Bought a Triplex, now what? Solar in San Diego?

Question

Hey BP! Thanks to BP and numerous books I finally felt confident enough to take the plunge and buy a triplex. Here is the post for context: https://www.biggerpockets.com/forums/850/topics/853758-san-diego-va-house-hack?highlight_post=5014571&page=1#p5014571

Looking forward I am eager to increase the value of the property. It was remodeled prior to purchase so there is not a lot I can do in that realm. I've been looking into solar power installation and it seems that i could increase the value of the property by ~4%. Has anyone had experience with this? Are there other ways I can increase property value?

As a multi-unit property I understand that the value is directly tied to incoming rent. Thanks in advance!

Dan H. · Answer

Vacancy in San Diego is very low and much of the vacancy is in commercial MF where the NOI sets the RE value.  My actual vacancy rate is <1% when not counting vacant time for value adds.  We have had one vacancy in the last couple of years between all of our LTR units (16 LTR units).  It was bad timing because it was during Covid (Moved out May 1).  It took more of our time to rent (no huge open house - We showed to each prospective tenant individually), but it was only vacant 1 month and about 2 weeks of which were spent on the tenant turnover (previous tenant was there 5 years so painted all interior, replace 2 out of 3 faucets, replaced all internal water valves and hoses, laundry roof needed some repair, repainted car port, replace one bathroom fan, replaced 3 blinds, some work to closet doors: turnover cost was ~$4k).

You seem to have done your due diligence.  I mostly was concerned because of the negative cash flow.  You are in a position to handle the negative cash flow so that is not a concern.

As you have likely already figured out, STRs have much higher operating costs (with PM) or take much more time (no PM), or a combination of the two, than LTRs.  The rents look good, but many investors do not understand the associated expenses.   Our duplex STR has average rent of ~$16K/month (pre-Covid) but the expenses are significantly higher than our LTRs (Our STR has professional PM, we self manage the LTRs).  In addition, STRs in CA are at constant risk of regulations limiting them.  Most of these proposed limitations do not apply to owner occupied (so you are at lower risk), but you never know.

I have a question for you.  Seeing that the CA multiplex is rent controlled, how did you get the tenant out to convert to STR?  I recognize you can get a tenant out for you or close family to move into a unit.  I do not believe you can force a tenant out to convert to STR.  Was it delivered vacant?

Thanks

Christian Johnston · Answer

@Dan Heuschele yes I did a pro forma. My pro forma using the 50% rule and using standard expense percentages for San Diego both created a small negative cashflow. I took the risk on this negative cashflow due to vacancy rates being significantly lower in the area that I purchased, the cap ex % would be lower given that every appliance is new and under warranty. The property proved to fully rent 25 days before my first mortgage payment (so I believe my assumption of lower vacancy rates was a decent one...but time will tell). Additionally, the Airbnb is renting at almost double my projected amount...though this can not be expected in the future.

At the end of the day I am allocating funds on the basis of the 50% rule. Though so far I am "renting" for free, I am allocating what I would normally pay for rent to cover future costs. That, paired with a healthy amount of reserves, puts me in a good position in the case of a large expense.

Ulysses Arreguin · Answer

The value of your home would increase with going solar, but it would not be in the 4% range. The value of the investment property would increase depending on the size of the system install and since it is a triplex you might get a good little jump. The important thing that you need to calculate is the amount of money you would be saving monthly if you installed solar also the amount you'd get back with the tax credit. The tax credit for solar is currently 26% and is going to decrease to 22% next year and will be terminated following 2022. If you're contemplating to see if going solar is the right move for you feel free to reach out I am a solar broker in CA and I can help you figure out how much money you'd be saving monthly. Tenants love the idea of solar if they are paying for electricity because of the cheaper cost so its usually a win win.

Dan H. · Answer

>As a multi-unit property I understand that the value is directly tied to incoming rent.

A residential property with 4 or less units has its value set on comps and not on NOI, rent, etc.  Reducing the expenses by adding solar would not increase the value (even if you were not individually metered).

>I've been looking into solar power installation and it seems that I could increase the value of the property by ~4%.

The solar will add less to the RE value than the cost of the solar.  In addition, you indicate that the units are separately metered so I assume you are not going to be paying the utilities.  I am a conservationist, but adding solar to this property would not be wise financially (but would be good for the environment).

>Are there other ways I can increase property value?

Value adds should be identified prior to purchase.  They are often unique to the individual property.  However, seeing that you are in CA, a value add available on many CA properties is to add ADU(s).  Another obvious value add that may, or may not, apply to your particular property is to leverage under utilized zoning.  The most common value add of a rehab is not available to you (the previous owner performed this value add and when you purchased the property you compensated them for their effort/risk).

If you wanted a property with a value add, you should have looked for a property with a value add opportunity.  To try to identify a value add after the purchase is very limiting.

Curious, did you run a pro forma cash flow projection prior to purchase?  The property has a 0.7% rent to cost ratio.  At a 100% LTV loan, that likely projects negative cash flow and will rely on rent increases for profit.  I have purchased with not much better ratios, but the property needs to have a value add if the ratio is that low.  The value add provides return in the short term.  In the longer term, the increased rents improve the cash flow.

Good luck

Aaron K. · Answer

@Christian Johnston solar does not increase the value of a property very much it would be nowhere near 4% in San Diego, however that doesn't mean it is a bad idea.  If you the landlord are paying all utilities and intend to continue to do so it could be worth it to put up solar.  If you are independently metering and have the ability to bill for the energy you create it may be worth it, but other than that it does not increase the value of a property much just by being present.  The studies that suggest otherwise don't seem to control for many if any other factors thus it ends up being a correlation rather than a causation.

Bought a Triplex, now what? Solar in San Diego?

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