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

• “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

Solar Powered Apartment Buildings / Acres of Diamonds

Solar Powered Apartment Buildings / Acres of Diamonds

I was going door to door selling solar panels last year. I was looking for a hook to make the sale. I started wondering how much coal was being burned each year to power an average home? The answer is roughly 10,000 pounds, or 27 pounds each and every day. If your local power plant burns natural gas, you are burning 316 cubic feet of natural gas per day.  

I am in the apartment business as a few of you might know. I started researching the energy usage in our apartment buildings. Please pardon the pun, but the light bulb went off for me. What if we went solar on a 10 unit apartment building? Multiply the numbers above times 10 units, then by 12 months and you can see how dramatic an effect we could have on the environment by going solar. We could stop burning 82,440 LBS of coal per year, or 515,700 gallons of natural gas. This is enough natural gas to fill over 200 swimming pools a year, and this is just one apartment building. Ask yourself if you think this is sustainable?

FINANCIAL BENEFIT example: We purchase an $850,000 10 unit building. We install solar, and then we increase the rents to reflect the tenant’s old utility bill payments.

1. The increased revenue represents a 33% equity return on our down payment.
2. Our operating income almost doubles, giving us the ability to borrow more in a re-finance. Hypothetically, we could borrow $110,000 with the increased cash flow, replacing 42% of our down payment.  

GREEN BENEFIT: We buy energy (in the form of electricity) from the electric company. Electricity is sold in units of the "kilowatt hour". If you run a 1000 watt (1 kilowatt) appliance for an hour, you have used a kilowatt hour. If you light a 100 watt bulb for 10 hours = a Kilowatt hour. 1.2 LBS coal creates 1 KW, and 75 gallons of natural gas create 1 KW.

Step one:

Go solar: Fill the roof with solar panels.

Step two:

Reduce the electric and gas consumption at our building. We can do three powerful things to reduce demand:

1: Solar Thermal Hot Water Heater: Solar water heating systems can typically reduce natural gas demand by 60% to 70%, and Solar Thermal Panels produce four to five times as much energy as solar photovoltaic panels of equal size. Solar thermal uses the sun’s energy to pre-heat water and transfer it to a hot water storage tank. A buildings conventional water heater then draws out the pre-heated water, and boosts the temperature “only if necessary.” Heating represents 40% of a typical gas power bill.

2: Replace lightbulbs: LED and CFL light bulbs: About 20% of your electric bill is lighting. LED and CFL bulbs draw about 85% less energy than a regular incandescent bulb.

3: Energy Star rated appliances: Changeover to refrigerators with an Energy Star rating that can use less electricity more efficiently.

The Financials:

10 one bedroom units together spend roughly $8,880 per year on electricity/ gas. A Kilowatt hour costs roughly 13 cents in California for tier one. 573 KW x .13 cents = $74.00 per month for our one bedroom unit electric bill, x 10 units x 12 months = $8,880. If we convert to solar, then pay for the utilities ourselves and charge the tenants, AKA: “master meter” the financial aspects are remarkable. If you email me I will send you two spreadsheets showing before and after.

There are two formulas that are important in the apartment business; The Gross Rent Multiplier and arriving at the Net Operating income/ debt coverage ratio.

“GRM” = Gross annual Rental Income multiplied by a factor = an indicator of the value of an apartment building. If we go solar, increase rents to tenants to cover their old utility bills the formula is this: $8,880 x a 9.5 GRM = $83,600 increase in the buildings value.

Net operating Income: This is cash flow after expenses. Generally, a bank will loan you roughly 80% of the “NOI”. In our example: NOI of $8,880 x .80% = $7,104 available for annual loan payment. Figure a 30 year amortization at a 5% interest rate: $7,104 / 12 months = $592 monthly payment @5% = loan amount of $110,278.

There are Acres of Diamonds waiting for us who go GREEN on apartment buildings. The power that drives this machine is the flipping of the utility bill payments from the utility company to the landlord, giving the landlord the ability to allocate the increased cash flow as they see fit.

Enjoy-