Solar Panels on Rentals?

Question

Does this make sense or not?

I am considering putting solar panels on a rental property.

Reasons to consider:

1.  There is a 30% federal tax credit

2.  Bonus depreciation would apply - I am not clear on if it is 50% or 100%

3.  My ARV would be higher.  I have not been able to get a clear percentage from anyone.

4.  I could charge the tenant for power or I could sell all of it back to the power company.

5.  There are specific loan programs for solar.

Clearly, I have more work to do on this, but it is an interesting idea.

Paul Caputo · Answer

@Lesley Resnick Interesting idea. I'm all for solar, but you're gonna have to run the numbers to see if it makes sense. If you're doing it to give the tenant some free electricity you'd have to bump up the rent to compensate. Selling it all back to the power company might be the best way to go since then you're getting some monthly income to offset the cost, but the question is how much? Different power companies have different rules and the laws governing it are different everywhere too. One guy I met back in Colorado, which is great for solar since it's sunny 300+ days per year, had a big solar system on his roof and it completely paid for his electricity plus he got a $200+ check from the power company every month. Mind you he had made the house super energy efficient with all LED lightbulbs, energy star everything and a bunch of other stuff which probably wasn't cheap to implement.

One thing I'd recommend anyone do before considering solar is to checkout Google's project sunroof. They've mapped a big chunk of the buildings in the US and have some good info on the feasibility of a solar installation. Some houses are great candidates, others not so much. My place for example is terrible for solar. There are a bunch of trees in the yard that shade parts of the roof, can't even install satellite TV because of the trees. Plus in Chicago there isn't much sunshine in the winter and only about 180 sunny days per year. Google's estimate for my roof is $100 in savings OVER 20 YEARS! I used to live in Florida so while I remember lots of sunny days, I also remember lots of rainy days. Figure out how much sun the property really gets and what the panels would really produce before letting a solar salesman tell you it'll wipe out the power bill.

As for the bonus depreciation I do know that the solar system (not just the panels but the supporting systems as well) would qualify for accelerated depreciation on a rental. You actually get to elect whether to do 100% bonus depreciation to write off the whole cost in year one, 50% bonus depreciation to do half the cost in year one and the other half over the regular 5 year accelerated 200% DB schedule or not do bonus and and do the whole thing on the 5 year accelerated schedule. What makes the most sense would depend on your tax situation, but most opt for the 100% bonus. Just a note bonus is not extra depreciation, it's just taking all or some of it in year one instead of spreading it out.

Jeff Copeland · Answer

My initial reaction is if you are paying your tenant's electric bill, I think your money would be better spent on a new electrical meter/panel and separating the utilities so the tenant can pay their own electric bill.

It's somewhat rare for a landlord to pay the tenant's electric bill (sure it happens, but in my market it's not the norm), so electric bills are usually a net zero for the landlord.

So why lay out the CAPEX for an improvement that really only benefits the tenant, and may come with expensive maintenance and repair issues later on?

Maybe the higher rents you might be able to charge, tax credits, etc. make it worth it for you. Every situation is different. But I'm not sure the numbers would pan out for a rental property.

For example, a 30% tax credit on a $10k capital expenditure does not sound that exciting to me - you get to deduct $3000 (maybe a $1000 tax savings) from your gross income in exchange for spending $10k on solar panels for your tenant to get free/reduced electricity?

I'm also no sure how much value an appraiser would assign for solar panels. Maybe some appraisers can chime in - but I'm almost certain it would not be dollar for dollar (cost and value are two very different things from an appraisal standpoint). All else being equal, how much more is your average consumer/investor willing to pay for an identical property that has solar, compared to one that does not? My assumption is not that much, for some of the reasons outlined above.

Not trying to rain on your parade or shoot down your idea...just playing devil's advocate. Hope it gives you some food for thought!

Andrew Smith · Answer

@Lesley Resnick JEA are a nightmare for solar right now FYI. Their net metering rates are really obnoxious and actually basically stop us from being able to offer solar in JAX. There is a lawsuit going on currently to combat that so that would be something to research for sure.

Andrew Smith · Answer

We've experienced very dirty politics in FL. There's obviously zero reason that the Sunshine State shouldn't be leading the world in solar and it's taken massive effort by politicians, oil companies and other vested interests to suppress it. Amendment 1 was shot down by the people in Nov 2016 which basically enabled solar in Florida as a whole. Without that, solar would pretty much be non-existent in FL.We've seen an explosion in business in FL since then so there's no problem with the underlying demand. In spite of Amendment 1 being shot down along with other pro fossil-fuel measures there are pockets that still fight hard to retain their ways and unfortunately JEA is one of those currently but will surely have to follow the rest of FL if the people speak up.

Thomas S. · Answer

Not worth the expense associated with a rental. You would better spend your money investing in additional rentals than dabbling with possible pennies in return on solar. Solar is highly inefficient and to costly except on a extremally large scale.

Pass the electric cost along to tenants and stay out of power generation. Doubtful you will force any worthwhile ARV with solar.

Lesley Resnick · Answer

Wow, that is interesting.  As a small city-owned power company that does not run a power deficit, they must feel empowered to behave poorly.

Lesley Resnick · Answer

You make a LOT of valid points.

all the solar in its own llc and be my own "utility" (captive entity).  It may just create too much complexity to be worth it.

If I can figure a way to get the system for virtually nothing and I could get a few dollars a month, it would be huge.  The tax credit is dollar for dollar 30% of the purchase.  The bonus depreciation would allow me to take the entire amount off my taxes 32% rate and self-employed tax.

Bottom line is I have more research to do.

Mitch Messer · Answer

Hi @Lesley Resnick. Yes, this is a very intriguing idea and one I've toyed with myself over the last few years. Especially lately, as the material costs have decreased and the incentives have started to flow.

One of my hangups has been regarding your reason #4. In order to get credit for the power generated, I believe the electric bill would have to be in your name, not the tenant's. That could mean you just market the home as including electric service, and then bump up the rent to cover it.

But doing this does complicate matters some, especially if the tenant's usage gets so high that you're no longer making money. Also, if you have to evict for non-payment, you probably wouldn't be able to deny electric service, so you might have to keep paying the bill even though you're not getting rent.

Alternatively, you could have the tenant pay you for electric each month, but that introduces its own issues.

I'm confident there's a clean and smart solution; I just haven't found it yet.

I'm curious to hear your thoughts, and those of anyone else out there!

Solar Panels on Rentals?

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