It’s often said that cash is king. So, for many of us, holding on to cash for as long as possible (and hopefully investing it for growth) is an important goal. There is also the very popular concept of O.P.M. or ‘other people’s money’. Not every homeowner who considers installing solar panels has the cash on hand to pay for them outright, but for those that do, it’s worth understanding the advantages and disadvantages of using hard earned cash to pay for solar panels when there are so many viable loan options available today.
The best way to address this question is to look at the problem we’re solving for. If you are serious about going solar, chances are you have a decent sized electric bill and are looking to eliminate this expense long term. If you have the cash available to pay for the solar installation outright, then you’ll want to evaluate whether this is the best and highest use of your money. In other words, could you invest your cash differently and receive a higher return than the solar panels provide over the life of the investment. The other important consideration is once you buy the solar panels, your cash is now ‘illiquid’ meaning it cannot be easily accessed for other uses. You’ve essentially turned your cash into solar panels, inverters, racking, and electrical conduit.
While returns on a solar investment vary wildly depending on the rate you pay for electricity, how much energy you consume, system installation costs, etc, it’s not unusual to find solar customers earning anywhere from 8% – 15%+ on their solar investment. The nice thing about investing in your own solar power plant is that the returns are as predictable as the sun rising every morning and the weather patterns where you live.
On the other hand, if you could borrow money from a financial institution for a lower interest rate than the return mentioned above, you get to hold onto your cash AND make a return on the ‘spread’. For example, if your solar system is estimated to provide a return of 10% and you secure a loan for 5%, you pocket the 5% spread.
Let me simplify this concept further with a real-world example of how this works. Let’s say you have an average monthly electric bill of $250 per month. If you can find a loan that offers a payment lower than $250 per month, you’re ahead of the game day one. It’s quite possible in today’s credit environment that you find a loan (in this example) that is $150/month. Thus, month one, you’re ahead $100; year one you’re ahead $1200. As electricity rates continue to increase over time, the savings spread continues to improve. Best of all, you didn’t shell out the tens of thousands of dollars to buy the solar panels upfront. That cash is still sitting in your bank account, stock portfolio, certificate of deposit, etc!
Think about it this way: You are taking your electric bill payment and shifting it to the bank. Eventually those payments end and you now own the system free and clear (Will your electric bill ever end if you don’t take action?). So, what happened? The electric company paid for your solar panels and all associated interest and fees, plus you pocketed the spread. Therein lies the power of using O.P.M.!
The disadvantage of O.P.M. is that you’ll enjoy a 33% lower return over twenty years than paying cash according to Consumer Reports. However, if you’ve invested your cash properly, hopefully it’s grown by an amount greater than the difference and you’ll be ahead regardless.
There are a scant few home improvements that can be evaluated purely on the merits of their financial return. Solar is one of these and as such it’s important to understand your options so you can make the correct financial decisions for you and your family.
At Flex Advisers, we empower our clients to go solar in the manner that best suits them. With some of the most innovative solar financing available today, let us show you how to save with solar from day one. Contact us today for a complimentary solar analysis.