Would you buy this rental?

Question

Single family home in class C area:

Buying for $141k

$20k solar loan paid @ $90/month

Rehab of $12k to get rent ready

Rent amount of $1,250/month

Would appraise for $200k

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So, all in at $154k, which is 77% of ARV

Rent - insurance & taxes = $1,150/month

Dave Hagen · Answer

Financing on solar installs definitely favors the company. And a lease complicates the deal. Many solar companies are going out of business. What happens then? And you are on the hook for the deal. How does that affect rent. If you pay the electric bill, do you pass that on to the renter, or is the rent increased because it includes electricity.

There are usually tax credits for a solar install. Did the seller get one? Do you benefit from that in a lower price? After all, you would be stuck with the bill.

It complicates the decision and adds to the problems you may have. Did they tear off and replace the roofing before install? Or is the roof going to need work in 5 or 10 years. What happens if the roof starts leaking? Are they a solid enough company to stick around.

If you find problems, it might be enough to lower the price. But if they are just trying to get out what they owe on the loan, it might be because the whole deal doesn't work. Just because you are buying it for cash doesn't mean it "Cash flows". If it doesn't cash flow with a normal loan, then it might still be over priced.

This Consumer Reports article is from 2016, but points still makes plenty of solid points. Some may change as a rental property, such as writing off the lease expense. As usual... get expert advice. And don't add $20k to a comp for the Solar, even if it is new. "It should assess for $200k" sounds like there is no expert appraisal, so don't accept it at 100% valid. And it may have a couple years ago, but a current appraisal by a professional is they only way to be sure.

The real cost of leasing vs buying solar panels

Dan H. · Answer

I personally would not buy it due to not having leverage but $46k equity gain is great.  At 50% rule, $625 - $90 solar lease is $535/month cash flow.

I suspect this is better than a lot of RE purchases in this market and many investors would jump at these returns.

Good luck

Bill B. · Answer

There are many solar leases where you can’t buy out the system at any time or you can never buy the system. (You’re really renting the solar panels.) often you will also see an amount your payment will go up every year.  I would pass on either of those setups. But a HARD pass is for any PPA. (A power purchase agreement.) this where you are simply buying the power from the solar panels on your own property. (You will see a price per kw stated somewhere.)

Last year 5 of the 7 properties I looked at were unbuyable because of the solar contracts. 1 was bad. And 1 “didn’t suck” but added no value. People need to stop being told these “add value”. MAYBE they do, after you’ve paid them off completely, until then, no thank you.

Ps. I just saw an article where a solar company sold a terminally ill man a 25 yer lease/loan on a new solar system. SMH. These sales men are the “tin men” of days gone by. Good luck.

Keegan Darby · Answer

Hi @Bill Brandt - Thank you for your response. This one is a solar lease. What are the cons of this vs a solar loan?

Bill B. · Answer

Not excited about class c. Make sure the solar is loan and not a lease or rental. If the alternative is not buying anything and you know the market well, go ahead, your returns will increase and rents increase. And if rates decrease low end properties like this may appreciate the fastest.

Crystal Smith · Answer

I would not buy it at that price.  You've forgotten to include vacany rate and monthly expenses for the property. When adding those expenses in the property will most likely have a negative cash flow.  If the property is an area that is appreciating fast then I may pull the tirgger.

Jon K. · Answer

Taking away debt service leaves you with $872.50/month or $10,470/year. That is roughly a 6.8% cash on cash return. That would be too low for me personally as there are other investments that yield better results for less risk.Personal preference but I also don't buy without leverage for a number of reasons, even when the cash is available.

Keegan Darby · Answer

Hi @Jon K. - buying cash

Jon K. · Answer

I wouldn't buy it. You mention the ARV so I'm assuming you're either BRRRRing or using a loan to purchase. If you're BRRRRing this property your 150k loan payment is going to be around $1,000 on top of the taxes and insurance. You also haven't accounted for capital expenses, vacancies, maintenance, or the solar panel payment in your cash flow calculation. When underwriting I usually use 5% of gross rent for cap-ex, vacancies and maintenance as place-holders/quick rule of thumb absent better data. You also haven't left room for property management (if you intend to use it).So long story short, if you're BRRRRing or using a mortgage to obtain the property you are going to be cashflow negative or close to it:

$1,150 - $1,000 - $90 - $62.50 - $62.50 - $62.50 = -$127.50My personal criteria is that I won't buy any single family rental unless it cash flows $250/month after all average expenses and provides a minimum of a 20% cash on cash return.