Home warranty benefits for Investors: ROI worries? Harness the benefits of home warranties, minimize risks, maximize returns, & safeguard investments. Investors, especially those with limited reserves, often grapple with the dilemma of home warranties. Initially skeptical, I explored their worthiness. Home warranties cover mechanical systems due to normal wear and tear, offering a safety net for sudden breakdowns. Expectations are vital; it’s not instant but significantly curtails repair costs. Top coverage means a mere $250-300 for a failed air conditioner condenser. Renewing for multiple years secures substantial savings. Transferrable and tax-deductible, home warranties emerge as prudent shields for investors facing unforeseen property challenges.
Brett
0:00:43 – Welcome to another episode of It’s 5 O’Clock Somewhere Real Estate Podcast. We’re not experts, we actually know what we’re talking about. We’re with the Stamps Real Estate Company Investment Division. We’re an investment team that does nothing but specialize in working with old school, middle school, and brand new kindergarten investors. We have investors around the world that we help buy and sell, and we’d love to work with you. My number is 901-692-7401, or you can go visit us at MyMemphisInvestmentProperties.com. And we are sponsored by Title Assurance and Escrow. It’s a title company here in Cordova that does all of our closings, title work, escrows, and I only use title assurance and escrow. That relationship to me is very important because I can get things done for my investors quickly and easily. So title assurance and escrow, 901-737-3332. If you call up here, ask for Chris or April. We’re going to start anew, kind of talk about what we have. You know, we spend a lot of time educating investors, passing along advice, interviewing lenders and people like that, builders, to try to give guidance to investors in this new and ever-changing investment real estate world, especially the one here in Memphis. But we never really talk about what we do as a team on the other side. So our team has a lot of off-market listings, properties available, rental properties. So we’re going to start taking a few minutes out of each episode and just kind of giving you an idea of what we have. And obviously, if you’re interested in pursuing or looking at any of these properties as a potential investment, you can give me a call at 901-692-7401. In studio with me is Nick Gibson, Jerry Zickman, two of our team members, and our Wanker producer, Richard. Jeff and I are co-listing a 16-house package, and the unique thing about this package, it can be broken up into 1s, 2s, 3s, 5s, 10s, however you want to break it up, but the unique thing about this is all these properties were purchased by one of my Builders Tom and what Tom does is he goes in and he completely rehabs them new bathrooms new kitchens new floors new roofs HVAC hot water heaters you name it and then he turns it over to our buddy Andre who we had on a previous episode Andre does MHA placement so Andre then goes out and gets MHA tenants at over market rent and then Tom turns that house over to me and then we turn around and sell it out to our investors. So you get a turnkey property with a one-year warranty with a tenant in place paying over market rent. It hits or exceeds the 1% rule so it’s a great opportunity for especially new investors just getting started to get their feet wet and get into a situation where there’s not going to be a lot of maintenance issues. If there are issues Tom warranties the issues, Tom warrants the property, he comes out and fixes whatever the problem is. That’s one batch of 16 homes that we have listed currently off market. We’re going to go to public listing sometime next week. I think I got Cassie working on it now. Also I got one interesting property actually in my book. It’s on Truman over in the Burclare slash Grahamwood area, which for those of you listing out of state, that means nothing to you, but that is an excellent rental property. Highly Hispanic, a lot of homes have been picked up, remodeled, turned over, purchased, rents are high, values are high, so it’s been a good, solid, stable rental market. The unique thing about this is that one of my lenders, it’s actually his wife’s aunt maybe, anyway, she’s been moved into assisted living and the house is in good shape. It needs about $30,000 worth of work, but it’s got a market value of around $135,000 as high as $140,000. And it can be picked up for around $80,000. So market rent on that property is going to be around $1,200 to $1,300 a month. So it’s a great opportunity for someone to pick it up, put some work into it, and gain some equity and some cash flow. Jerry, what do you have?
Jerry
0:04:21 – We have a house on 4230 Kerwin, list price $100,000. There’s a tenant in place, $1,000 a month, so that hits the 1% rule. Tenant has been in place for quite a while and will continue to be there for some time. So another good property for investors, hits the 1% rule, very little maintenance involved. It’s a good property.
Brett
0:04:46 – The market rent’s $1,100, so actually, if you went the market rent on it, you’d actually exceed the 1%. Market value, minimum is about 106, and I think the neighborhood high was in the 130s. So it’s got some good opportunity for upswing and pickup, as well as cash flow as well. Also, we have new construction. This is something you don’t hear a lot in the investment world is new construction, because typically new construction is out of reach for investors, because the cost per square foot is too high, you’re not getting the rent you need to justify the purchase price. But we have linked up with, I know Jeff’s got a new builder, I’ve got three builders now and they’re building brand new 4’2″, just under 1,300 square foot homes from the ground up with a one year builder warranty and they are renting at the 1% or better. So the unique thing about this is these are brand new homes and they’re almost tenant proof. So they’re wrapped, eaves and overhangs, hardy board siding, polished concrete floors, so you’re not replacing carpet or LVT if they damage it and you simply go back in there and refinish it. So with that one year warranty, everything being brand new and getting at the 1% or better with very little maintenance, this is another good opportunity for new investors, brand new, trying to get into investments, this is a safe way to go. You have no maintenance for the first year, probably for the first three or four years in case, you know, act of God or something happens. And the home itself is pretty much tenant-proof. Now, I know there are some tenants that could destroy concrete floors, could find a way to destroy hardy board siding and vinyl rapeseed and overhangs, but the majority of time, the houses are built almost tenant-proof. It’s built for longevity. So in our new construction, basically, we’re going to have in 2024, I know we’ve got close to 40 or 50 starting up our plan for 2024, that entire year is probably to produce 60 to 70 new construction rental properties. So they’re fantastic, good way for new investors to get rolling. I mentioned earlier about the MHA voucher program and then paying over market rent and you being able to exceed the 1% rule on a brand new construction with a one-year warranty. But I want to refer you back to a previous podcast where we had our MHA guy on who does the placement. The title of that episode was Section 8 Makeover, High Rent, Less Risk in Memphis. So check that out if you get a chance. That’s kind of what we have currently, 901-692-7401 if you want to touch base with us, if you’re interested in anything we have, or if you just want to call and pick our brain about your investment strategy and bounce things off of us. We also put you in touch with some of our other investors who love to talk to newer investors and try to give them their insight and wisdom. So feel free to reach out to us, MyMemphisInvestmentProperties.com, 901-692-7401.
Brett
0:07:34 – In studio with us is Christy Stokes from Choice Home Warranty.
Christy
0:07:37 – Hello, thank you for having me.
Brett
0:07:38 – Yeah, so we were talking and about a month or so ago, I got an investor that asked me a question. We were talking about repairs. We were talking about setting aside money for future issues and repairs and turnover and stuff like that. And he just asked me the question, should I put a home warranty on it? My initial response was no, why would you do that? I mean, it probably doesn’t cover anything anyway. You’re just gonna be wasting your money. It’s like car insurance. It’s a waste of money until you actually get an accident. But then as we started digging into it, and I do have a few new investors who have a home warranties, then we started researching it and trying to understand more about home warranties and whether it is a good choice for an investor, especially young investors who don’t have a lot of surplus money set aside, who are fearful of getting a dreaded call, the furnace just blew up and it’s 20 degrees outside. So explain to us quickly or briefly to start what a home warranty is.
Christy
0:08:29 – So a home warranty is going to cover the mechanical systems in the home that fail due to normal wear and tear. A tree falling on it, wind damage, not covered. It has to disfail a normal natural failure. But homeowners essentially take care of an act of God. They take care of the act of God. So that’s how they kind of work together. Water heater and the attic bus, water comes down, we fix the water heater, they fix the secondary damage. Expectations are important with a home warranty. It is not going to be immediate gratification. It is not an emergency service, but it offsets the cost of repairs hugely. Let’s take an outside air conditioner, the condenser that’s outside, that fails. If you have the top coverage, you’re probably going to be spending about $250, $300 out of pocket. I would much rather do that than the thousands of dollars, which is going to get you upside down with your rentals. A full system replacement, anywhere from $800 to $1,200 replacement. If you have replaced the system recently, you know that is a heck of a deal.
Brett
0:09:28 – So when you say cost is $300, $400 out of pocket for the investor, what does that entail? What does that?
Christy
0:09:36 – That would be modifications, code upgrades, anything out of the ordinary that has to be done. It’s just very normal in the world of warranties to have some skin in the game as a homeowner. So I’d pay that two or three times to not have to pay retail for that.
Brett
0:09:51 – So basically I get an investor that closes tomorrow. A week from now, the furnace or the HVAC blows up. It’s just shot. The home warranty is going to cover replacing that, but you’re saying there’s other issues so that, guess what, the new condenser is not going to match with the old coil. That coil’s got to be changed out. So that property owner would pay for the new coil.
Christy
0:10:11 – Not necessarily. So if you have our top coverage, we do whatever has to be done to make the part that failed change out, other than non-covered cost. So if you have our top coverage called ultimate, we’re going to cover the condenser, and if that coil has to be changed out, we’re going to take care of that less the non-covered cost. But you touched on something. Brand new coverage, you have to start the coverage in good working order to the best of your knowledge. So if something happens that first 30 days after we pay for the warranty, you pay for the warranty, we’re going to be more critical. We expect if you bought thousands and hundreds of thousands of dollars for a house, things should work for a minute. So if they don’t and they fail, we’re going to ask for a copy of the home inspection.
Brett
0:10:53 – Right. For repairs. But after 30 days…
Christy
0:10:56 – You’re golden. In case something’s really wonky or looks like a squirrel has been in there or something, it was never working, people do take advantage of warranty, sadly. Then that would be the only reason we would ask for that.
Brett
0:11:08 – So there’s a window of 30 days that if something goes wrong, you’re probably SOL?
Christy
0:11:12 – No, if you have your home inspection and any repairs that were done to offset the deficits in the home inspection You’re golden. It says on that inspection have that unit cleaned because it’s dirty It’s wearing a sweater if you do that and have licensed receipts from technicians You’re not going to be denied and that’s where I come in. I’m local. You’re not dealing with a 1-800 number I know the gray areas and how to keep you safe So as long as you trust me and you ask me, hey this is what’s wrong, what do we do? I’m going to guide you.
Richard
0:11:43 – Now what about if I’m an existing owner of properties? If I’ve owned them for two years already, is that process going to be any different? If I buy a policy, what is going to be my experience in relation to the 30-day scrutiny? As obviously I wouldn’t have a valid inspection I could provide.
Christy
0:12:04 – 30-day wait. If you have just purchased that you own, you come through me directly, not a 1-800 number, I put you in place and you have to have a 30 day wait. And then it won’t start for that 30 days, so then we’re still going to be a little critical, but we assume people aren’t living without an air conditioner to let something season for 30 days.
Brett
0:12:20 – Hmm. For $3,500 to $4,000 total, I might. Just go buy some Walmart fans and just gut it out for you. Keep the house cool.
Nick
0:12:29 – I’ve got a question for you. Investor buys a 10-house package. Absolutely. Is he buying 10 separate home warranties or is there some sort of a package that he can get, a discount that he can get for having multiple properties covered?
Christy
0:12:40 – I have built-in discounts that I’m able to offer, but it would be individual because each house has its own policy.
Brett
0:12:46 – So you’d have 10 policies, but you can get a discount on all ten if you buy in bulk.
Christy
0:12:52 – Absolutely. And one of the things that we have, another investor, Mr. Richard Scarborough does, he does three or five year warranties because once you get, if our normal warranty is $660 for the year, that’s 13 months of coverage, when you go to 26 months, it’s $1,010. Three years and three months is $1,490. So you’re saving money the more years you get.
Brett
0:13:12 – It’s always better to put a four or five year policy on it and not worry about it.
Christy
0:13:15 – It is. It is. The only thing we’re going to be more critical that second, third, or fourth year is cleaning the unit. Keep your units clean. As long as they don’t get out there and there’s not debris and it looks like weeds are growing up, you’ve changed your filters, that’s the only thing we’re going to be a stickler about.
Nick
0:13:31 – Can these warranties be transferred to the next owner should the investor decide to sell?
Christy
0:13:35 – Absolutely. If you’ve paid that warranty in full, you would just let me know, we’re closing this date, here’s the new buyer’s phone number and email, and as of the day of closing, it can become theirs.
Brett
0:13:43 – Okay, that makes sense. Jerry, you had a question, you were asking your question earlier and we wanted you to stop so we can get it on recording.
Jerry
0:13:54 – My question was, my past experience, it took an extremely long time for the home warranty company to respond to an issue that I had, and because it took them so long I just got away from the home warranty and just took care of everything myself. I think when it comes to home warranties and from what I’ve heard so far this lady here in Memphis has things down to where you can actually be trustful in what she’s telling you but my only thing would be when you do purchase a home warranty to make sure exactly what you’re going to get for what you’re paying. Would that not be correct?
Christy
0:14:28 – That is exactly true. I think when people get the lower policies, they assume everything’s covered because we don’t read. We just assume. And so they’re disappointed when things aren’t covered. But back to your point, the warranty is not immediate gratification. Sometimes a part has to be ordered in the middle of summer, that first two or three weeks of huge heat. It is going to be a delay. So in that situation, you know that the amount that you’re going to save, you kind of have to weigh that because we do have some times where it takes a week to get the unit in. It could take five days for the tech to get out there. I can kind of help manipulate that or kind of allow you to use your own technician, but it is not going to be call on a Sunday and get out there Sunday night.
Brett
0:15:08 – Well, that was my question. It’s important to know. Let’s say I’ve got a rental house and my tenant calls, it’s typical Memphis summer beginning of August and air goes out on a Sunday morning and it’s blazing hot. So home warranty company says look we can get somebody out there Monday or Tuesday but I know that this tenant’s miserable and we need to figure something out quick. Can I get my own guy to go out and fix it and then submit those receipts to the home warranty company if they’re legitimate would I be reimbursed any portion of that?
Christy
0:15:35 – Some.
Brett
0:15:36 – Some? What is some? 10%? 20%?
Christy
0:15:37 – Because we are not an emergency service, we would allow you to do that, but you have to follow the instructions, you have to fill out a little thing online, and we are only going to reimburse at our rates. Now keep in mind, we’re a national company. We’re number two to three in the country, so our rates are just stupid low compared to what you can go to Lowes for, you can call whoever your technician is. So your amount reimbursed is going to be way more minimal than it would normally be. still an option. I don’t have to let my tenant sit there and swelter for a week if there’s a problem.
Brett
0:16:05 – But at the same time, I spend $3,500, get a new condenser put in Sunday afternoon, pay an emergency call fee, and then I get $1,600 of it back or whatever it is, then that’s
Christy
0:16:18 – Because you know that in an emergency situation, you would have had to pay the entire amount anyway. So if you get something back, let’s say $1,000. That’s still a thousand dollars. That’s way more than what the policy would cost.
Brett
0:16:29 – Well, you just paid for your policy.
Christy
0:16:30 – You paid for your policy. So having those expectations, now if you’re in the middle of fall and it’s pleasant outside and the air goes out, wait a few days or keep a couple window units on hand because I have that that a lot of investors, they’ll keep a few emergency window units, it helps cut the air until we can get that replaced.
Nick
0:16:48 – What about the vetting process with the technicians and the contractors that y’all use?
Christy
0:16:52 – It is like herding cats, as you know. Y’all deal with contractors. What we do is we have a team, we try our best, we vet them, we make sure they’re insured, that they have good reputations, but their employees turn over.
Brett
0:17:04 – At the end of the day, they’re still contractors and stuff.
Christy
0:17:06 – They’re still contractors and their employees turn over. So what may be a fabulous company for three, four months could absolutely lose the show a month later, but that’s where I come in. I want those phone calls when a technician shows up with dogs in the car, unmarked car, flip-flops, kit, you know, there’s so many calls I’ve gotten.
Brett
0:17:25 – Unprofessional. Yeah, because nothing says this isn’t going to work when I leave than a guy in flip-flops and a tank top with dogs in the back. Or with a car with a back door that’s fallen off.
Christy
0:17:32 – We do use mom-and-pop companies. So these are hard-working individuals and they may not have the top-of-the-line cars, but they’re hard workers. But if they aren’t hard workers and they do something wrong, I want to know so I can call in the dogs. So if they shows up high, I can report it. Yes, and I have gotten that call.
Brett
0:17:53 – I don’t know man, if he’s high, he may do a better job. He may undercharge me, right? Charge me half the price by mistake because he was stoned.
Christy
0:18:02 – I’ve had every call out there as I’m sure you all have.
Brett
0:18:04 – Oh yeah. Well, I’ve been in this game a long time. Nick’s been around the construction business a while. Jerry’s new to it, but he’s been in the retail side of the world for a long time. So yeah, we pretty much probably dealt with every bottom feeder that is known to the world. So well, then I’m going to ask you a point blank question and take your sales rep hat off, take your home warranty hat off. As an investor, would you recommend that I buy a home warranty? And if so, why?
Christy
0:18:29 – You know, I grew up with rental property. We had many, many rental properties and my family did it old school. He didn’t have groups that he could talk to. He had to go and after work at the police department, him and my mom took care of these homes all over Memphis. So I saw the blood, sweat, and tears that went into that. But now, as you talked about earlier, a new investor, a young investor, somebody who’s just getting started with their family, that hurts when you have thousands of dollars for a new air conditioner or a few thousand dollars, $1,500 for a water heater. That could totally blow your rent for a while, the profit. So having a warranty helps offset that cost. So yes I do, as long as you understand it’s not immediate and that it’s going to offset the cost of repairs, you may have some non-covered cost, but gosh, when you’re paying $250 or so for a new water heater, that is very budget-friendly, especially in this day when prices are going up, up, up on everything that we touch. It’s just nice to have a little cushion there to help you.
Brett
0:19:24 – A good deal on a new hot water heater installed, Nick just told me, was probably at least $1,500. I’ve heard them as high as $2,000. So $250 is a deal.
Christy
0:19:32 – All day long. Now, could it be a little higher, a little lower? It depends on what has to be done. Maybe they can’t go back with a gas water heater, they have to go back with electric. There’s going to be things that happen, but as long as you trust me that I’m going to look at it and tell you this is accurate, this is a good denial, no, this is a bad denial, I can flip it over. Leaning on me to guide you and having the proper expectations of time and cost, that is what makes a warranty. People love it instead of hate it.
Brett
0:20:03 – Let me ask you, you said denial. Yes. What would be the cause of me as an investor contacting Choice Home Warranty saying, hey just got a call, hot water heater blew up. What would be a reason for denial? That tenant caused or obviously act of God?
Christy
0:20:20 – Act of God, maybe the faucet plumbing is one of the biggest claims that we have and as a previous investor and with my family they’re not as careful with the faucet handles. They rip off, they tear them off. That would not be covered. We talked about roach. We’ve had rodents in investor properties. We’ve had dishwasher.
Brett
0:20:36 – Memphis roof rats.
Christy
0:20:37 – We had those and we’ve had where roaches had gotten into the dishwasher and it made it fail. So if there’s something that doesn’t fail due to age, that would not be within the scope of coverage.
Brett
0:20:47 – Or due to just the investor and or tenant not taking care of the property.
Christy
0:20:53 – Exactly.
Nick
0:20:54 – An investor has a home warranty through you guys. Do they have to themself call, make the claim? Can the property manager who’s working for them handle that for them?
Christy
0:21:02 – Yes. Property manager can, absolutely. And I’ve got some investors who do it one of two ways. I always suggest that the property manager is on there because he needs to kind of guide the ship, kind of make sure everything’s going right. Tenant may not schedule. They may get too busy at their complainant. It’s just it’s easier for them to have their hand on the pulse. So yes, they can do that. They can place it online super easily. It takes just a few minutes and then they can kind of watch the progress of the claim online. So super easy to do. Now there is a service call fee due. No matter what is done, whether they get out there and the water heater has just been unplugged accidentally, which can happen, there’s still a service fee due. So that would be arranging with the contractor, do you make the tenant pay it? On some levels of property, absolutely. We have investors who…
Brett
0:21:46 – Most of our management companies, if there’s a tenant cause issue, bill it back to the tenant.
Christy
0:21:50 – They do..
Brett
0:21:51 – But what is that service call?
Christy
0:21:52 – $75. Sometimes on renewal, it may go up to $85, but you’re at a $75 to $85 range.
Brett
0:21:58 – Now if it’s a legitimate call and there has to be work done, the service fee is charged on top of the work?
Christy
0:22:04 – Always you’re going to have a service fee, no matter what. For them to show up, that’s just like if you called a contractor, you’re probably going to have a service fee.
Nick
0:22:12 – Which, and that’s honestly, that’s a bargain. I know some electricians and plumbers that they won’t show up to your house for less than $150 To even take a look at it.
Christy
0:22:18 – All day long. But, it’s also you asking those questions to the tenant. Is it plugged in? Could you check that? Could you make sure the breaker’s not tripped? You know, do some of those things to kind of save you both a little bit of time.
Brett
0:22:30 – Interesting. Well, that makes a lot of sense. You know, we’re obviously looking at opportunities to better what we do for our investors. I feel home warranties is a good solution for some of the problems that we’re seeing as of late. A lot of our turnkey properties and new construction properties all have builder warranties on them. But at the end of that first year, literally I’ve seen the day after the warranty expired, HVAC condenser was only a year old, blew up. Now it was supposedly under warranty, but the guy that installed it was gone. He had gone out of business, had disappeared, and there was just no way for us to get the warranty worked on. In this case, that would be a covered item, and I think that would have saved my investor. I think he spent close to $3,000 on it.
Christy
0:23:13 – Which is a great deal because most just regular homeowners can’t get it for that. A whole new unit is going to be ridiculous. One of the other things, which is kind of good for investors, unless it’s a multi-year policy, they can pay monthly. So you’re looking at $50-something a month, which is pretty reasonable per house.
Brett
0:23:29 – Well, that’s my next question is obviously cash flow is why people invest. And every expense creates less of a cash flow and it hurts their ROI. So a monthly $50 fee may be absorbable, but in my opinion, you’re better off getting a five-year plan, paying for it all up front as part of your closing, and then that first year writing that cost away and now you’re covered.
Christy
0:23:51 – Right, because it is a tax write-off to have the warranty. Five years and five months is $2,400, so that’s under, that’s like what, $480 a year?
Brett
0:24:00 – You can write it off against the property.
Christy
0:24:01 – You can write it off.
Brett
0:24:02 – So what percentage do you know, the whole thing?
Christy
0:24:04 – I think it’s the whole thing. That’s a couple of years ago that I was told that, so I don’t know what’s changed.
Brett
0:24:09 – So we’re not tax advisors, but you can ask your tax advisor. And if it is completely deductible, that’s even a better angle, in my opinion, because even if you never use it and you can get a $2,400 write-off. Listen, a lot of guys invest in real estate right now because they need a tax write-off. I wish I was in that category. I would want the cash flow, but they’re just doing it for tax write-offs. So here’s another 10 properties, you’re talking $24,000 in tax write-off. I guess the question would be is can you do it all at once or if you got to take it over a period of time or how long the warranty is or… But those are questions for your CPA.
Nick
0:24:39 – How do our investors get in touch with you so that they can ask questions and get pricing and go over scenarios?
Christy
0:24:44 – My cell phone is 901-616-2285. That’s 901-616-2285. These guys have my phone number. That’s really probably the fastest way. It’s Christy Stokes. You can look me up on Facebook or social media. Choice Home Warranty. I’d suggest you don’t call the 1-800 number. I’m local to have a friendly voice, to plug me in your phone, to get the best real estate rate. There’s two sides of most all warranties. There’s a consumer side. You just call off the street. You’re gonna get a lesser product. With me, it’s a more robust product because we have to answer to real estate agents and investors. So going through me is going to get you a better policy and pricing.
Brett
0:25:24 – Yeah, our team is all about local. We preach local. Yeah. We’re very grassroots-oriented, boots on the ground type of organization, and we want people around us that do the same thing. So Christy, thank you. I appreciate it. Nice to finally meet you, Face to Face.
Christy
0:25:36 – Yes, nice to meet you.
Brett
0:25:37 – We’ve talked before. I think I’ve sent you some home warranties in the past.
Christy
0:25:39 – Thank you.
Brett
0:25:39 – So I appreciate everybody listening to our Real Estate Podcast. Give me a call at 901-692-7401 or you can go visit us at MyMemphisInvestmentProperties.com.