Buffett and Einstein would agree on solar panel cash returns!

Imagine this conversation:


Warren says to Einstein, “Albert, I look for investments growing at 20%+ a year.”


Albert replies, “Using my “rule of 72 formula, I calculate you double your money every three or four years!”


Warren replies, “How do you think I became one of the richest people in the world?”

Warren Buffett quote: “Investors are always looking for stocks that are going to double in a year or two years- that’s why they want tips. Instead, they should be looking for stocks that are going to go up a more reasonable amount, such as 20% or 25% a year for the next twenty years. That’s where fortunes are made.”

“Einstein’s rule of 72”: if you divide your desired compound rate of return into 72 you get the number of years required for your investment to double. Conversely, if you divide the number of years in which you wish your investment to double into 72 you get the required compound rate of return.”

In our previous Blog: How to Double your net Income by installing Solar Panels, We established that we can create a 15%+ annual cash on cash return on the solar component of our apartment building investment by utilizing Virtual Net Metering,( Installing solar panels, then charging the tenants for their electricity). This return can increase along with electricity rate increases, eventually hitting 20%+ returns yearly for the life of the solar panels.

Number wise, I think Buffett and Einstein would both approve and appreciate the extra returns created by our “solar panels on apartment buildings” investment strategy.

Interesting Einstein story: Einstein wanted a divorce. He could not afford the money Mileva wanted for child support of their two sons. Confident that he would win the Nobel Prize for his 1905 work, he promised her that he would give her the prize money when he won, if she would grant him a divorce. Einstein won the Nobel Prize for his work on the photon (not for relativity theory). He kept his promise and gave all the money to Mileva Maric, holding up his end of the contract. She bought three apartment buildings in Zurich, one for her and one for each son.

If Mileva were alive today, I would like to think she would enjoy the extra return on her investment that net metering would bring, and be delighted to be improving the environment by not burning coal to power her electricity usage.

Steve Nauert

How to Double your Net Income by installing Solar Panels on your Multi-Family Building-

As you know, the cash flow after you purchase an apartment building is slim at best. Typically on a 25% down deal you can expect a 3- 4% return on your cash invested, if all your expenses stay in line.

With the addition of solar panels and a few “tweaks” you can almost double your annual net income. We are not counting debt reduction, loan amortization, excess depreciation or appreciation in our example, we are only counting the cash left over at the end of the month.

Given:
Los Angeles-10 one bedroom unit’s
Gross annual income of $90,000
Landlord pays $250 per month to heat the buildings water with a Gas Water heater.
Tenants pay an average of $74.00 per month for electricity: (573 KW Per month @.13 cents per KW).

Step #1: Install a solar panel system, using Virtual Net Metering. Definition: Virtual Net Metering is a method in which one solar power system feeds one master meter, sending electricity back to the grid. The power company then applies the credits from that energy to each of the tenants in the building, thru sub-meters, offsetting each tenant’s electricity cost.

Step #2: Add a Solar Thermal Hot Water System, which can typically reduce natural gas demand by 60% to 70%. (Solar thermal uses the sun’s energy to pre-heat water and transfer it to a hot water storage tank. Heating represents 40% of a typical power bill).

Step #3: Replace light bulbs with LEDand CFL light bulbs. About 20% of an average electric bill is lighting. LED and CFL bulbs draw about 85% less energy than an incandescent bulb. Additionally, you can make your building a Wi-Fi Hot spot for $60.00 per month, a real money saving treat for the tenants. Add a recycling program and you are now a Green landlord!

Step #4: Re-write the leases so you now collect what the tenants used to pay the electric company: in our 10 unit example, $8,400 per year. Add the direct savings from your old gas hot water bill of $3,000 per year, and you have created an additional $10,400 which falls to the bottom line. In our example, using an $850,000 purchase price with 25% down payment and 44% expenses you netted 4%, or $10,000.  Your expenses after these changes now fall to 37%, and your net income increases by an additional $10,400 to $21,258 per year.

Of course there are costs to getting here: Assume you purchase as much used equipment as you can, and pay $250.00 per new solar panel, (assuming 125 panels). Estimate $70,000 for the installation and equipment, and we have a 7 year payback on your investment, or 15% cash on cash return. If you prefer to borrow the $70,000 @5% for 30 years the monthly payment is $375.00  x 12months = $4,500 per year, netting an additional $5,900, which adds 50% to your bottom line with no out of pocket cost on your part, and the interest is a write off as you know.   

Environmentally- or the “Catnip” as I have seen it called: you would prevent the burning of roughly 80,000 Lbs. of coal per year.

Steve Nauert

Solar Apartment Buildings! “Maintain a firm grasp of the obvious at all times.”

When Jeff Bezos, founder of Amazon, made this quote, it was my understanding he was referring to selling books over the internet, a new concept at the time. He was looking for a reasonably expensive item relative to size and weight. A book became the obvious thing, and Amazon was born.

A whopping 33% of the U.S. population lives in a rented apartment, and they are paying the electric company every month for their power. What if the landlord could supply their tenant’s electricity needs using solar panels? The landlord could increase the rent from each tenant to cover the solar installations cost, plus some profit. 

I would like to think Jeff Bezos would agree on two points:

1) There is going to be a rush to put solar panels on apartment house rooftops. The internet was the catalyst for Amazon, and Virtual Net Metering, (a method in which one solar power system sends electricity back to the grid, then applies the credits from that energy to each of the units in the building), is the catalyst for solar panels.

 2) Environmentally, this is a way to reduce the carbon footprint of 50 to 100 people per building

When you put solar panels on your own personal rooftop it is to save money, and do right by the environment. When you place solar panels on your apartment building, the tenants pay you for their electricity thru increased rent, and you are producing their electricity inexpensively from your panels. This also increases the value of the building.

The great wealth shift from the utility companies to the landlords is happening. This transfer of wealth will take place as the utility company’s stream of revenues starts shifting to the landlords, the Proverbial Gold Mine. Utility companies need a 20, 30 or 40 year investment payback period, while a “solar landlords” payback is 5 to 7 years.

• “The Stars Have Aligned” for Solar Panels on Apartment Buildings!

Virtual Net Metering is the Game Changer:

TIME: solar panels have continued to drop in price and gain wider acceptance. The cost of solar panels today is about 100 times lower than the cost of solar panels in 1977.

TECHNOLOGY: Virtual Net Metering is a method in which one solar power system feeds one master meter, sending electricity back to the grid. The power company then applies the credits from that energy to each of the tenants in the building, thru sub-meters, offsetting each tenant’s electricity costs. The utility handles all the record keeping, while the landlord collects the utility payments from the tenants. One of the great advantages of solar multi-tenant housing is education. Tenants at the solar apartments learn and understand how they are using energy and how solar energy can help.

LEGISLATION: Utilities are on board with the California Solar Initiative, in giving the go ahead thru the MASH Program to Virtual Net Metering. This is similar to the scene in the movie the Graduate when the advice given to Dustin Hoffman is, “One word:Plastics”

This is a game changer in the solar industry. Apartment owners can now become a Utility Company. Assume rents increase roughly 3% per year, and electricity prices increases about 5%: "We are now in an era of rising electricity prices," said Philip Moeller, a member of the Federal Energy Regulatory Commission. .. “In California, residential electricity prices shot up 30% between 2006 and 2012, adjusted for inflation, according to Energy Department figures. Experts in the state's energy markets project the price could jump an additional 47% over the next 15 years.”

For EXAMPLE: Historically, rents and electricity are both rising in price at an average of 4% per year. You purchase an apartment building and install a VNM system. In your purchase, you used 4 to one leverage, (a 25% down payment), so a 4% price increase becomes a 16% leveraged return. You have now almost accomplished what Warren Buffet recommends for a good investment: “Investors are always looking for stocks that are going to double in a year or two years- that’s why they want tips. Instead, they should be looking for stocks that are going up a more reasonable amount, such as 20% or 25% a year for the next 20 years. That’s where fortunes are made.”

Currently, there is a bestselling book by Thomas Piketty: "Capital in the Twenty-First Century.” Per The Economist summary:"Mr. Piketty derives a grand theory of capital and inequality.  As a general rule wealth grows faster than economic output, he explains, a concept he captures in the expression r > g (where r is the rate of return to wealth and g is the economic growth rate).” To boil this down, the landlord owns the apartment building = wealth, receiving a leveraged return of roughly 16% per year, compounded. The economic growth = wages, hopefully grow at 3% per year, giving landlords a 5 to 1 financial advantage over their tenants. Landlords and tenants have historically been a good example of Mr. Piketty’s theory.

Steve Nauert, the GreenLandlord.org