Advice is needed for solar vs legalize duplex

[Peter Doan]

Hi,

I recently bought a house with an in-law unit. The size of the in-law unit is the same size of the house (around 1400 sqft for each of them). Both of them are rented to separate tenants.

Currently the two units share the same electricity and water meter. I charge each tenant $80 for electricity and give them water free.My electricity bills around $400-$500 since PGE charges the high usage (two units combined). The water bill is around $120. Those expenses very much eat all the cash flow.

I am thinking of two options:

1. Legalize the duplex. I talked with the city and was told that the fee I need to pay for the city to make this happen is around $35,000 - $36,000. On top of that I need to fix the common wall between the two units to make it fire proof. So I guess the cost is around 40K totally. The benefit is that I will have separate water meters and separate electricity meters. The downside is that it requires a big downpayment (40k immediately).

2. Add solar panel. I talked with solar company (Tesla )and they estimated an $32,000 solar system would be sufficient for both units. If I go with $320/month I would be able to pay off in 10 years. Solar company will guarantee the solar system works for 20 years. Because this is investment property, I do not get 30% tax credit for solar system as it would applies for primary resident. The benefit of the solar option is that I would not need to worry about high PGE cost. After 10 years, I would be able to get additional cash flow by selling the electricity for tenants. Also I would not need a big downpayment like option 1. The downside of this option is that the house is not legalized as a duplex. Also I would need to take care of electricity and water bills. The water and the electricity will still be shared.

I am not sure what will add the value to the house more (solar system or legalize the duplex and having separated water and electricity meter). Also what is the better option that I should go with?

I am new to the house renting investment and still learning. I would truly appreciate your input and guidance.

Thank you very much.

Peter

[Casey Murray]

@Peter Doan I was in a similar position where I had 3 units tapped onto 1 electric meter. The other unit had a separate meter. Our monthly electric bill was $800. We went with the solar option by financing the $38.7K install over a 12 year loan at 5.49%. Our monthly payment is now $367 so our annual savings is ($800-$367) X 12 = $5.1K which gives us a ROI of ($5.1K/$38.7K) = 13%.

A couple of notes. 1) The credit union attached the solar panels as a lien to the property. So the solar panels stay with the property, not with me. 2) A city inspector will need to come to the property and validate the install is correct; it's a quick visit for them.

I can't speak to legalizing a property but I'd highly recommend the solar install. It's way less capital intensive and you can get everything completed in a timely manner. Hope this helps!