Advice is needed for solar vs legalize duplex

6 Replies

Hi,

I recently bought a house with an in-law unit. The size of the in-law unit is the same size of the house (around 1400 sqft for each of them). Both of them are rented to separate tenants.

Currently the two units share the same electricity and water meter. I charge each tenant $80 for electricity and give them water free.My electricity bills around $400-$500 since PGE charges the high usage (two units combined). The water bill is around $120. Those expenses very much eat all the cash flow.

I am thinking of two options:

1. Legalize the duplex. I talked with the city and was told that the fee I need to pay for the city to make this happen is around $35,000 - $36,000. On top of that I need to fix the common wall between the two units to make it fire proof. So I guess the cost is around 40K totally. The benefit is that I will have separate water meters and separate electricity meters. The downside is that it requires a big downpayment (40k immediately).

2. Add solar panel. I talked with solar company (Tesla )and they estimated an $32,000 solar system would be sufficient for both units. If I go with $320/month I would be able to pay off in 10 years. Solar company will guarantee the solar system works for 20 years. Because this is investment property, I do not get 30% tax credit for solar system as it would applies for primary resident. The benefit of the solar option is that I would not need to worry about high PGE cost. After 10 years, I would be able to get additional cash flow by selling the electricity for tenants. Also I would not need a big downpayment like option 1. The downside of this option is that the house is not legalized as a duplex. Also I would need to take care of electricity and water bills. The water and the electricity will still be shared.

I am not sure what will add the value to the house more (solar system or legalize the duplex and having separated water and electricity meter). Also what is the better option that I should go with?

I am new to the house renting investment and still learning. I would truly appreciate your input and guidance.

Thank you very much.

Peter

  

@Peter Doan I was in a similar position where I had 3 units tapped onto 1 electric meter. The other unit had a separate meter. Our monthly electric bill was $800. We went with the solar option by financing the $38.7K install over a 12 year loan at 5.49%. Our monthly payment is now $367 so our annual savings is ($800-$367) X 12 = $5.1K which gives us a ROI of ($5.1K/$38.7K) = 13%.

A couple of notes. 1) The credit union attached the solar panels as a lien to the property. So the solar panels stay with the property, not with me. 2) A city inspector will need to come to the property and validate the install is correct; it's a quick visit for them.

I can't speak to legalizing a property but I'd highly recommend the solar install. It's way less capital intensive and you can get everything completed in a timely manner. Hope this helps!

Hi Casey,

Thank you very much for the advice. Yes, I think going with solar would be less capital intensive and less effort.  Legalizing a duplex will take much time and effort, especially to satisfy requirements of city

When you did your solar, would you be able to claim 30% of the tax credit. I did some research and found the following articles mentioned about this topic. It seems to me 30% tax credit is applicable for rental property but must be claimed as either business expense for home improvement or using a special code (48(a)(5)(D)).

https://ttlc.intuit.com/questions/3935509-i-rent-out-a-home-and-added-solar-panels-since-i-don-t-occupy-the-house-not-eligible-for-the-30-solar-tax-credit-can-i-reduce-my-expenses-as-a-property-improvement

https://www.irs.gov/pub/irs-pdf/i3468.pdf

https://www.thetaxadviser.com/newsletters/2017/oct/credit-residential-solar-panels.html https://www.caltax.com/message-board/26789 https://ttlc.intuit.com/questions/3935509-i-rent-out-a-home-and-added-solar-panels-since-i-don-t-occupy-the-house-not-eligible-for-the-30-solar-tax-credit-can-i-reduce-my-expenses-as-a-property-improvement Thank you, Peter

@Casey Murray

I recently got a special offer for a solar system from Tesla. System will generate about 90% of the energy for the house. It is a lease system with 20 year term, with no buy option. The monthly payment is $57 every month for the first year.  There is no downpayment. Tesla will do 2.9% annual rate hike.

Tesla provides real time monitor of the system, which requires high speed internet setup for the house so that they can send usage data back for monitoring. Since this is a rental duplex, it seems like I have to setup an internet system just for power monitoring. This will add to the monthly cost of the electricity. Do you have to do something like this for your solar system or you just skip it?

Also the lease of 20 year is kind of long for me because I actually do not know if I will keep that property that long. Any advice would be appreciated.

Thanks,

Peter

Originally posted by @Peter Doan :

@Casey Murray

I recently got a special offer for a solar system from Tesla. System will generate about 90% of the energy for the house. It is a lease system with 20 year term, with no buy option. The monthly payment is $57 every month for the first year.  There is no downpayment. Tesla will do 2.9% annual rate hike.

Tesla provides real time monitor of the system, which requires high speed internet setup for the house so that they can send usage data back for monitoring. Since this is a rental duplex, it seems like I have to setup an internet system just for power monitoring. This will add to the monthly cost of the electricity. Do you have to do something like this for your solar system or you just skip it?

Also the lease of 20 year is kind of long for me because I actually do not know if I will keep that property that long. Any advice would be appreciated.

Thanks,

Peter

 The advantages of ownership - even zero down financed ownership - are that you first get to appraise the full system value. Fannie Mae allows for that appraisal with ownership but not with a PPA/Lease. Second, with ownership there is no lien on the property, but the solar system is secured by UCC1 equipment filing until paid for. Leased/PPA systems will come with a property lien.

As it is a rental, you' likely not qualify for the 30% Federal tax credit, but would get a 5 year depreciation which can work really well especially as others are paying for the system.

@Peter Doan I don't have an internet setup for our solar. We got micro inverter solar panels installed on our roof. My brother leads more of the operations on our investments so I don't know much past this. Before we got solar, our monthly electric bill was around $500-$600/month; now we'll pay the utility accompany around a $1K for our 2018 annual true up.

I agree with @Andrew Smith in that I see no value in renting Tesla's solar offer. I personally see no value (most of the time) in renting something when I can buy. I would encourage buying the solar especially when there's so many solar companies out there now; I'm concerned you're paying a premium price since Tesla is a huge name brand. We went through a local credit union to finance the purchase which they did place a lien on the property but I still get to claim the 30% tax credit. Hope this helps!