The case for solar on a rental property

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The case for solar on a rental property

James Smyth
Investor · Amityville, NY · Member since 2020 · 24 posts · 13 votes

TLDR; Summary:

If I go with the Tesla Solar Roof, the cost to install after incentives is going to be lower than the cost of the traditional roof without solar. I will be able to finance the entire roof with no money down, will cashflow from day 1 ($60/mo), and after 15 years the tenants will have paid off the roof and there is still 10 years left on the warranty! If the cost of utilities goes up 2.8% per year and my solar system is producing 94% of the year 1 production; the system will produce 9,851 kwh/yr, the cost of electricity will be 34c/kwh, and I will cash flow an extra $279/mo.

Since there is no money out of pocket my cash on cash return for this system is technically infinite.

So, not only can we advertise the rental as a "green rental" since we're saving the planet from carbon emissions and all... but we can also make a little extra $$$ at the same time!

Details:

I did a search here and it seems that many investors have talked down the case for solar on a rental property and I would like to make the case for it and encourage thoughtful discourse against it.  Convince me it is a bad idea.  Pardon the detail, as I am an engineer this is going to be a strict analysis of the numbers.

I am still looking into the taxable cost basis and the depreciable life of the solar system components (roof vs electrical); I'm unsure of the cost basis and depreciable life of the Tesla Solar Roof. For now I'm going to assume that on standard solar with a asphalt roof that only the electrical components have a 6-year MACRS depreciable life and the entire Tesla Solar Roof is depreciable as solar.

Case Study: House hack located in Suffolk County NY. The house is old and needs a new roof before installing solar.  If the roof is replaced as the "structural support" for the solar it is considered for the 26% tax credit.

Utility cost: 22c/kwh 

Annual electric usage: 12,000 kwh/yr

Annual electric cost: $2,640

Available Incentives: 

NYS Discount, 25% up to $5k 

Federal of 26% with no limit

Depreciation (once placed in service): 89% of the solar cost at a 24% federal rate and 6.57% state tax rate

Install solar panels and new roof: 25 year warranty workmanship and materials across the entire roof and solar assembly

Cost of replacement roof: $8,600 - 12,400; going with the cheapest reputable roofer at $10,300

Cost of solar system: $27,000 - $32,000; the cheapest quote has been in business the longest and has the best warranty go with $27,000

Cost of system: $10,300 + 27,000 = $37,300

Annual solar power production estimate: 12,179 kwh/yr; offsets the entire estimated usage

Annual solar production cost: 12,179 * 22c = $2,679.38/yr -or- $223.28/mo

Cost after incentives: $37,300 - $5,000 - $9,698 = $22,602

Finance option: Use NYS low-interest loan @ 3.5%; 0% bridge loan for incentives, ($22,602 @ 3.5% for 180 months) $161.56/mo

Tax benefits of depreciation once place in-service: $7,342 over six years, $6,083 recovered in year 1

Install Tesla Solar Roof; integrated solar roof with 25 year warranty across the entire roof assembly, 15 years on the inverter

Cost of Tesla Solar Roof: $31,635

Annual solar power production estimate: 10,480 kwh/yr; offsets the 87% of the estimated usage

Annual solar production cost: 10,480 * 22c = $2,305/yr -or- $192.12/mo

Cost after incentives: $31,635 - $5,000 - $8,225 = $18,410

Finance option: Use NYS low-interest loan @ 3.5%; 0% bridge loan for incentives, ($22,602 @ 3.5% for 180 months) $131.61/mo

Tax benefits of depreciation once place in-service: $8,603 over six years, $7,127 recovered in year 1


Summary of the effective cost of the solar:

Effective cost of solar system = Total installed cost of solar and roof - incentives - cost of new roof (required regardless of solar install) - tax savings

Effective cost of traditional solar = $37,300 - ($5,000 + $9,698) - $10,300 - $7,342 = $4,960

Effective cost of Tesla Solar Roof = $31,635 - ($5000 + $8,225) - $10,300 - $8,603 = -$493 (say what!? It is cheaper to install a Tesla Solar Roof than a traditional roof and that's before I charge the tenants for the electric!)

Understated benefits:

The solar loans are 0% down at 3.5% interest, I get the roof and solar system installed with a low interest loan with no money down

"You don't pay utilities, why would you put solar on the roof!?"

Besides the fact that after incentives I am getting the roof cheaper with no money down and a low interest loan?  Sure, in the standard lease utilities are the tenants responsibility.  Instead of getting stuck in what is "standard" why don't we just revise the lease to include some sort of mechanism to recover the cost of the solar system?  I can think of two simple ways this can be done in a number of ways:

Option #1: Utilities included with a cap

Include the utilities and adjust the rent up the cost of 1/12 of the estimated annual solar production.  If the tenant uses excess electric you bill them for the excess electric as additional rent.  If you want to make this one simple you can reconcile the utilities annually at lease renewal.  This would be very similar to the utility company offering "balanced billing".  If the tenant ends up with a sizeable bill, raise the rent to cover the added costs.

Option #2: Bill the tenant for utilities
Keep the utility bill in your name and charge the tenants whatever the going rate, or a discounted rate if you want, for the electric usage. Included the electric charge in the lease as "additional rent"

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John UnderwoodPro Member
Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
5y

I don't buy properties where I would need to pay the utilities. I can rent for top dollar without needing to through in solar cells or washers and dryers. 

So spending any money on this to benefit the tenants utility bill would be a waste of money for me.

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  • Dennis Wayne
    Member since 2020 · 339 posts · 356 votes
    5y

    Sounds good on paper but that’s not reality in real life . Those numbers efficiency and incentives seem like wishful thinking on your part lol

    The three main reasons I don’t see why you’d do this are

    It is very expensive

    It costs a lot

    It is not cheap at all

    8k versus 37k . Makes no sense and I’m not paying the electric anyway why would I even care ? That’s the tenants problem

    0Reply
  • Steve Morris
    Real Estate Broker · Portland, OR · Member since 2019 · 4k+ posts · 2k+ votes
    5y

    I think with the subsidies and if you have good exposure, I see no reason why not to do it.

    I'd just make sure:

    1) It's professionally installed since poking holes in the roof not good

    2) See if you can get some kind of workmanship warranty in case you do get moisture invasion

    3) Find out what gets recorded against title.  I think they record a UCC (meaning a lien) since they are financing it.  Only issue is if you sell the house or get a new loan, you need to call and get a release and then re-record the UCC.

    2Reply
  • Dennis Wayne
    Member since 2020 · 339 posts · 356 votes
    5y

    I try to make sure all of my rentals are “ green” and if I started buying up outrageous junk like windmills skylights and solar roofs then they wouldn’t produce the “ green” for me each month .. then I’d have a “ red” house ! I didn’t get into being an investor to save the whales , the ozone or the wolves etc

    1Reply
  • Marcello I.
    Rental Property Investor · Long Island, NY · Member since 2019 · 20 posts · 13 votes
    5y

    @Steve Morris

    Your response seems to be ignoring a few things mentioned, particularly I the last part of the post.

    The system is 0% down. In these types of setups the energy output is monitored and viewable, often through an app. If you read the last part of the post, an option of this scenario would be billing the tenant (likely for a cheaper rate than the utility company) and acting as the utility provider. I think you can achieve a decent ROI by acting as the utility provider and billing the tenant for usage with your system that you put no money down into. The system will effectively be paid off by the tenant and in this scenario the owner can receive a tax write off for a new roof install.

    Seems like a win win scenario to me.

    1Reply
  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    5y

    I don't buy properties where I would need to pay the utilities. I can rent for top dollar without needing to through in solar cells or washers and dryers. 

    So spending any money on this to benefit the tenants utility bill would be a waste of money for me.

    2Reply
  • James Smyth
    OP
    Investor · Amityville, NY · Member since 2020 · 24 posts · 13 votes
    5y
    Originally posted by @Dennis Wayne:

    Sounds good on paper but that’s not reality in real life . Those numbers efficiency and incentives seem like wishful thinking on your part lol

    The three main reasons I don’t see why you’d do this are

    It is very expensive

    It costs a lot

    It is not cheap at all

    8k versus 37k . Makes no sense and I’m not paying the electric anyway why would I even care ? That’s the tenants problem

    Originally posted by @Dennis Wayne:

    I try to make sure all of my rentals are “ green” and if I started buying up outrageous junk like windmills skylights and solar roofs then they wouldn’t produce the “ green” for me each month .. then I’d have a “ red” house ! I didn’t get into being an investor to save the whales , the ozone or the wolves etc

    Dennis, I'm not surprised that there are people who are strongly against the idea which is why I've presented the fact, which you can choose to reject if you'd like.  The incentives are what they are, there is no optimism required there.  As a real estate investor there should be no surprise that the government incentivizes things they want people to invest in!  The generation is also very easily estimated based on satellite data (https://www.google.com/get/sun...). If you looked into solar a few years ago you were right about "expensive, expensive, expensive" but the cost of solar has gone 21% in the past two years (https://news.energysage.com/ho...) and Tesla has lowered the cost an additional 30% in the last year (and the Tesla panels are surprisingly manufactured Buffalo NY!!!) (https://electrek.co/2020/06/20...): 

    Not sure what you mean about $8k vs $37k?  The cost of the Tesla Solar Roof system is cheaper than the new roof after incentives and it eliminates the current utility liability of $2700 with a guarantee for 25 years; you're looking at a minimum return of $67,500 on a $0 out of pocket expense or $10k if you paid out of pocket.

    Originally posted by @Steve Morris:

    I think with the subsidies and if you have good exposure, I see no reason why not to do it.

    I'd just make sure:

    1) It's professionally installed since poking holes in the roof not good

    2) See if you can get some kind of workmanship warranty in case you do get moisture invasion

    3) Find out what gets recorded against title. I think they record a UCC (meaning a lien) since they are financing it. Only issue is if you sell the house or get a new loan, you need to call and get a release and then re-record the UCC.

    Thanks Steve for the thoughtful comments! I absolutely agree. I have posed the questions about the liens on the financing, I believe the NYS programs do no record a lien position but I have requested clarification on this.

    I am a fan of the Tesla Solar Roof system over traditional solar because it built like a hybrid slate and standing-seam steel roof. Since the solar is build into the roofing tiles, there are no penetrations to.  If there is a leak, it is covered by a 25-year weatherization warranty!

    Originally posted by @John Underwood:

    I don't buy properties where I would need to pay the utilities. I can rent for top dollar without needing to through in solar cells or washers and dryers.

    So spending any money on this to benefit the tenants utility bill would be a waste of money for me.

    John, I'd think you would be able to charge top dollar and then some if you had a washer/dryer; but that's not what we're discussing here.  I'm proposing charging the tenants the cost of the electricity as additional rent, if you review the numbers this is a simple way to increase your monthly cashflow on a property by $60 now and $300 in the future by playing the incentives that are available on solar!

    0Reply
  • Alexander Szikla
    Real Estate Agent · New York City · Member since 2020 · 818 posts · 639 votes
    5y

    This is awesome! Definitely go with the Tesla Solar Roof!

    0Reply
  • Dennis Wayne
    Member since 2020 · 339 posts · 356 votes
    5y
    Originally posted by @Marcello I.:

    @Steve Morris

    Your response seems to be ignoring a few things mentioned, particularly I the last part of the post.

    The system is 0% down. In these types of setups the energy output is monitored and viewable, often through an app. If you read the last part of the post, an option of this scenario would be billing the tenant (likely for a cheaper rate than the utility company) and acting as the utility provider. I think you can achieve a decent ROI by acting as the utility provider and billing the tenant for usage with your system that you put no money down into. The system will effectively be paid off by the tenant and in this scenario the owner can receive a tax write off for a new roof install.

    Seems like a win win scenario to me.

    Basically Your paying 37,300$ for a 8k roof plus you’ll pay out 3.5% interest for many years and it’ll take twice as long ( forever)  to realize the savings because you are using 2640 as the yearly electric that’s over 200 a month . I don’t know anybody who pays that on a single family who has natural gas .I like to recoup my investments fast not in decades!

    Also you have no idea of the future of all this . We don’t even know if this can hold up long term in cold climates or cloudy areas like where I live . You can’t say this for sure and you know it , what if the parent company hopes out of business . Can’t warranty something if they are gone now can you ? We Especially can’t tell with these spend hungry politicians coming into office on what future incentives or write offs you can really count on in years ahead . It’s subjective That’s what folks said about the 1031 exchange and now it appears we are losing that benefit after 80 years of having it on the books . 

    0Reply
  • James Smyth
    OP
    Investor · Amityville, NY · Member since 2020 · 24 posts · 13 votes
    5y
    Originally posted by @Alexander Szikla:

    This is awesome! Definitely go with the Tesla Solar Roof!

    Thanks Alex!  Since you are Any advice on how solar impacts assessment? Increased property value was absent on my discussion.

    0Reply
  • James Smyth
    OP
    Investor · Amityville, NY · Member since 2020 · 24 posts · 13 votes
    5y
    Originally posted by @Dennis Wayne:
    Originally posted by @Marcello I.:

    @Steve Morris

    Your response seems to be ignoring a few things mentioned, particularly I the last part of the post.

    The system is 0% down. In these types of setups the energy output is monitored and viewable, often through an app. If you read the last part of the post, an option of this scenario would be billing the tenant (likely for a cheaper rate than the utility company) and acting as the utility provider. I think you can achieve a decent ROI by acting as the utility provider and billing the tenant for usage with your system that you put no money down into. The system will effectively be paid off by the tenant and in this scenario the owner can receive a tax write off for a new roof install.

    Seems like a win win scenario to me.

    Basically Your paying 37,300$ for a 8k roof plus you’ll pay out 3.5% interest for many years and it’ll take twice as long ( forever)  to realize the savings because you are using 2640 as the yearly electric that’s over 200 a month . I don’t know anybody who pays that on a single family who has natural gas .I like to recoup my investments fast not in decades!

    Also you have no idea of the future of all this . We don’t even know if this can hold up long term in cold climates or cloudy areas like where I live . You can’t say this for sure and you know it , what if the parent company hopes out of business . Can’t warranty something if they are gone now can you ? We Especially can’t tell with these spend hungry politicians coming into office on what future incentives or write offs you can really count on in years ahead . It’s subjective That’s what folks said about the 1031 exchange and now it appears we are losing that benefit after 80 years of having it on the books . 

    Not sure where you are, Long Island NY has very high electric rates of 22 cents a kwh. People with bigger houses and AC can easily see $500-600 a month.

    I own investment properties in Upstate NY where power costs are 11c/kwh. I ran the same analysis there and it was only breakeven rather than cashflowing. I am not putting solar on that house.

    The cost of the Tesla Solar Roof costs less than the asphalt roof after incentives. We could have a separate discussion about whether we agree politically about the tax incentives, but this is a real estate forum and my goal is to maximum ROI. If I can increase cashflow, while getting a new roof (which should decrease my cap costs) with no money down? Sign me up!

    The point of the discussion is that you need to run your own numbers because there is no one size fits all. Solar might not make sense in some areas where electric is cheap. But in markets with high electric and good incentives, the numbers don't lie

    0Reply
  • Alisa O.
    Investor · Buffalo, NY · Member since 2014 · 83 posts · 46 votes
    5y

    Hello James. 

    Ultimately, I believe the answer lies in your risk tolerance and the amount of your reserves. 

    I will start with some questions that you may want to ponder about. 
    1. In the summary you are saying that, "my solar system is producing 94% of the year 1 production; the system will produce 9,851 kwh/yr" and in the Details you are saying, "Annual electric usage: 12,000 kwh/yr". How are you going to bridge the gap between production and the usage requirement and whats the cost of both systems (if needed?) and how is it going to affect your depreciation and/or credit schedule? 

    2. While the solar warranty is for 25 years, the effectiveness of the solar will start diminishing over time. If you are getting 100% output today, will you get 100% output in 15 years? So, will your numbers work the same? The same is for the shingle roof. Most likely you will have to perform maintenance, but what is the comparison in terms of the initial cost and the following maintenance? 

    3. When the solar needs to be replaced, is it going to cost extra to remove the panels and will you need new setup to install the next set? You don't know this now, but most likely it will cost extra. While with the regular roof you just put another layer and you are good to go. In Western NY I can easily put 3 layers on. How costly and how challenging is the new set up with the solar?

    4. In the situation of the strong storm/natural disaster/another Sandy and the solar panels getting damaged, how fast and how easily can the panels be replaced? During the hurricane Sandy electricity by the Manhattan beach in Brooklyn (right by the ocean) was restored in 7 days (I believe its one of the longest repairs in Brooklyn. My friends in Bayshore and Halstead and Ronkonkoma got their electric back in 2-3 days), how long will it take to replace the panels if they are damaged? Is there a similar ratio of roofer to roofs as the solar installers to solar roofs? What I mean is, in case of another Sandy/storm, how easy is it to find a solar installer to replace the damage? There are hundreds of roofers out there- its the same concept of installing the architectural shingle in CT or MA or NJ or NY. If the company in NY is not available, there will be one in NJ or other states. While your particular solar system might require particular company in order not to void the warranty. What if there are only 10 installers and you are customer #300? How long is your wait? You are "green" conscious, so you realize with the current damage to climate, another mini Sandy is just around the corner. 

    On the other hand, if the panels survived the natural disaster, your property can be the only property on the block to have the electric. 

    5. Do you know that there are 50 years architectural shingles? While they may start loosing effectiveness after 40 years and you may need to replace a few tabs here and there, the cost of labor to replace them is pretty low, especially if you buy a square or two extra on the onset. 

    6. Are you including the vacancy factor when you are in between tenants? Or, what if the tenant is not paying rent and your electric bill? In Suffolk county it takes months to evict somebody, can you cover the cost of the solar mortgage? 

    7. Will the cost of the solar affect your DTI ratio and prevent you from purchasing another property where you can collect rent?

    If you strictly think of the numbers, it seems like an interesting opportunity. However, you don't live in the world of only numbers. You have natural disasters and storms that cause damage, you have Covid and tenants who do not pay rent and you have banks that look at DTI ratios. These are real questions that you need to think about.

    I just noticed that you updated your initial post. Are you a Tesla sales rep and this whole thing was a promotional gimmick or you do not have any sponsorship with Tesla? 

     

    2Reply
  • Account Closed
    Investor · Newtown, CT · Member since 2020 · 15 posts · 10 votes
    5y


    Short answer, for a rental property, IT CAN make sense, just think it through, especially when it's time to sell.

    0Reply
  • James Smyth
    OP
    Investor · Amityville, NY · Member since 2020 · 24 posts · 13 votes
    5y
    Originally posted by @Alisa O.:

    Hello James. 

    Ultimately, I believe the answer lies in your risk tolerance and the amount of your reserves. 

    I will start with some questions that you may want to ponder about. 
    1. In the summary you are saying that, "my solar system is producing 94% of the year 1 production; the system will produce 9,851 kwh/yr" and in the Details you are saying, "Annual electric usage: 12,000 kwh/yr". How are you going to bridge the gap between production and the usage requirement and whats the cost of both systems (if needed?) and how is it going to affect your depreciation and/or credit schedule? 

    2. While the solar warranty is for 25 years, the effectiveness of the solar will start diminishing over time. If you are getting 100% output today, will you get 100% output in 15 years? So, will your numbers work the same? The same is for the shingle roof. Most likely you will have to perform maintenance, but what is the comparison in terms of the initial cost and the following maintenance? 

    3. When the solar needs to be replaced, is it going to cost extra to remove the panels and will you need new setup to install the next set? You don't know this now, but most likely it will cost extra. While with the regular roof you just put another layer and you are good to go. In Western NY I can easily put 3 layers on. How costly and how challenging is the new set up with the solar?

    4. In the situation of the strong storm/natural disaster/another Sandy and the solar panels getting damaged, how fast and how easily can the panels be replaced? During the hurricane Sandy electricity by the Manhattan beach in Brooklyn (right by the ocean) was restored in 7 days (I believe its one of the longest repairs in Brooklyn. My friends in Bayshore and Halstead and Ronkonkoma got their electric back in 2-3 days), how long will it take to replace the panels if they are damaged? Is there a similar ratio of roofer to roofs as the solar installers to solar roofs? What I mean is, in case of another Sandy/storm, how easy is it to find a solar installer to replace the damage? There are hundreds of roofers out there- its the same concept of installing the architectural shingle in CT or MA or NJ or NY. If the company in NY is not available, there will be one in NJ or other states. While your particular solar system might require particular company in order not to void the warranty. What if there are only 10 installers and you are customer #300? How long is your wait? You are "green" conscious, so you realize with the current damage to climate, another mini Sandy is just around the corner. 

    On the other hand, if the panels survived the natural disaster, your property can be the only property on the block to have the electric. 

    5. Do you know that there are 50 years architectural shingles? While they may start loosing effectiveness after 40 years and you may need to replace a few tabs here and there, the cost of labor to replace them is pretty low, especially if you buy a square or two extra on the onset. 

    6. Are you including the vacancy factor when you are in between tenants? Or, what if the tenant is not paying rent and your electric bill? In Suffolk county it takes months to evict somebody, can you cover the cost of the solar mortgage? 

    7. Will the cost of the solar affect your DTI ratio and prevent you from purchasing another property where you can collect rent?

    If you strictly think of the numbers, it seems like an interesting opportunity. However, you don't live in the world of only numbers. You have natural disasters and storms that cause damage, you have Covid and tenants who do not pay rent and you have banks that look at DTI ratios. These are real questions that you need to think about.

    I just noticed that you updated your initial post. Are you a Tesla sales rep and this whole thing was a promotional gimmick or you do not have any sponsorship with Tesla? 


    Alisa, thanks for your post. I will respond to your last comment first. No, I am not affiliated with Tesla. I spent more time that I needed thinking about the numbers on this and wanted to share the analysis since it's not cut and dry like 99% of the other posts on BP have made it out to be.  If someone uses the promo code, they get $100 off a Tesla Roof and I get referral bonuses towards future Tesla products if someone uses the link.  I included the Promo Link as an update because it was an afterthought.

    Apparently the Tesla Solar Roof panels are manufactured in your neck of the wood at their Gigafactory in Buffalo!  I would be excited to have an affordable NY made product installed on my roof!

    On your other point you have some very solid points I hadn't previously considered, I'll have to consider some of the added risk you've brought up. 

    For some added discussion:

    1) With the electric usage, I'm charging the tenant by the kwh at the market rate. Regardless if they are use more or less than the solar produces, I'd be covered. If they use more than the solar produces, they cover the cost of the bill.

    2) I haven't decided on going with Tesla, I'm not sure what the production warranty is on the Solar Roof but they warranty their Solar Panels for 80% of year 1 production in year 25.  The newer Sunpower panels are guaranteed for 92% at year 25!

    3) You bring up a great point on thinking about the long-term life cycle cost.  Many of the factors you bring up are hard to know when we're at the beginning of the adoption cycle of a new technology.  This is one of the biggest unknowns.  How much will a roofer charge me to rip off the Tesla Roof in 25+ year, who knows? Will it be significantly more than a asphalt shingle roof? Maybe a 50% surcharge? Asphalt rip they'll charge $2k for and they'll charge me $3k? Since the solar should be cash flowing an addition $4k/year starting in year 16 and increasing through year 25, this added charge should be covered.

    For the re-roof, I can go up to two layers of shingles by code but the engineer who performed my inspection recommended not to have more than one layer; my property was built in 1910 and he said the roof wasn't built to carry the load of more than one layer.

    4) This would be a problem.  I was on LI for Sandy and it sounds like your friends made out well.  I was on the north shore and didn't have power for 10 days and know people who we without power for well over 2 weeks.  This past year we were hit my a small Tropical Storm and I lost power for 6 days!  While the roof would be covered by the warranty, it would take time for them to be able to service it for sure.  The roof system is made of tiles tempered glass installed over two layers of peel and stick weather barrier.  Even if some tiles were lost the roof should remain weathertight for some time.  The peel and stick membranes are rated for 30+ days of exposure and they have two layers.

    5) I have had roofing contractor quote me for GAF Timberline, Owens Corning Duration, and Atlas.... "lifetime" shingles.  The warranties on these products are very limited unless you go with a high-end certified roof, which adds to your install cost.  The Platinum Certified Owens Corning Roofer quotes me $17k for the roof:

    Since the roof tiles are constructed from tempered glass panels, I have more confidence that the Tesla Solar Roof is going to last the lifespan of a slate or terracotta roof (at least structurally) when in comparison to an asphalt shingle roof. Likely will last 50+ years...

    6) For vacancy, I hadn't really considered this very much since the roof was cheaper after incentives.  I view the payment more as financing the roof than financing the solar.  In the case of vacany, I'd be paying the cost of the electric if the house were to be vacant and the solar system would eliminate the power bill during vacancy; and the excess power is fed back to the grid and builds up extra energy credit to be used when a tenant moves back in.  My market is very HOT, there aren't actual vacancies and with how I care for my properties, turnover is low.  Economic vacancy is real risk, hopefully this is handled through properly screening tenants and having strict acceptance criteria, but it's always a risk of being a landlord.  I should re-run the analysis with an assumption of 5% vacancy!

    7) This is another very valid point I hadn't previously considered. If my payments are $130 and the tenant is paying $190. The bank will likely consider 75% of the $190, or $142.50 against my $130 payment. It would seem to me that the solar system would reduce my DTI?

    I'll spend some more time thinking about the points you brought up.  Thanks for the thoughtful discussion!!!

    0Reply
  • James Smyth
    OP
    Investor · Amityville, NY · Member since 2020 · 24 posts · 13 votes
    5y
    Originally posted by @Account Closed:


    Short answer, for a rental property, IT CAN make sense, just think it through, especially when it's time to sell.

    Agreed! My market has high utility costs, so the ROI might be higher than other markets. But I wanted to share my analysis for others to think about. With the costs of solar coming down, at some point it might make sense for all landlords to install solar and squeeze out another $100-200/mo in profit!

    Not sure how much the solar improves the true resale value. According to this article solar increases property values in metro NY by 5.4%; in my case my ARV is $610k and that'd be $33k if true! I'm not counting on this sort of return.

    0Reply
  • Adam Martin
    Rental Property Investor · Member since 2020 · 1k+ posts · 1k+ votes
    5y

    I really like the idea of solar and at some point plan on getting it for my personal house. My biggest problem is the upfront cost but you have found a way to get it financed as well as we have low utility costs in KY so it is harder to justify the upfront costs. The prices keep going down which makes it more appealing but also leaving me wondering how much lower it could go so I wait. I also think the new administration is going to offer additional incentives, with more people switching to electric vehicles the power has to come from somewhere. For a rental however I don't see it making sense on a SFH or multi where the tenant is paying utilities and just adds another layer of complexity for me and another bill if I get a bad tenant who doesn't pay. If you have a multi though where you pay electric I see this as being possibly a good play since you are actually saving money vs. transferring cost for utilities. If you are in an area that allows you to bank overages I can also see this as beneficial but currently my co-op lets me bank them, not get income.

    0Reply
  • James Smyth
    OP
    Investor · Amityville, NY · Member since 2020 · 24 posts · 13 votes
    5y
    Originally posted by @Adam Martin:

    I really like the idea of solar and at some point plan on getting it for my personal house. My biggest problem is the upfront cost but you have found a way to get it financed as well as we have low utility costs in KY so it is harder to justify the upfront costs. The prices keep going down which makes it more appealing but also leaving me wondering how much lower it could go so I wait. I also think the new administration is going to offer additional incentives, with more people switching to electric vehicles the power has to come from somewhere. For a rental however I don't see it making sense on a SFH or multi where the tenant is paying utilities and just adds another layer of complexity for me and another bill if I get a bad tenant who doesn't pay. If you have a multi though where you pay electric I see this as being possibly a good play since you are actually saving money vs. transferring cost for utilities. If you are in an area that allows you to bank overages I can also see this as beneficial but currently my co-op lets me bank them, not get income.

    On my purchase I budgeted $15k in the rehab for a new roof, since the solar roof after incentives is cheaper than the traditional roof before incentives, I can finance 100% of the roof for 3.5% and I can keep my cash working elsewhere for more than the 3.5%;  I'm not concerned with the loan payment in the case of vacancy because I already have the cash reserves set aside for the new roof.

    If you consider the solar payment is really covering the cost of the new roof (which I had already budgeted for) and the tenant's utility payment is towards the solar.  I am essentially adding a cashflow of $190/mo. This would increase my monthly cashflow by 40%.

    0Reply
  • Kevin Purvis
    Developer · Orange County, CA · Member since 2020 · 42 posts · 23 votes
    5y

    I've thought about this, especially since new stick built homes are required to have solar anyway (California), with modular requiring it in a year I think.

    I believe it will become more normal for renters to pay back electrical.  

    I also believe that renters are not idiots and are fully aware of benefits of a property with panels, and can calculate those savings.

    My main goal when I rent is to rent out to people who stay 5+ years.  Obviously this is not for everyone and doesnt work in all locales or for all kinds of properties.  But for long stay renters, things like this matter a lot.  They know they are getting a good deal, so even if you cant increase rent the full amount the first year, you may make up that amount in reduced vacancy, later increases and/or overall easier tenants.

    TLDR I think its a good move for nice, 3 bed+, 1500+ sq ft properties in stable areas with highly filtered tenants and high energy costs.

    0Reply
  • Tanya F.
    Rental Property Investor · Madison, WI · Member since 2013 · 629 posts · 339 votes
    5y

    So great that you're doing this!

    Numbers look good to me, NY is better than WI where the numbers also look good. We've had solar on our rental since 2011. Just expanded the system in 2019.

    0Reply
  • Alisa O.
    Investor · Buffalo, NY · Member since 2014 · 83 posts · 46 votes
    5y

    James, 

    You already have the answer. In your situation it makes sense. There are only 2 points I would be interested in before I signed the contract: 

    1. You mentioned those newer Sunpower panels that would guarantee 92% efficiency at year 25. I would be interested in their cost. 80% is good, but 92% will allow you to use the panels a bit longer than 25 years (if the actual roof will withstand). Who knows, you might squeeze a few more years out of them. Even if you are making $3000 or ever $2000 vs $4000 at optimum capacity, I don't think you would find it too offensive. Also, you already know the Sunpower technology exists and is out there. If the cost makes sense, I believe its better to buy the latest more efficient model if the funds permit. As an analogy think of it as buying this year last year's model. 

    2. Biden is seriously pro "green" and alternative energy. He wants to invest $400 billion over 10 years. Even if he doesn't get the full amount, he will continue pushing to get something. I see additional tax credits and incentives in the near future. Can you wait a few months to see what he will come up with? You might find it beneficial.  

    My friend is one of the pioneers in solar energy farms in Erie County NY built a solar farm with his business partner. Right after they bought a hotel and converted it to the apartments and everything to electric.  They will use energy from their solar farm to energize the building. He was telling me his numbers and they sound really attractive. The bank really loved that solar component as well. Whats interesting in his situation is that he will be offering an all inclusive rate for the apartments. Tenants can budget the same amount every month and don't need to worry about the additional bills. While my friend will have one bill for the building, which he would cover with the solar credit from the farm, the tenant essentially would save the base delivery rate for gas and electric, even if they don't use any utilities. For some tenants this saving is crucial and one all inclusive apartment bill is a huge benefit. My friend and his partner will get extra income, just like you will. Our cost in Buffalo is about 18c/kwh and it still makes sense to go solar. 

    You are on the right track. 

    1Reply
  • Aigo Pyles
    Flipper/Rehabber · Memphis, TN · Member since 2020 · 758 posts · 285 votes
    5y

    In reality solar power for rental property is not a good idea. First of all it's expensive. Second, you will not pay for the utility of your tenants. Third, the hassle in the maintenance of a solar panels. Fourth, panels affects the aesthetics of the roof. And when you decided to sell it, the some people might not want solar panels for the property. 

    0Reply
  • James Smyth
    OP
    Investor · Amityville, NY · Member since 2020 · 24 posts · 13 votes
    5y
    Originally posted by @Kevin Purvis:

    I've thought about this, especially since new stick built homes are required to have solar anyway (California), with modular requiring it in a year I think.

    I believe it will become more normal for renters to pay back electrical.  

    I also believe that renters are not idiots and are fully aware of benefits of a property with panels, and can calculate those savings.

    My main goal when I rent is to rent out to people who stay 5+ years.  Obviously this is not for everyone and doesnt work in all locales or for all kinds of properties.  But for long stay renters, things like this matter a lot.  They know they are getting a good deal, so even if you cant increase rent the full amount the first year, you may make up that amount in reduced vacancy, later increases and/or overall easier tenants.

    TLDR I think its a good move for nice, 3 bed+, 1500+ sq ft properties in stable areas with highly filtered tenants and high energy costs.

    It is interesting how California is going to require solar on new builds, with the distribution problems in CA in sounds like a good idea.  Once it becomes a standard you'll see many people become much more familiar with it and it won't be so much "good luck finding someone to service your solar"

    In NY there are incentives for commercial RE to install solar and leaseback the cost to the tenant.  I haven't heard of many people doing this in residential.

    0Reply
  • James Smyth
    OP
    Investor · Amityville, NY · Member since 2020 · 24 posts · 13 votes
    5y
    Originally posted by @Tanya F.:

    So great that you're doing this!

    Numbers look good to me, NY is better than WI where the numbers also look good. We've had solar on our rental since 2011. Just expanded the system in 2019.

    How has your solar done?  Was production in line with estimates?  Have you received the benefits you expects?  Have you had any issues with maintenance (leaks or service calls for the solar equipment)?

    0Reply
  • James Smyth
    OP
    Investor · Amityville, NY · Member since 2020 · 24 posts · 13 votes
    5y
    Originally posted by @Aigo Pyles:

    In reality solar power for rental property is not a good idea. First of all it's expensive. Second, you will not pay for the utility of your tenants. Third, the hassle in the maintenance of a solar panels. Fourth, panels affects the aesthetics of the roof. And when you decided to sell it, the some people might not want solar panels for the property. 

    What if I'm putting in a new roof and the cost to install the Tesla Solar Roof after incentives is cheaper than a traditional asphalt roof?

    What if you charged you tenant utilities as additional rent? Make it a monthly balanced bill with an annual readjustment to make it easier.

    What maintenance are you anticipating on the solar?  They have strong warranties and they don't have any preventative maintenance (unless it's been really dry and dusty, then you might want to rinse dust off).

    What if the solar panels are built into the roof and have the appearance of a luxury product?

    At resale time, on average solar increases property values by 4.1%

    1Reply
  • James Smyth
    OP
    Investor · Amityville, NY · Member since 2020 · 24 posts · 13 votes
    5y
    Originally posted by @Alisa O.:

    James, 

    You already have the answer. In your situation it makes sense. There are only 2 points I would be interested in before I signed the contract: 

    1. You mentioned those newer Sunpower panels that would guarantee 92% efficiency at year 25. I would be interested in their cost. 80% is good, but 92% will allow you to use the panels a bit longer than 25 years (if the actual roof will withstand). Who knows, you might squeeze a few more years out of them. Even if you are making $3000 or ever $2000 vs $4000 at optimum capacity, I don't think you would find it too offensive. Also, you already know the Sunpower technology exists and is out there. If the cost makes sense, I believe its better to buy the latest more efficient model if the funds permit. As an analogy think of it as buying this year last year's model. 

    2. Biden is seriously pro "green" and alternative energy. He wants to invest $400 billion over 10 years. Even if he doesn't get the full amount, he will continue pushing to get something. I see additional tax credits and incentives in the near future. Can you wait a few months to see what he will come up with? You might find it beneficial.  

    My friend is one of the pioneers in solar energy farms in Erie County NY built a solar farm with his business partner. Right after they bought a hotel and converted it to the apartments and everything to electric.  They will use energy from their solar farm to energize the building. He was telling me his numbers and they sound really attractive. The bank really loved that solar component as well. Whats interesting in his situation is that he will be offering an all inclusive rate for the apartments. Tenants can budget the same amount every month and don't need to worry about the additional bills. While my friend will have one bill for the building, which he would cover with the solar credit from the farm, the tenant essentially would save the base delivery rate for gas and electric, even if they don't use any utilities. For some tenants this saving is crucial and one all inclusive apartment bill is a huge benefit. My friend and his partner will get extra income, just like you will. Our cost in Buffalo is about 18c/kwh and it still makes sense to go solar. 

    You are on the right track. 

    Alisa, 

    Really great points, I honestly hadn't looked very close at the numbers between Tesla and Sunpower because the idea of a Solar Roof that is cheaper (after incentives) than a standard roof was just too appealing to not discuss with the BP community straight away!

    I took a closer look at the Sunpower vs Tesla; long story short is that the Sunpower costs $5,453 more upfront and it produces $19,495 over 25 years.  This comes out to a 5.45% annualized rate of return. Since this is still $0 down the cash on cash is "infinite". The major concern with the Sunpower roof is that they're putting lots of holes that are warrantied for 10 years in a 25-50 year asphalt roof...

    I will look into any indications for potential Biden proposals closer before I move forward.  I imagine most incentives will likely be qualified based on when the system is put in service, which between the Tesla backlog and the permitting lead time could very well be the end of this year and likely would qualify for new stimulus legislation.  The 26% federal investment tax credits where extended for two-years with the most recent stimulus package, so there is no longer a rush on that front.

    I find it really interesting the solar farms that are being installed in upstate NY.  If large-scale solar makes sense this far north, it has to make sense in other areas that have better insolation.

    Details of cost analysis:

    0Reply
  • Tanya F.
    Rental Property Investor · Madison, WI · Member since 2013 · 629 posts · 339 votes
    5y
    Originally posted by @James Smyth:
    Originally posted by @Tanya F.:

    So great that you're doing this!

    Numbers look good to me, NY is better than WI where the numbers also look good. We've had solar on our rental since 2011. Just expanded the system in 2019.

    How has your solar done?  Was production in line with estimates?  Have you received the benefits you expects?  Have you had any issues with maintenance (leaks or service calls for the solar equipment)?

     No leaks, no maintenance. No service calls. I get automated emails from the Enphase Enlighten when the panels are covered with snow and are not producing. (Duh!, but the inverters don't know the weather.) We haven't ever washed panels. The rain takes care of that.

    The system has exceeded estimates in monthly production since 2011 most of the time, except for most Decembers and Januaries due to snow cover (yay! more skiing!!). Every single April and July have exceeded expectations.  In November 2020, we produced 30% over the expected value (it was a VERY sunny November). Since we expanded our system in 2019, our summer bills are negative and winter bills positive, so the net is what we were hoping for, total bills close to zero.
    0Reply
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