Landlord Strategy: Become the Utility
With rapidly falling solar costs and the 30% tax credit, has anyone discussed the idea of "becoming the utility" for their tenants?
Most landlords can have solar installed at no up-front cost & finance it over 25 years and come very close to matching their current power costs. What does this mean?
Let's say you have a 4-plex. Your tenants are paying $150/mo ea for power now. You can buy a whole-house solar system to replace their power usage for around $125,000 (increasing the value of the property by almost that much at the same time). Including a never-a-penny-out-of-pocket-for-25-years-warranty. Payments will be around $600-650 depending on your interest rate.
But when you make this move, a few things happen:
1) You get a federal tax credit of 30% - $37,500 in the above example. Pay down your solar loan or use it elsewhere.
2) You gain a new revenue stream - your tenants start paying you for their electricity instead of the utility. You could get technical and install meters but a fixed montly number is probably better (so you know you're covered). And since it's solar: your property's appeal to the environmentally-friendly crowd goes way up. You can give them bragging rights for moving in. Raise rents too - people pay more to feel like they are doing their part to help the environment. Properties with solar sell faster and for higher prices too.
3) Since you are the utility now:, you get to set the price. Utilities are raising their prices a LOT these days - those bills NEVER go down. But that means you can increase the monthly tenant fee for power - since you are now the utility - to whatever you want. And if you just raise it at the rate of inflation (let's say 8%/yr) you'll be bringing in $1000/mo in 10 years and over $2400/mo in 20 years. and in 25 years when it's paid off (and you can probably pay it off much faster) you will have a free and clear $4400+/mo coming in for electricity (that costs you nothing) from a system that is paid off. Imagine if you had 20 4-plexes doing this - that's an extra $880,000/yr in revenue. Not chump change - definitely need some Bigger Pockets then!
Yes, you'll still be tied to the grid (batteries are cool for sure, but not much ROI yet) and that might cost a few bucks a month but you'll be done buying electricity from them and you'll become your tenants' utility.
What's the downside of this?
Disclosure: I sell solar, but this is a legitimate innovative strategy. And I didn't include any contact information. Happy to discuss.
Downside is you now own panel risk, replacement, etc. And upside is little.
Love the creativity. Sounds like very little margin though. Plus, what
@V.G Jason mentioned there is risk there. And lets not forget the quirk of having panels on your roof (if any roof repairs needed, who pays to take down and put back up panels, etc)
Hey Dave - thanks for the input.
You're right - just like buying real estate: the money is in the years ahead. You'll make a lot more 5 or ten years down the line than you will on day 1, but you can still make $ on day 1.
The risk is zero for 25 years. Nothing out of pecket ever if anything ever happens to your system - you're 100% covered. Any repairs, service, replacements roof repairs/penetrations - anything. That point seems to have been missed by both of you. Things are different than they used to be in 2023 and the equipment is simply more efficent and more reliable than in the past.
Thanks again for your input guys!
Not a RE agent but I have the data handy.
Berkely says solar properties sell faster: https://emp.lbl.gov/news/berke...
NREL Study shows homes with solar sell 20% faster and for 4-17% higher prices (413 page study - most exhaustive study on the topic to date): http://www.nrel.gov/docs/fy07o...
I’m a real estate agent in Minnesota and also a solar consultant remotely to many states. The home value thing is never a guarantee and it is highly location and buyer specific. A place like San Diego that has highest electrical rates in the country, a solar system will look more beneficial to buyers. The benefit usually from from owned systems, not leases or PPA’s. In MN, there’s been some cases where an appraiser has given the solar system half of the install value to the home value. Then there are some who haven’t given any value because of not enough comps or data to support it. It’s still a new thing in many parts of the country and there are really no guarantees or standards. I’m obviously not against Solar at all, I just think it’s important to be realistic that it won’t always increase the value of the home.
The ROI on solar is going to be dependent on a lot of different factors. The added value to a home is debatable. I do not think that solar in my area would add value to a home. Most buyers are really concerned about beds, baths, and the kitchen. A secondary concern that is still important is the school district.
The desirability for renters to live in a solar home is highly doubtful. I would expect that some renters in more environmentally concerned areas might consider the solar a benefit, but would this move the needle on actual rents? I dont think so.
Your calculations assumed 8% inflation in electrical over 20 years. Not going to happen.
Tax strategies should not dictate the investment strategy, that is the tail wagging the dog.
I have solar on a quad in a c+/b- area in San Diego county.
- I purchased the home with the solar. The Solar provided minimum value to the previous owner when sold to me.
- the tenants do not value utilities at their full value. If I try to reflect the full value of utilities prices in the rent, I would get no one to look at the units to rent.
- panels are not maintenance free. they require cleaning, ideally, quarterly.
- the projected time to recover the cost of solar in San Diego is too long for it to be a good/great investment even on your home where you actually realize the full savings.
Now to some assumptions
- 8% annual electrical increase is likely far to high
- 8% annual return on my investment would be a too poor return to interest me. S&P has higher lifetime return. Good RE syndicators have been producing returns over double that in recent times. My BRRRR have achieved infinite return. An RE purchased at 80% LTV that appreciates 4% in year 1 has achieved 20% return that 1st year.
good luck