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Updated over 2 years ago on . Most recent reply

User Stats

961
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Will F.
  • Investor
  • Los Angeles County, CA
277
Votes |
961
Posts

Solar in Rentals?

Will F.
  • Investor
  • Los Angeles County, CA
Posted

Hey does anyone have solar in their rental properties?

If so what is the best way to go-- finance or buy it outright?  

I'm in southern california.

Most Popular Reply

Account Closed
  • Rental Property Investor
  • Portland, OR
332
Votes |
338
Posts
Account Closed
  • Rental Property Investor
  • Portland, OR
Replied

@Will F. and others:

This is a topic I've thoroughly analyzed and researched over the past year.  I'm a landlord and have worked in the solar energy industry on and off since 2010 in Oregon.  I recently had two solar PV systems installed on the roof of one of my duplexes.  I would not have done this had the numbers not worked out in my favor.  

Disclosure: I DON'T work in the solar industry right now.  And I only read the first page of this thread before getting frustrated at so many ill-informed answers that I decided to chime in.  

To everyone who says that solar is a bad investment for rental properties--it's not that "you're wrong," but rather, "it depends."  

The fact is, every building is different.  You can't generalize about whether solar (PV or thermal) would "pay off" for rental properties or even owner-occupied properties.  Each state and each utility district has its own incentives and rebates, and even then, all other things being equal, properties in one zip code may qualify for certain programs that others don't.  

1.  Do the research and find out whether solar may provide a ROI for you (http://www.dsireusa.org/ is one place to start, then visit your state's website for state tax credits, then your local utility company's website for other incentives.  This is on top of a 30% federal tax credit off the net price after state credits).  The incentives and tax credits also vary if the property/electric meter is considered residential or commercial.  

2.  Contact at least 3 solar installers for bids.  Ask them about all the available financing options and plans.  Some companies, like SolarCity, have lease or power purchase options, which may prove to be more cost-effective than purchasing a system, depending on where you live and how big your system is.  You may find, however, that purchasing a system from one company doesn't make financial sense, but another company might provide you a much lower bid.  When purchasing a system, size matters, as there's sometimes a sweet spot where you maximize the available incentives but don't offset your energy consumption 100% (e.g. in Oregon, the state tax credit maxes out at $6,000, so systems larger than 3.5kW can cost more per watt, if you're buying the system yourself).

It depends on which state you're in, the direction your roof faces, the pitch of your roof, the age of your roof, shading, the average amount of annual sunlight in your area, your electricity company's available incentives, your electricity rate, your electricity rate plan, how long you plan to own the property, how much electricity you currently pay for (if any), how new/energy-efficient the building already is, and available financing options.  

3.  While the price of panels may fall, so will the available tax credits and incentives.  As one person pointed out, most of the cost is in labor, so if you're going to go solar, you will reap the most benefit from your decision if you act sooner rather than later.  To those who say, "just install it yourself," no.  You can't get many of the incentives if you're not licensed or otherwise professionally affiliated with the state and/or utility district and/or don't tie your system to the grid.  

4.  There are multiple ways to pass the cost on to your tenants.  If you are leasing a system or have an agreement to purchase the power (PPA), you could simply pass the bill onto your tenants.  No matter your financing, you could also include the cost of solar in the rent, and advertise this in your rental listing.  Thirdly, you could have a separate "solar electricity fee" each month, so the rent listed on your ad is competitive with neighboring listings.  Make it clear that the solar system offsets what they'd pay to the electric company and their overall electricity costs will be lower than other area rentals (and make sure that's so).

5.  INCOME AND PROPERTY TAX BENEFITS

-  If you purchase the system, you can depreciate the cost.  Talk to your accountant as you may be able to cost segregate and depreciate over fewer than 27.5 years.  (There might also be an expedited "green upgrade" depreciation rate for all I know, but idk.).  

-  Many if not most municipalities have statutes that prevent your property taxes from increasing when you add solar or other green upgrades.  

-  If you borrow to finance the system for a rental, you can also deduct the interest.  And if you have a lease/PPA, you can deduct your entire monthly payment.  

-  There's another benefit, but I'm putting it in #10 below.  

I'm not an accountant so do your own due diligence regarding all the points above.  

6.  Yes, there's a hip factor that will make your solar-powered property more desirable to certain tenants.  If you rent to many younger people, or people who are left of center politically, your vacancy rate will likely decrease as now you have a competitive advantage over non-solar units.

7.  When you sell your property, if you purchased your system, solar will increase the value of your investment.  If you have a lease/PPA, those can be easily transferred to the next owner.  Most leases and PPAs will have some sort of rate lock, so if electricity rates continue to rise as they have, in 2021, the per kW/h rate you locked in in 2016 will look very attractive compared to whatever the utility company is charging at that time.  There is no reason you should have to "buy out the system" just because you're selling the property.  But in theory, you could buy it out if, for whatever reason, your buyer didn't want solar electricity?  

8.  Solar doesn't cost me anything.  Yes.  I installed two solar PV systems on a lease.  I maximized the system size so 100% of the annual electricity consumption should be offset by solar.  I didn't pay for any materials or labor, and the installer maintains the system and insures my roof beneath the panels.  

9.  Solar saves me money from Day 1.  What I will pay for is the monthly lease at ~$40 per system.  The electricity pre-solar bills solar averaged about $60 per unit.  Subtract the electric utility's base charge of $10/month and that's a savings of about $10/month per unit = $240 (for two systems) in year 1.  

My particular lease has a 1% escalator built into it.  Assuming electricity rates will continue to increase at about 4% per year, this is how one of my two solar systems pencils out over 5 years (the lease is longer than 5 years because I intend to hold this property indefinitely):  

.solarelectric utility
# months6060
IR1.00%4.00%
payment year 14060
Payment year 5$41.02$66.30
with electric utility base charge$51.02$66.30
savings per month in year 5$15.270
savings per year in year 5$183.290
total solar savings years 1-5:$790.050
total solar savings years 1-20:$5,201.760
total solar savings including RETC$7,601.760


10.  I paid nothing for my two systems, but I get to keep $4800 in Residential Energy Tax Credits from Oregon ($2400 per system).  This is a portion of the whole credit ($6000 per system); the installer keeps the rest.  But since I didn't buy the system or pay for installation, for me, it's like free money.  

Granted, I worked in the solar industry so I know the ins and outs of the incentives, tax credits, and financing options, and I leveraged that knowledge to make solar return on its investment (which was $0) from day 1.  

I've put a lot time into researching solar for landlords and have a couple more strategies that I didn't mention here.  One of the beautiful things about solar at a rental property is, even if you include the cost of solar in the tenant's rent, they are still incentivized to not waste electricity.  That's because if they use more energy than the panels can make, they then still have to buy it from the electric utility. So that's just one tidbit up my sleeve.  

If you'd like help deciding whether solar could benefit you as an investor or homeowner, or if you want to know a couple other ways you can make money from solar as a landlord, you're welcome to PM me.  I don't work in solar anymore; I'm offering up my experience because I do believe in renewables and know that it can be a good investment for some people.   

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