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