Hello James.
Ultimately, I believe the answer lies in your risk tolerance and the amount of your reserves.
I will start with some questions that you may want to ponder about.
1. In the summary you are saying that, "my solar system is producing 94% of the year 1 production; the system will produce 9,851 kwh/yr" and in the Details you are saying, "Annual electric usage: 12,000 kwh/yr". How are you going to bridge the gap between production and the usage requirement and whats the cost of both systems (if needed?) and how is it going to affect your depreciation and/or credit schedule?
2. While the solar warranty is for 25 years, the effectiveness of the solar will start diminishing over time. If you are getting 100% output today, will you get 100% output in 15 years? So, will your numbers work the same? The same is for the shingle roof. Most likely you will have to perform maintenance, but what is the comparison in terms of the initial cost and the following maintenance?
3. When the solar needs to be replaced, is it going to cost extra to remove the panels and will you need new setup to install the next set? You don't know this now, but most likely it will cost extra. While with the regular roof you just put another layer and you are good to go. In Western NY I can easily put 3 layers on. How costly and how challenging is the new set up with the solar?
4. In the situation of the strong storm/natural disaster/another Sandy and the solar panels getting damaged, how fast and how easily can the panels be replaced? During the hurricane Sandy electricity by the Manhattan beach in Brooklyn (right by the ocean) was restored in 7 days (I believe its one of the longest repairs in Brooklyn. My friends in Bayshore and Halstead and Ronkonkoma got their electric back in 2-3 days), how long will it take to replace the panels if they are damaged? Is there a similar ratio of roofer to roofs as the solar installers to solar roofs? What I mean is, in case of another Sandy/storm, how easy is it to find a solar installer to replace the damage? There are hundreds of roofers out there- its the same concept of installing the architectural shingle in CT or MA or NJ or NY. If the company in NY is not available, there will be one in NJ or other states. While your particular solar system might require particular company in order not to void the warranty. What if there are only 10 installers and you are customer #300? How long is your wait? You are "green" conscious, so you realize with the current damage to climate, another mini Sandy is just around the corner.
On the other hand, if the panels survived the natural disaster, your property can be the only property on the block to have the electric.
5. Do you know that there are 50 years architectural shingles? While they may start loosing effectiveness after 40 years and you may need to replace a few tabs here and there, the cost of labor to replace them is pretty low, especially if you buy a square or two extra on the onset.
6. Are you including the vacancy factor when you are in between tenants? Or, what if the tenant is not paying rent and your electric bill? In Suffolk county it takes months to evict somebody, can you cover the cost of the solar mortgage?
7. Will the cost of the solar affect your DTI ratio and prevent you from purchasing another property where you can collect rent?
If you strictly think of the numbers, it seems like an interesting opportunity. However, you don't live in the world of only numbers. You have natural disasters and storms that cause damage, you have Covid and tenants who do not pay rent and you have banks that look at DTI ratios. These are real questions that you need to think about.
I just noticed that you updated your initial post. Are you a Tesla sales rep and this whole thing was a promotional gimmick or you do not have any sponsorship with Tesla?
Alisa, thanks for your post. I will respond to your last comment first. No, I am not affiliated with Tesla. I spent more time that I needed thinking about the numbers on this and wanted to share the analysis since it's not cut and dry like 99% of the other posts on BP have made it out to be. If someone uses the promo code, they get $100 off a Tesla Roof and I get referral bonuses towards future Tesla products if someone uses the link. I included the Promo Link as an update because it was an afterthought.
Apparently the Tesla Solar Roof panels are manufactured in your neck of the wood at their Gigafactory in Buffalo! I would be excited to have an affordable NY made product installed on my roof!
On your other point you have some very solid points I hadn't previously considered, I'll have to consider some of the added risk you've brought up.
For some added discussion:
1) With the electric usage, I'm charging the tenant by the kwh at the market rate. Regardless if they are use more or less than the solar produces, I'd be covered. If they use more than the solar produces, they cover the cost of the bill.
2) I haven't decided on going with Tesla, I'm not sure what the production warranty is on the Solar Roof but they warranty their Solar Panels for 80% of year 1 production in year 25. The newer Sunpower panels are guaranteed for 92% at year 25!
3) You bring up a great point on thinking about the long-term life cycle cost. Many of the factors you bring up are hard to know when we're at the beginning of the adoption cycle of a new technology. This is one of the biggest unknowns. How much will a roofer charge me to rip off the Tesla Roof in 25+ year, who knows? Will it be significantly more than a asphalt shingle roof? Maybe a 50% surcharge? Asphalt rip they'll charge $2k for and they'll charge me $3k? Since the solar should be cash flowing an addition $4k/year starting in year 16 and increasing through year 25, this added charge should be covered.
For the re-roof, I can go up to two layers of shingles by code but the engineer who performed my inspection recommended not to have more than one layer; my property was built in 1910 and he said the roof wasn't built to carry the load of more than one layer.
4) This would be a problem. I was on LI for Sandy and it sounds like your friends made out well. I was on the north shore and didn't have power for 10 days and know people who we without power for well over 2 weeks. This past year we were hit my a small Tropical Storm and I lost power for 6 days! While the roof would be covered by the warranty, it would take time for them to be able to service it for sure. The roof system is made of tiles tempered glass installed over two layers of peel and stick weather barrier. Even if some tiles were lost the roof should remain weathertight for some time. The peel and stick membranes are rated for 30+ days of exposure and they have two layers.
5) I have had roofing contractor quote me for GAF Timberline, Owens Corning Duration, and Atlas.... "lifetime" shingles. The warranties on these products are very limited unless you go with a high-end certified roof, which adds to your install cost. The Platinum Certified Owens Corning Roofer quotes me $17k for the roof:
Since the roof tiles are constructed from tempered glass panels, I have more confidence that the Tesla Solar Roof is going to last the lifespan of a slate or terracotta roof (at least structurally) when in comparison to an asphalt shingle roof. Likely will last 50+ years...
6) For vacancy, I hadn't really considered this very much since the roof was cheaper after incentives. I view the payment more as financing the roof than financing the solar. In the case of vacany, I'd be paying the cost of the electric if the house were to be vacant and the solar system would eliminate the power bill during vacancy; and the excess power is fed back to the grid and builds up extra energy credit to be used when a tenant moves back in. My market is very HOT, there aren't actual vacancies and with how I care for my properties, turnover is low. Economic vacancy is real risk, hopefully this is handled through properly screening tenants and having strict acceptance criteria, but it's always a risk of being a landlord. I should re-run the analysis with an assumption of 5% vacancy!
7) This is another very valid point I hadn't previously considered. If my payments are $130 and the tenant is paying $190. The bank will likely consider 75% of the $190, or $142.50 against my $130 payment. It would seem to me that the solar system would reduce my DTI?
I'll spend some more time thinking about the points you brought up. Thanks for the thoughtful discussion!!!
@Steve Morris
Your response seems to be ignoring a few things mentioned, particularly I the last part of the post.
The system is 0% down. In these types of setups the energy output is monitored and viewable, often through an app. If you read the last part of the post, an option of this scenario would be billing the tenant (likely for a cheaper rate than the utility company) and acting as the utility provider. I think you can achieve a decent ROI by acting as the utility provider and billing the tenant for usage with your system that you put no money down into. The system will effectively be paid off by the tenant and in this scenario the owner can receive a tax write off for a new roof install.
Seems like a win win scenario to me.
Basically Your paying 37,300$ for a 8k roof plus you’ll pay out 3.5% interest for many years and it’ll take twice as long ( forever) to realize the savings because you are using 2640 as the yearly electric that’s over 200 a month . I don’t know anybody who pays that on a single family who has natural gas .I like to recoup my investments fast not in decades!
Also you have no idea of the future of all this . We don’t even know if this can hold up long term in cold climates or cloudy areas like where I live . You can’t say this for sure and you know it , what if the parent company hopes out of business . Can’t warranty something if they are gone now can you ? We Especially can’t tell with these spend hungry politicians coming into office on what future incentives or write offs you can really count on in years ahead . It’s subjective That’s what folks said about the 1031 exchange and now it appears we are losing that benefit after 80 years of having it on the books .
Not sure where you are, Long Island NY has very high electric rates of 22 cents a kwh. People with bigger houses and AC can easily see $500-600 a month.
I own investment properties in Upstate NY where power costs are 11c/kwh. I ran the same analysis there and it was only breakeven rather than cashflowing. I am not putting solar on that house.
The cost of the Tesla Solar Roof costs less than the asphalt roof after incentives. We could have a separate discussion about whether we agree politically about the tax incentives, but this is a real estate forum and my goal is to maximum ROI. If I can increase cashflow, while getting a new roof (which should decrease my cap costs) with no money down? Sign me up!
The point of the discussion is that you need to run your own numbers because there is no one size fits all. Solar might not make sense in some areas where electric is cheap. But in markets with high electric and good incentives, the numbers don't lie
This is awesome! Definitely go with the Tesla Solar Roof!
Thanks Alex! Since you are Any advice on how solar impacts assessment? Increased property value was absent on my discussion.
Sounds good on paper but that’s not reality in real life . Those numbers efficiency and incentives seem like wishful thinking on your part lol
The three main reasons I don’t see why you’d do this are
It is very expensive
It costs a lot
It is not cheap at all
8k versus 37k . Makes no sense and I’m not paying the electric anyway why would I even care ? That’s the tenants problem
I try to make sure all of my rentals are “ green” and if I started buying up outrageous junk like windmills skylights and solar roofs then they wouldn’t produce the “ green” for me each month .. then I’d have a “ red” house ! I didn’t get into being an investor to save the whales , the ozone or the wolves etc
Dennis, I'm not surprised that there are people who are strongly against the idea which is why I've presented the fact, which you can choose to reject if you'd like. The incentives are what they are, there is no optimism required there. As a real estate investor there should be no surprise that the government incentivizes things they want people to invest in! The generation is also very easily estimated based on satellite data (https://www.google.com/get/sun...). If you looked into solar a few years ago you were right about "expensive, expensive, expensive" but the cost of solar has gone 21% in the past two years (https://news.energysage.com/ho...) and Tesla has lowered the cost an additional 30% in the last year (and the Tesla panels are surprisingly manufactured Buffalo NY!!!) (https://electrek.co/2020/06/20...):
Not sure what you mean about $8k vs $37k? The cost of the Tesla Solar Roof system is cheaper than the new roof after incentives and it eliminates the current utility liability of $2700 with a guarantee for 25 years; you're looking at a minimum return of $67,500 on a $0 out of pocket expense or $10k if you paid out of pocket.
Originally posted by @Steve Morris:
I think with the subsidies and if you have good exposure, I see no reason why not to do it.
I'd just make sure:
1) It's professionally installed since poking holes in the roof not good
2) See if you can get some kind of workmanship warranty in case you do get moisture invasion
3) Find out what gets recorded against title. I think they record a UCC (meaning a lien) since they are financing it. Only issue is if you sell the house or get a new loan, you need to call and get a release and then re-record the UCC.
Thanks Steve for the thoughtful comments! I absolutely agree. I have posed the questions about the liens on the financing, I believe the NYS programs do no record a lien position but I have requested clarification on this.
I am a fan of the Tesla Solar Roof system over traditional solar because it built like a hybrid slate and standing-seam steel roof. Since the solar is build into the roofing tiles, there are no penetrations to. If there is a leak, it is covered by a 25-year weatherization warranty!
I don't buy properties where I would need to pay the utilities. I can rent for top dollar without needing to through in solar cells or washers and dryers.
So spending any money on this to benefit the tenants utility bill would be a waste of money for me.
John, I'd think you would be able to charge top dollar and then some if you had a washer/dryer; but that's not what we're discussing here. I'm proposing charging the tenants the cost of the electricity as additional rent, if you review the numbers this is a simple way to increase your monthly cashflow on a property by $60 now and $300 in the future by playing the incentives that are available on solar!
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"
@James Smyth bees may only stay in the hives for 14 days at a time, otherwise they will have to be added to the lease.. 🐝 📝
Need to run a full background check and credit
I have a single family investment property located in a small city in upstate NY. The house is situated on a 0.25 acre property in the city limits. The tenants have been in the house a few years, have taken great care of the place, are paying premium rents, and have expressed they plan to be long term tenants living out their retirement in my rental.
The tenants like to keep busy with projects. The tenants maintain the landscaping well, I have allowed the tenants to make changes to the landscaping, and plant a vegetable garden.
This past week the tenants requested to keep honey bees on the property. I'm open minded to the idea and there is a sizable backyard where the tenants could locate the hives. The tenants already got written permission from the city code enforcement and I confirmed with my insurance company that beekeeping wasn't prohibited. While the insurance company doesn't prohibit keeping bees, they do exclude any damages caused by the bees. For this, I already require the tenants keep a renter's policy and maintain me as a additional interest on the policy.
Has anyone had this come up? What are your thoughts? What would terms to include in a lease addendum be?
Congratulations for posting something I don't think I've ever seen come up on here :)
As long as the hive isn't attached to your house (or ridiculously close to it), I really don't imagine it could be a problem. Even if neighbors are allergic to bees, there's nothing that would stop bees from making their own nest on something on your property; all that's happening here is the tenants are encouraging and controlling it.
I've never had anyone ask me this in any of our properties but I do know a few people who have done it and I've never heard of any problems. The only real negative I could think of is the possible attraction of bears to your property (if that's a problem, since you say it's upstate NY).
Thanks! I did a search before I posted and I don't see that the topic has been discussed yet. Happy to provide a new point of discussion to the forum!
I appreciate all the feedback. I'm all for the idea of keeping bees. My uncle runs an apiary and I've helped him with the bees before. I have no issue with with the idea, just looking at the business side of things, mainly managing potential liability. Honeybees are completely non-aggressive and the risks for getting stung are if you stand in front of the hive where they come and go from or if you did something to bother the bees.
The house is in the City of Syracuse and I don't believe bears are an issue in the city. There are plentiful deer, but I don't know of any issue with bees and deer.
The hives would be located about 10' from each property line in that corner and 50' from the nearest neighbor's house. There is a very friendly relationship with that neighbor and that neighbor made the point to call me and tell me how much he really likes the tenants I have in the house now. I don't foresee getting permission from that neighbor being an issue.
One thing with honeybees is that if they aren't managed properly hives can split and half the hive will leave and try to find a new place to live, this is called a swarm and it's literally a huge ball of bees that are all surrounding their queen looking for a new place to make a home. My concern would be liabilities and/or damages of a swarm ended up in my house or a neighbor's house.
Swarm
For the beekeeping lease addendum:
I have a single family investment property located in a small city in upstate NY. The house is situated on a 0.25 acre property in the city limits. The tenants have been in the house a few years, have taken great care of the place, are paying premium rents, and have expressed they plan to be long term tenants living out their retirement in my rental.
The tenants like to keep busy with projects. The tenants maintain the landscaping well, I have allowed the tenants to make changes to the landscaping, and plant a vegetable garden.
This past week the tenants requested to keep honey bees on the property. I'm open minded to the idea and there is a sizable backyard where the tenants could locate the hives. The tenants already got written permission from the city code enforcement and I confirmed with my insurance company that beekeeping wasn't prohibited. While the insurance company doesn't prohibit keeping bees, they do exclude any damages caused by the bees. For this, I already require the tenants keep a renter's policy and maintain me as a additional interest on the policy.
Has anyone had this come up? What are your thoughts? What would terms to include in a lease addendum be?
OK, I'm going to stir the pot on this one a bit, here goes ... personally, I think escalator clauses are chicken s$%t ... if I were selling a property (and I have been in this situation), I would NOT accept escalator clauses, but rather just instruct the buyer to send in their highest and best offer. I am not disclosing the details of the other offers, just the same as I am not disclosing the details of your offer ... that is the fair way to do it IMO. Otherwise, the only other fair way is public auction, where everyone knows everyone else's bid ... but selectively sharing that info with only some of the potential buyers but not others is chicken s%&t. It is the same with buyer's agents asking what my highest offer is ... WTF?!? I'm not going to tell you what my highest offer is ... why would I provide that info? Which is essentially the same as what you are doing with an escalation clause. I will tell you how many offers I have, but I won't tell you what the highest one is, and I won't even tell you if they are over or under asking price. That does not serve my interest as the seller, nor is it fair to the other potential buyers. If you really want the property, just put in your best and final ... otherwise, if you want to try to horse trade a bit put in a lower offer and try to negotiate but understand then that you are running the risk of getting beat out by a higher offer in the meantime.
This is an old post, but I'm researching Escalation Clauses and I don't see you're point.
What is the downside to revealing the highest offer? The sellers agent is going to say "highest and best" and suddenly the buyer is going to offer way over asking price? I'm not so sure about that.
The seller lists an asking price, once offers start going over asking price I would argue that it is the Seller's agent's responsibility to follow-up with each of the people who were outbid and try to get the sell the TRUE highest and best offer. In this case, I don't see any seller offering $490k for a house listed at $450k without something driving the price up; which the seller's agent fiduciary responsibility.
@Andrew Syrios Thanks for your feedback!
I was leaning towards making an offer with the adjustments in the offer and trying to explain why I was deducting from the beginning and hoping that would help seal the deal. As a matter of doing business, I would prefer to be upfront and hope it prevents friction in actually closing the deal!
You're saying I should aim to be at 75% of ARV? Any adjustment of that if you're buying a house that is a third of the size of the others in the neighborhood? There is lots of potential to expand the home and increase the value.