Financial Feasibility of solar electric for rental properties?

Question

I am new to real estate investing, but I have had an idea for a long time. The numbers are finally to a point where this idea makes sense to me. I am a solar contractor in Florida, I do mainly residential photovoltaic installs. I want to get an opinion of some people who own rental properties. I guess to do that we should use a theoretical example.

Let's pretend that we have a rental property that rents for $1,000 per month, electricity bill is $180 per month average. Rather then the tenant paying the electricity bill, the owner pays it and charges $1,200 per month rent rather than $1,000. Except you don't have $180 to pay, you only have a $9 connection fee to pay.

Over 10 years you will have collected an additional $24,000 from that unit (in a perfect world) - $1,080 in connection fees over the 10 years, leaving you with $22,920.

We can use a 10 kilowatt system to eliminate the electricity bill, something that I install regularly on residential for anywhere between $20,000 to $26,000 depending on roof type, roof sections, county wind speed codes, and a few other factors.

All equipment has at least a 12 year warranty, so it is guaranteed to have paid for itself at least once before its out of warranty.

If we use a $20,000 system as an example, you're ahead of the game without any incentives at all, but you will be able to use 30% of the cost as a tax credit, and depreciate another large amount. Usually writing off 50% of the system, leaving you with an out of pocket cost of $10,000. While increasing your property value, reducing carbon foot print, increasing cashflow, and make the rental property more appealing to high end consumers.

It seems like a pretty solid plan to me, and I plan on implementing it when I get some rentals, can any landlords give me their opinions on this?

Adam Schooley · Answer

@Kyle Bronstein this is a very interesting topic to me. I think most investors would want to verify all the tax benefits in their particular state. I have to ask because your example was for one unit. Most of the landlords I know own properties that have multiple units. My question to you is. Do I need a separate system for each unit of a multifamily property? So I assume it would cost me $40,000 for one duplex? Thats a huge up front cost in my opinion. I live in South Florida and there has been a lot of talk about solar energy in the last couple years. Let me know your thoughts. Thanks

Chris Martin · Answer

The biggest issue I think you will have is when the electric bill spikes to $500 one month. I would just charge $1200 rent, with the tenant responsible for the service. You can "pitch" that the solar panels will save the tenant $X per month and that the comparable rent cost to a house without solar would be $1000 or whatever.

Check with your tax advisor regarding ITC applicability to residential rental property. I am not a tax authority but I think the ITC requires an owner occupied residence. I could be wrong. @Kyle Bronstein

Ed B. · Answer

If your math is correct, it sounds like a win-win for everyone. One potential problem is marketing to find tenants able and willing to do a brain shift to rent a place with electric utilities already included. You will have those who are convinced they will always pay less to pay their own utilities rather than let the landlord pay them. A better plan might be to let the tenant have some of the solar savings ( maybe 25-30% ) to incentivize them to rent your place rather than the one down the street without solar panels. That will cost you some, and will decrease your yield, but maybe not so much to be a deal killer. However you do it, you must sell the tenants on the idea that they will benefit from the solar panels as well as you.

Account Closed · Answer

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Jerry Miller · Answer

From my research doesn't the solar company usually lease the equipment and need an agreement with the local power company to buy power produced?

Kerry Baird · Answer

Our Air Force family lived in England for 16 years. So many houses over there have solar panels on the roof, and hardly any air conditioning units (explained by latitude, of course). Government subsidies have to be part of the equation, because there are so many properties with panels. We recently moved to the land of sunshine and I see very few solar setups, and nearly every house has A/C.

It is good to see your numbers. That is quite expensive up front. It might be nice to pay along the way, over time. Many of us who are getting started, struggle with getting down-payments to buy our properties, or to renovate the properties we do buy.

I would rather use $20k to buy another property, at this point in my journey, than to buy a solar system...even though I like them, and would appreciate the value and the eco-friendly attributes.

Adam Schooley · Answer

My duplex in Fort Lauderdale is 1250 sqft per side. Each side has its own meter. My tenants told me the average bill through out the year is $150 a month. It's also a flat roof and faces east. Its about 3 miles from the beach also. I've been contemplating this for quite some time if you can tell!

Kyle Bronstein · Answer

I agree it is very interesting. I should've mentioned that those incentives are federal, and some states have more incentives on the state level, further increasing the return. My example was geared towards a single family home, it is hard to estimate what both units in a duplex would take need, without knowing the energy consumption. If we're talking about each side being around 1,000 sq ft., fairly efficient, then a system would be somewhere in the ballpark of $30-$35k. Again that is assuming a lot. Yes I have done tons of work in south Florida. Broward and Palm beach county seem to really like solar energy.

Financial Feasibility of solar electric for rental properties?

Financial Feasibility of solar electric for rental properties?

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