The case for solar on a rental property

[James Smyth]

TLDR; Summary:

If I go with the Tesla Solar Roof, the cost to install after incentives is going to be lower than the cost of the traditional roof without solar. I will be able to finance the entire roof with no money down, will cashflow from day 1 ($60/mo), and after 15 years the tenants will have paid off the roof and there is still 10 years left on the warranty! If the cost of utilities goes up 2.8% per year and my solar system is producing 94% of the year 1 production; the system will produce 9,851 kwh/yr, the cost of electricity will be 34c/kwh, and I will cash flow an extra $279/mo.

Since there is no money out of pocket my cash on cash return for this system is technically infinite.

So, not only can we advertise the rental as a "green rental" since we're saving the planet from carbon emissions and all... but we can also make a little extra $$$ at the same time!

Details:

I did a search here and it seems that many investors have talked down the case for solar on a rental property and I would like to make the case for it and encourage thoughtful discourse against it.  Convince me it is a bad idea.  Pardon the detail, as I am an engineer this is going to be a strict analysis of the numbers.

I am still looking into the taxable cost basis and the depreciable life of the solar system components (roof vs electrical); I'm unsure of the cost basis and depreciable life of the Tesla Solar Roof. For now I'm going to assume that on standard solar with a asphalt roof that only the electrical components have a 6-year MACRS depreciable life and the entire Tesla Solar Roof is depreciable as solar.

Case Study: House hack located in Suffolk County NY. The house is old and needs a new roof before installing solar.  If the roof is replaced as the "structural support" for the solar it is considered for the 26% tax credit.

Utility cost: 22c/kwh 

Annual electric usage: 12,000 kwh/yr

Annual electric cost: $2,640

Available Incentives: 

NYS Discount, 25% up to $5k 

Federal of 26% with no limit

Depreciation (once placed in service): 89% of the solar cost at a 24% federal rate and 6.57% state tax rate

Install solar panels and new roof: 25 year warranty workmanship and materials across the entire roof and solar assembly

Cost of replacement roof: $8,600 - 12,400; going with the cheapest reputable roofer at $10,300

Cost of solar system: $27,000 - $32,000; the cheapest quote has been in business the longest and has the best warranty go with $27,000

Cost of system: $10,300 + 27,000 = $37,300

Annual solar power production estimate: 12,179 kwh/yr; offsets the entire estimated usage

Annual solar production cost: 12,179 * 22c = $2,679.38/yr -or- $223.28/mo

Cost after incentives: $37,300 - $5,000 - $9,698 = $22,602

Finance option: Use NYS low-interest loan @ 3.5%; 0% bridge loan for incentives, ($22,602 @ 3.5% for 180 months) $161.56/mo

Tax benefits of depreciation once place in-service: $7,342 over six years, $6,083 recovered in year 1

Install Tesla Solar Roof; integrated solar roof with 25 year warranty across the entire roof assembly, 15 years on the inverter

Cost of Tesla Solar Roof: $31,635

Annual solar power production estimate: 10,480 kwh/yr; offsets the 87% of the estimated usage

Annual solar production cost: 10,480 * 22c = $2,305/yr -or- $192.12/mo

Cost after incentives: $31,635 - $5,000 - $8,225 = $18,410

Finance option: Use NYS low-interest loan @ 3.5%; 0% bridge loan for incentives, ($22,602 @ 3.5% for 180 months) $131.61/mo

Tax benefits of depreciation once place in-service: $8,603 over six years, $7,127 recovered in year 1

Summary of the effective cost of the solar:

Effective cost of solar system = Total installed cost of solar and roof - incentives - cost of new roof (required regardless of solar install) - tax savings

Effective cost of traditional solar = $37,300 - ($5,000 + $9,698) - $10,300 - $7,342 = $4,960

Effective cost of Tesla Solar Roof = $31,635 - ($5000 + $8,225) - $10,300 - $8,603 = -$493 (say what!? It is cheaper to install a Tesla Solar Roof than a traditional roof and that's before I charge the tenants for the electric!)

Understated benefits:

The solar loans are 0% down at 3.5% interest, I get the roof and solar system installed with a low interest loan with no money down

"You don't pay utilities, why would you put solar on the roof!?"

Besides the fact that after incentives I am getting the roof cheaper with no money down and a low interest loan?  Sure, in the standard lease utilities are the tenants responsibility.  Instead of getting stuck in what is "standard" why don't we just revise the lease to include some sort of mechanism to recover the cost of the solar system?  I can think of two simple ways this can be done in a number of ways:

Option #1: Utilities included with a cap

Include the utilities and adjust the rent up the cost of 1/12 of the estimated annual solar production.  If the tenant uses excess electric you bill them for the excess electric as additional rent.  If you want to make this one simple you can reconcile the utilities annually at lease renewal.  This would be very similar to the utility company offering "balanced billing".  If the tenant ends up with a sizeable bill, raise the rent to cover the added costs.

Option #2: Bill the tenant for utilities
Keep the utility bill in your name and charge the tenants whatever the going rate, or a discounted rate if you want, for the electric usage. Included the electric charge in the lease as "additional rent"