- Most states require builders to warranty the home’s structural elements for up to 10 years.
Also, when you buy new furnishings and appliances, use a credit card that extends the product’s warranty. That can add as much as an extra year of protection.
Is a home warranty right for you?
Sellers may offer a year’s coverage as an incentive to home shoppers. Owners of new homes frequently pay the premiums after their free year expires.
Real estate agents sometimes give home warranties to clients as a thank you gift for purchasing a home. Some buyers of older homes find that a warranty gives them confidence.
Other homeowners decide they’re better off setting aside savings to cover home repairs and replacements.
One way to think about your needs: Compare the age of each covered item with its average life span. To do so, use this chart from the National Association of Certified Home Inspectors.
With expensive components near or past their life expectancy, a home warranty might be a good idea. Components that have pre-existing problems, however, typically are excluded from protection.
Buyers who purchase a previously owned home inherit used appliances and home systems with wear and tear. A home warranty can help cover the cost if things break down.
New Jersey real estate agent Lorraine Labonne-Storch told HSH.com that a few days after closing on a home she purchased, the boiler caught fire. It cost her $12,000 to replace.
A home warranty would have covered a portion of the cost, she said. She’d had the option to purchase a warranty when she bought the house, but declined it.
However, home warranties top the list of complaints received by Angie’s List. One reason, the site says, is the difference between customers’ expectations and what the plans actually deliver. Homeowners also complain about the quality of service from warranty companies.
Before buying a home warranty, read the contract and understand exactly what it does and does not cover. For example, some contracts will not provide coverage if:
- You didn’t maintain the appliance.
- The appliance was installed incorrectly.
- The appliance had too much wear and tear.
If you haven’t read it carefully, be prepared for surprises. Don’t assume:
- Your policy will replace a faulty component. The warranty company may insist on repairing it instead.
- You can call your favorite service provider. Home warranties usually require you to use a contracted servicer.
- The warranty will cover the entire cost. Although she would have been happy to have it, Labonne-Storch said the home warranty she declined would have paid only up to $1,600 to repair or replace the $12,000 boiler.
Find out what’s covered, and what the warranty provides. There may be exclusions and limitations. Perhaps the refrigerator is covered, but the ice maker is excluded. Claims may be rejected because of pre-existing problems or insufficient maintenance.
Learn who will perform the repair work. Also, find out if you can cancel the policy. Most contracts allow a 30-day “free look” that allows a buyer to cancel within 30 days and get a full refund, says the Service Contract Industry Council.
Vet the company
Research a company using these sources:
- Better Business Bureau: Type in your city’s name. On the next page type the company’s name. Or type “home warranty.” You’ll see if a company is BBB accredited. That means a company agrees to resolve complaints with the BBB and pays an accreditation fee of anywhere from $400 to several thousand dollars. See company ratings, if any, and a summary of complaints to the BBB.
- Your state attorney general’s office: Find yours from the National Association of Attorneys General.
- Your state insurance commissioner: Locate yours with this National Association of Insurance Commissioners map. Although home warranties aren’t insurance policies, 32 states require companies offering warranties to register or be licensed by the state’s department of insurance.
When it comes to the tax deductions you can take as a rental property owner, are you keeping good records and taking advantage of all the deductions available to you? Did you know that owning a rental property often offers larger deductions and tax benefits than most other investments?
I thought you might be interested in a recent article we posted on our blog on this important topic, “Rental Property deductions you can take at tax time” which highlights a few tips to help you maximize your NOI and deduct expenses on your Real Estate investments.
“You see people moving out of town or state to go to a better job. If they can’t sell their house, they rent is.” –David Ayoub, CPA in Syracuse, N.Y.
Remember, having an experienced team of professionals like Desert Wide Properties will lead to increased revenue and greater returns. We will consistently update you on the market, offer comprehensive analysis reports of your rental homes and develop a mutually beneficial business relationship with you our client. Our expertise in the business and knowledge of the Real Estate market keeps us as a trendsetter in the business.
~ Lorrie Baker, Desert Wide Properties
Courtesy by Turbo Tax
Rental property often offers larger deductions and tax benefits than most investments. Many of these are overlooked by landlords at tax time. This can make a difference in making a profit or losing money on your real estate venture.
If you own a rental property, the IRS allows you to deduct expenses you pay for the upkeep and maintenance of the property, conserving and managing the property, and other expenses deemed necessary and associated with property rental.
Employees and independent contractors
Landlords can deduct wages and salaries for employees, such as for residential managers and staff grounds maintenance workers. Other tax-deductible services that can be used as deductions are independent contractors, such as:
- Carpenters, electricians and plumbers;
- Architects, landscapers and gardeners;
- Roofers, carpet-layers and painters.
Keep each contractor’s tax ID number, especially if they are unincorporated, and submit the amount you paid them on IRS Form 1099-MISC. If you paid the contractor less than $600 over the course of the year, this form is not required. However, you are still allowed to deduct the expense.
Deductible expenses for rental property
A landlord is allowed to deduct any reasonable expenses used in the conduct, maintenance and managing of her rental properties. That includes:
- Necessary and reasonable repairs to the property
- Travel costs incurred while doing business
Expenses that are sometimes overlooked, according to David Ayoub, CPA in Syracuse, N.Y., are meal and entertainment expenses for employees. “You can only deduct 50 percent of meal and entertainment expenses incurred while doing business with potential clients or business associates. However, if you throw a Christmas party or a summer picnic for your staff, it’s 100 percent deductible.”
It’s not unusual for someone to become a landlord out of circumstantial necessity.
“You see people moving out of town or state to go to a better job. If they can’t sell their house, they rent it,” Ayoub notes. “If you rent your home for three years out of five, and then sell it, the capital gain is taxable.
However, if you sell it within two years, you don’t have to claim capital gain. You’re also entitled to the same deductions as any other landlords. As with any rental property, make sure you have landlord insurance on your home. It’s deductible as an expense, too.”
By Andrew Beattie | Investopedia
From the first decision to invest in real estate to actually buying your first rental property, there is a lot of work to be done. This task may be daunting for the first-time investor. Owning property is a tough business and the field is peppered with land mines that can obliterate your returns. Here we’ll take a look at the top 10 things you should consider when shopping for an income property.
Starting Your Search
Although you may want a real estate agent to help you complete the purchase of a rental property, you should start searching for your investment on your own. Having an agent can bring unnecessary pressure to buy before you have found a property that suits you. The most important thing is to take an unbiased approach to all the properties and neighborhoods within your investing range.
Your investing range will be limited by whether you intend to actively manage the property (be a landlord) or hire someone else to manage it. If you intend to actively manage, you should not get a property that’s too far away from where you live. If you are going to get a property management company to look after it for you, your proximity to the property will be less of an issue.
Let’s take a look at the top 10 things you should consider when searching for the right rental property.
- Neighborhood: The quality of the neighborhood in which you buy will influence both the types of tenants you attract and how often you face vacancies. For example, if you buy in a neighborhood near a university, the chances are that your pool of potential tenants will be mainly made up of students and that you will face vacancies on a fairly regular basis (during summer, when students tend to return back home).
- Property Taxes: Property taxes are not standard across the board and, as an investor planning to make money from rent, you want to be aware of how much you will be losing to taxes. High property taxes may not always be a bad thing if the neighborhood is an excellent place for long-term tenants, but the two do not necessarily go hand in hand. The town’s assessment office will have all the tax information on file or you can talk to homeowners within the community.
- Schools: Your tenants may have or be planning to have children, so they will need a place near a decent school. When you have found a good property near a school, you will want to check the quality of the school as this can affect the value of your investment. If the school has a poor reputation, prices will reflect your property’s value poorly. Although you will be mostly concerned about the monthly cash flow, the overall value of your rental property comes in to play when you eventually sell it.
- Crime: No one wants to live next door to a hot spot for criminal activity. Go to the police or the public library for accurate crime statistics for various neighborhoods, rather than asking the homeowner who is hoping to sell the house to you. Items to look for are vandalism rates, serious crimes, petty crimes and recent activity (growth or slow down). You might also want to ask about the frequency of police presence in your neighborhood.
- Job Market: Locations with growing employment opportunities tend to attract more people – meaning more tenants. To find out how a particular area rates, go directly to theU.S. Bureau of Labor Statistics or to your local library. If you notice an announcement for a new major company moving to the area, you can rest assured that workers will flock to the area. However, this may cause house prices to react (either negatively or positively) depending on the corporation moving in. The fallback point here is that if you would like the new corporation in your backyard, your renters probably will too.
- Amenities: Check the potential neighborhood for current or projected parks, malls, gyms, movie theaters, public transport hubs and all the other perks that attract renters. Cities, and sometimes even particular areas of a city, have loads of promotional literature that will give you an idea of where the best blend of public amenities and private property can be found.
- Building Permits and Future Development: The municipal planning department will have information on all the new development that is coming or has been zoned into the area. If there are many new condos, business parks or malls going up in your area, it is probably a good growth area. However, watch out for new developments that could hurt the price of surrounding properties by, for example, causing the loss of an activity-friendly green space. The additional condos and/or new housing could also provide competition for your renters, so be aware of that possibility.
- Number of Listings and Vacancies: If there is an unusually high number of listings for one particular neighborhood, this can either signal a seasonal cycle or a neighborhood that has “gone bad.” Make sure you figure out which it is before you buy in. You should also determine whether you can cover for any seasonal fluctuations in vacancies. Similar to listings, the vacancy rates will give you an idea of how successful you will be at attracting tenants. High vacancy rates force landlords to lower rents in order to snap up tenants. Low vacancy rates allow landlords to raise rental rates.
- Rents: Rental income will be the bread and butter of your rental property, so you need to know what the average rent in the area is. If charging the average rent is not going to be enough to cover your mortgage payment, taxes and other expenses, then you have to keep looking. Be sure to research the area well enough to gauge where the area will be headed in the next five years. If you can afford the area now, but major improvements are in store and property taxes are expected to increase, then what could be affordable now may mean bankruptcy later.
- Natural Disasters: Insurance is another expense that you will have to subtract from your returns, so it is good to know just how much you will need to carry. If an area is prone to earthquakes or flooding, paying for the extra insurance can eat away at your rental income.
Talk to renters as well as homeowners in the neighborhood. Renters will be far more honest about the negative aspects of the area because they have no investment in it. If you are set on a particular neighborhood, try to visit it at different times on different days of the week to see your future neighbors in action.
The Physical Property
In general, the best investment property for beginners is a residential, single-family dwelling or a condominium. Condos are low maintenance because the condo association is there to help with many of the external repairs, leaving you to worry about the interior. Because condos are not truly independent living units, however, they tend to garner lower rents and appreciate more slowly than single-family homes.
Single-family homes tend to attract longer-term renters in the form of families and couples. The reason families, or two adults in a relationship, are generally better tenants than one person is because they are more likely to be financially stable and pay the rent regularly. This owes to the simple fact that two can live almost as cheaply as one (as far as food, rent and utilities go) while still enjoying dual income. As a landlord, you want to find a property and a neighborhood that is going to attract that type of demographic.
When you have the neighborhood narrowed down, look for a property that has appreciation potential and a good projected cash flow. Check out properties that are more expensive than you can afford as well as those within your reach – real estate can often sell below its listing price. Watch the listing prices of other properties and ask buyers about the final selling price to get an idea of what the market value really is in the neighborhood. For appreciation potential, you are looking for a property that, with a few cosmetic changes and some renovations, will attract tenants who are willing to pay out higher rents. This will also serve you well by raising the value of the house if you choose to sell it after a few years.
As far as cash flow, you are going to have to make an informed guess. Take the average rent for the neighborhood and subtract your expected monthly mortgage payment, property taxes (divided by 12 months), insurance costs (also divided by 12) and a generous allowance for maintenance and repairs. Don’t lie to yourself and underestimate the cost of maintenance and repairs or you will pay for it once the deal is done. If all these figures come out even or, better yet, with a little left over, you can now get your real estate agent to submit an offer and, if everything goes well, order business cards with Landlord emblazoned across the top.
Ready to Make the Move?
Make sure you get the best mortgage rate if you are looking to invest in a rental property.
The Bottom Line
Every state has good cities, every city has good neighborhoods and every neighborhood has good properties, but it takes a lot of footwork and research to line up all three. When you do find your ideal rental property, keep your expectations realistic and make sure that your own finances are in a healthy enough state that you can wait for the property to start producing cash flow rather than needing it desperately. Real estate investing doesn’t start with buying a rental property – it begins with creating the financial situation where you can buy a rental property.
Whether you own a single-family rental home or a large apartment complex, property insurance is crucial to protect your rental property from many types of perils. An experienced agent will analyze your rental operation and recommend a policy for you.
What Property Insurance Covers
Most property insurance covers damages or losses from fire, storms, and burglary. Be sure to check out whether your policy will cover “loss of rents” as a result of one of these perils (such as a fire in your building which makes a unit uninhabitable).
Property insurance should also reimburse your losses from vandalism (whether by a disgruntled tenant who punches holes in an apartment wall or a local teenager who paints graffiti on the side of your building). Always report vandalism to your local police department (your insurance company may require a police report before reimbursing you for vandalism-caused damage).
Property insurance does not cover all losses (mudslides, for example, may be excluded), so be sure you know what is and is not covered and the dollar limits of your policy.
Earthquake, Flood, and Other Insurance
Depending on where your property is located, you may want to purchase additional protection for special perils such as earthquakes and floods (these are not typically included in property insurance policies).
A comprehensive policy will also include liability insurance, covering injuries or losses suffered by tenants and others as a result of a defective condition on your rental property. For example, if your tenant breaks a leg as a result of falling down your broken front steps, liability insurance will cover the tenant’s medical bills. Liability insurance will also cover lawyers’ bills for defending personal injury lawsuits against you. The most comprehensive type of liability insurance covers libel, discrimination, unlawful or retaliatory eviction, and invasion of privacy (with some exclusions, such as intentional acts or violations of criminal statutes).
Many landlords (particularly in high-end rentals) require tenants to buy renters’ insurance. This covers the tenant from losses or damage to their belongings due to theft or fire. Renters’ insurance also covers as injury to other people or property damage caused by the tenant’s negligence.
by Brad McMillan
of Commonwealth Financial Network
Today, I want to revisit a post I wrote just over two years ago. I’ve updated some of the data, but the concerns and the conclusions remain timely. In keeping with one of my recurring themes, this is also an example of how rising interest rates won’t mark the end of the world but, rather, a return to a more normal environment.
Can the housing recovery survive rising interest rates?
That is, as rates rise, will we see average housing prices level off or even start to decline again?
This question is becoming increasingly relevant. Mortgage applications have fallen in some weeks recently as rates have risen, and the average mortgage rate just ticked back toward 4 percent, for the first time since the end of last year.
To keep this in perspective, rates are still at almost the lowest levels since records have been kept, per the chart below, and are still down significantly over the last year, despite the recent uptick.
Nonetheless, perception is reality, and buyers look at rates in the context of their recent experience.
Will an uptick in rates hurt demand?
At the end of the day, the future of housing depends on the market, on supply and demand. Let’s consider demand first; without it, supply is irrelevant.
It’s important to look at effective demand—demand from people who can afford to act. One way to analyze effective demand is to look at median incomes in order to determine how much people can afford to pay. We can then look at current mortgage rates and possible changes to determine how rate increases will impact effective buying power. Finally, we can compare the effective buying power with median home prices to see whether the change in rates changes effective demand, given current pricing.
Here’s an example: Assume a two-income family, with both husband and wife employed full time. The most recent data from the Bureau of Labor Statistics puts median weekly income for men over 25 at $944 and women at $759. This equates to a combined income of $1,703 per week, $7,380 per month, and $88,556 per year. At 28 percent of their income, a typical ratio, this family could afford to pay $2,066 per month on their mortgage. It’s a bit more complicated than that, of course, but this is a reasonable approximation.
Based on this payment, with a typical 30-year mortgage and a 20-percent down payment, this family could support the following mortgages and home purchase prices. You can see that higher rates do indeed affect the affordability of a home.
Rate Mortgage Purchase Price
3.5% $460,000 $575,000
4.0% $432,000 $540,000
4.5% $407,000 $508,000
5.0% $384,000 $480,000
5.5% $363,000 $453,000
6.0% $344,000 $430,000
The first thing I would note about these calculations is that no one in their right mind would actually borrow this much. These numbers represent what a borrower could conceivably qualify for, not what he or she should actually do. Nonetheless, they provide a guide to affordability overall.
The median price of a single-family home, depending on which data set you look at, is around $220,000, a nice round number. If we look at the figures above, we see that even at rates of 6 percent, affordability for the average family does not look to be a problem, even if rates continue to rise.
Taking a more restrictive view, using after-tax income, for example, we still find housing affordable at rates well above current levels. Using a 35-percent effective tax rate would give our family an allowed monthly mortgage payment of $1,343, which would lead to the following numbers:
Rate Mortgage Purchase Price
3.5% $299,000 $373,000
4.0% $281,000 $351,000
4.5% $265,000 $331,000
5.0% $250,000 $312,000
5.5% $236,000 $295,000
6.0% $224,000 $280,000
Even using this more conservative approach, the median house price remains affordable at higher interest rates.
Buying vs. renting
Another way to look at demand is to compare the relative costs of buying and renting. After all, just because a family can afford to buy doesn’t mean it will. What if it’s cheaper to rent?
Comparing the costs of renting versus owning is not simple; the numbers I have for the median apartment rental rate in the U.S. range between $801 and $1,430, depending on the source. For purposes of argument, let’s use the U.S. Census figure from 2011 for units built in the past four years, or $1,052. (Given rent increases since then, the rate is probably well above that, but it should be close enough.)
Using a 20-percent down payment and the median house price of $220,000, the monthly mortgage costs are as follows:
Rate Mortgage Payment
3.5% $176,000 $790
4.0% $176,000 $840
4.5% $176,000 $891
5.0% $176,000 $944
5.5% $176,000 $999
6.0% $176,000 $1,055
Even at the lowest average rent figure, a mortgage payment is comparable to rent using current interest rates. For the Census rent figure, mortgage payments will be less than rent for rates up to around 6 percent.
This is clearly a simplified analysis. I’m ignoring real estate taxes and maintenance costs, but I am also ignoring the mortgage interest tax deduction. I’m ignoring the freedom to move that comes with renting, but I am also ignoring the value of locking down housing costs into the indefinite future. Rents can go up; fixed mortgage payments don’t. Most of all, I’m ignoring the psychic benefits of homeownership, which haven’t gone away and which continued to drive people to buy, even when renting was cheaper.
The biggest thing I’m ignoring, however, is the down payment. The reason I’m not considering it is that the down payment has always, except for the period from 2005 to 2007 or so, been necessary. The need for a down payment is not a new factor but represents current conditions, and we do not need to model a change in this analysis.
Bottom line: demand should remain strong
In the end, buying demand for homes does not seem likely to be crippled by higher interest rates, at least in the immediate future. With a down payment, it is now generally cheaper to buy on a median basis and should continue to be so for some time, with all the other benefits of homeownership thrown in for free.
Given the amount of pent-up demand out there (look for another post on this soon) and the limited supply of homes available, it seems more likely than not that both demand and prices will continue to increase even if interest rates continue their climb.