I know the upfront cost of solar panels is significant. However, I'm wondering if I can pass the extra $50-$100/month to the tenant with the expectation to increase the demand for my property. Does anyone have any experience with this?
I definitely believe that tenants are looking for more amenities or a smoking deal. Being a fairly green millennial myself and if the rent is pretty comparable to the neighboring properties (Southern California pricing), I'm pretty sure that I would pick a green building that had free electricity with all else being equal, but maybe I'm a weird millennial. Any feedback would be much appreciated thx!!!
No firsthand experience with this, but if I were in the position of a prospective tenant I wouldn't find it that attractive. If the rent is raised to subsidize the cost of panels I'm not getting anything free, I'm just paying for electricity in a different way. I suppose what it would come down to for me is whether the rent increase is roughly equal to the electric bill I would otherwise be paying. If it's a wash I would give the unit equal consideration, if the solar is higher I would look elsewhere. It's fair to say I'm in the category of "green millennial" to some extent, I think renewable energy is cool but not enough to pay a rent premium vs. grid utilities.
Another factor to consider may be your long term strategy with the property? I could see solar panels being more attractive if you're planning to sell in the not too distant future, not so much if you'll retire with it.
Not sure of the dollar amount you'll be able to increase the rent, but we found this. We have a green rental with solar panels, efficient furnaces, good insulation, and garden space. We keep increasing the rent between tenants and still find we have a great applicant pool, multiple good applicants. I might argue that green features might increase the pool of interest if you're priced right. And the type of tenants who value these kinds of features are ones who will take good care of the property! (at least so far that's true for us)
Of course, location is critical, too. Are you on public transportation, near bike paths, in a walkable neighborhood? All of this stuff goes together.
@Matt Vezina @Tanya F. thx to you both for your input. In particular we have a 4 plex with long term tenants, most of which are slightly under market. To give some context, my 2 bedroom 2 bath tenant who has been there for nearly 5 years is paying $2750 and market is north of $3000/month.
My thought was that I've had other properties that had one meter so the rent was a little more, but all utilities included and it appeared to be a nice signing bonus for tenants. My thought was that solar panels would be a similar offer. I like the idea that the applicant pool would increase and that the tenants are probably more likely to care for the property. These tenants do a pretty solid job, but it couldn't hurt.
As a CA renter (but in Bay Area) I would pay higher rent for something tangible that I interact with daily (nice kitchen, floors, etc) but not sure I'd pay "over" market for solar panels. I don't see how they'd do anything but increase your applicant pool, but I think other updates could out perform them in terms of rent increases...
I have a rental home with solar panels, all appliances are electric and tenant has no electricity bill. The only benefit I've found is that the home rents faster then it does higher rent. All the homes around it are heated and cooled on propane so that's the real benefit to my rental.
In my opinion, it wouldn't work in many markets as renters wouldn't care, unless it saved them money, which would mean any increased rent would be minimal...however, in California I think there is a slight chance you could market it as a "green" house and have the potential to charge a premium, but I think this would involve more investment in other green efficiency appliances/fixtures and may increase vacancy times. it could be worth the research, but I doubt it would be worth the risk
@Matt K. @Shawn Johnson @Andrew Botcher Thank you all so much for your input. I like the concept of increasing my applicant pool and decreasing my vacancy period. I'm not expecting anyone to pay "over" market, but I typically like to be at the upper end of the market. Our properties are already completely gutted and totally new on the interior. In the last year, we've worked to improve the exterior of the property with the goal of decreasing the vacancy period and getting people in the door sooner. In particular, we had another 2 bedroom available at the same time that was $3200/month and I was trying to rent a 2 bedroom at said property for $2700/month. I couldn't get people in the door after driving by despite the fact that the property was equally as nice inside. Hopefully this continues to provide context for my marketplace and why I asked the question.
I'm taking the opinion that as our market continues to be successful and grow, I want to give back to the investment so that if there is a correction, applicants are more drawn to my property in contrast to competitors. There was a recent blog post on BP that discussed amenities as trending because tenants appear to have higher expectations out of their properties if there are many of us out there and investing.
The question becomes, is the increased applicant pool and decreased vacancy enough to offset the investment of solar panels?
Originally posted by @Jason D. :
If you were to advertise the rent to include electricity, and cover any overage that the panels couldnt produce, I would bet that you could charge a little more than the competition.
Seems like more risk for little to no reward....
Throw in something like free cable/internet than free electricity. You can run the tv/internet all day long and it's a set cost... not the same for electricity. I've also lived in places that had trash/water included, the dollar value wasn't that great but it was a big value in the sense it was one less bill for me to remember to pay.
I have several years of experience working in the solar industry and have solar on one of my rentals. My experience is that for most people, they'll be skeptical if you say, "The electric bill is $100 lower because of the solar panels, so therefore I'm charging $100 more in rent and your benefit is you get to know you're using clean energy". It's an unfamiliar technology to many people, so to help them understand you need to show them an actual power bill that's only $8, and really walk them through it.
If your solar is saving $100/month, I probably wouldn't expect to get that amount in increased rent, but I would expect you could get 50-80% of it. It's probably worth a look; solar can have a really strong ROI in CA since grid electric rates are so high. The tax benefits are even stronger for rentals than they are for owner occupied, because you'll get the federal tax credit, state tax credit, AND get to depreciate the system cost over 5 years. You should get a few quotes and run the numbers.
thanks @James Marshall for including tax info as well. I like that opportunity as well as adding value to the property through panels as opposed to a general discount for one thing or another.
@Kristina Heimstaedt How do renters in your market search for properties? I know where I own they do it based on the rent level. If you raise the rent (to offset the costs) such that your 3/1 has the same advertised rent as a 3/2 you could hit some roadblocks. Sure, some prospective tenants are going to click, read about solar power, read about utility savings, etc. but those might be a smaller subset. So parallel it, how many renters search for double-pane windows? Ask about the insulation used? I'd be zero. Will some care about solar? Probably. It's easier to see and easier to quantify. But I'd still posit it's harder to drive a tangible, measurable, ROI to offset the investment. I could be wrong 🤷🏻♂️
I would say no unless you are in a "green" market where that would actually appeal to renters. Seems like you would have to be in a slightly up scale neighborhood to find tenants this would matter to.
I think it comes down to a moral compass issue. If you feel enough tenants are morally persuaded to pay a little higher in order to forego typical energy production; go for it. If not, I would pass. I for one realize the underlying benefits of solar beyond just cost saving, so I know I would be persuaded by it. It also lets me know that you are a landlord that cares about your property, the environment, and your tenants.
IMO I would not add solar panels to a rental. Every single amenity or add on in a rental is something that can potentially break and cause service calls.
Unless the area is super green friendly I don't think it would matter if I had solar panels. Another issue is if I were to add something to increase the rent I would want the extra rent to pay for the item in the first year or less and last time I looked into solar panels they are not worth the cost of electricity savings even on your primary residence because they are so expensive to install.
Also have to be in a area with a lot of sunshine regularly to work as well as it should.
I would rather focus on adding energy efficient appliances, HVAC, low water spouts, make sure they understand to keep the air filters replaced every month to lower their bill, LED bulbs with wording in the lease they are charged if the bulbs come up missing after they leave etc. Then advertise as a energy efficient home.
I would only make these upgrades if the price made sense and as the existing item broke, in other words I would not put a lot of money into upgrades like this from the get go replacing perfectly working items and only if the cost was comparable or I knew I could get x amount of extra rent to cover the cost over a year.
Its all about the numbers and they have to make sense over the long term or you go broke. Sinking thousands of extra dollars into a unit that doesn't return more than thousands of dollars to you or is not absolutely necessary will end up eating all your profits.
If you make an honest $200 of profit on a unit a month after all expenses (capex, repairs, maintenance, vacancies, PITI etc) all it takes is a $2400 unnecessary expense to wipe out an entire years worth of profit.
@Andrew Johnson @Jonathan Klemm @Shaun C. @Michael J. Hi everyone. Thanks for the input. I should add that this property is in Southern California and the monthly mortgage payment is under 2k/month and the income on the property is over 10k/month. I should also note that the building only has 3 meters. As a result, we pay utilities for 2 out of the 4 units. Within the portfolio, this is our best earner and we've done some cap ex repairs that add to the quality of the property (new deck and new automatic garage doors). I should also note that we could increase the rents by an additional $500 without resulting in too much turnover, and/or not have vacancy. Thought being that even if I can't use solar panels as a selling point to increase my rent, I still have room to increase rents.
My thought behind the solar panels is that although it is a significant expense, it would be mutually beneficial to both we as investors, the tenants and potential resale value if we ever choose to sell our best performing asset.
In the 5 years that we've owned the property, we've doubled the rents and the property itself has more than doubled in value (beauty of investing correctly in Southern California). @James Marshall I definitely think that learning more about the potential tax benefits for solar panels could definitely impact the financials and I will need to look more into that. Let's face it, who likes taxes. I think that is the more significant lingering question that could push this over the edge. Thanks everyone so much again for all your input!!
Here's some info about tax incentives and other considerations for California. This website has a nice summary for every state.
@Kristina Heimstaedt I think I would include electric in the rent if I was going to do solar panels. First I think a long term contract might open up some other options on getting the solar panels and second I think it will be more simple for the tenants to completely understand the benefit they will be getting.
Rather than increasing the rent you could monitor the solar production and bill the tenant for the kWhs produced and provided. In most areas, you should be able to charge them at a rate that is lower than the utility company and yet is cashflow positive to you (assuming you are financing the solar purchase). This would serve the same purpose as the tenant paying off the solar asset for you. There is a service based out of CA that does this type of solar monitoring and tenant billing on your behalf for this exact scenario. Feel free to message me, I can send over info on it.
@Kristina Heimstaedt I'm in the middle of doing this right now. Detailing the project here: https://www.biggerpockets.com/forums/52/topics/494...
Doubt you can charge over market rent, but you CAN do a "utilities included lease" and keep the difference in production vs. giving it to the electric company. Works well under certain market conditions, but there is a lot of math/billing/rate structure malarky to navigate, nevermind the installed cost and hugely inflated pricing of solar systems, inverters and monitors.