You found a rental property that looks promising, ran preliminary numbers, and then discovered it has a solar panel lease attached. Now you're wondering whether this is a deal-killer, a neutral factor, or potentially an advantage. The answer depends on the specific lease terms and how they affect your cash flow projections.
Solar leases on investment properties have become increasingly common over the past decade. About 40% of residential solar installations are leased rather than owned, according to the U.S. Department of Energy. For investors, these leases create both opportunities and complications that don't show up in standard deal analysis templates.
What a Solar Lease Actually Means for the Property
A solar lease (sometimes called a PPA, or power purchase agreement) means a third-party company owns the panels on the roof. The property owner makes monthly payments to use the electricity those panels generate. When you buy the property, that lease obligation typically transfers to you.
This is fundamentally different from owned solar panels, which would be a property asset that adds value. With a lease, you're inheriting a liability with a set payment schedule, usually for 15-25 years.
The Three Types of Solar Arrangements You'll Encounter
Solar Lease: Fixed monthly payment regardless of electricity production. Payments may escalate 1-3% annually.
Power Purchase Agreement (PPA): You pay a per-kilowatt-hour rate for electricity produced. Variable monthly costs based on actual production.
Owned Solar (Loan or Cash): The panels are property assets. Any remaining loan balance transfers with the sale, but the panels add to property value.
For rental property analysis, leases and PPAs require similar treatment. You're inheriting an ongoing payment obligation. Owned solar is a different calculation entirely.
How the Lease Transfers When You Buy
Most solar leases have transferability provisions, but the process isn't automatic. Here's what typically happens:
Some solar companies are more cooperative than others. I've seen transfers that took 48 hours and others that dragged on for three weeks with multiple document requests. Budget extra time in your due diligence period for this.
When Transfer Gets Complicated
Credit requirements vary by solar company. If you're buying through an LLC (which most experienced investors do), the solar company may require a personal guarantee or additional documentation. Some won't transfer to LLCs at all without significant net worth verification.
If the solar company won't approve the transfer, you have three options:
Lease buyout costs are typically the remaining payment obligations discounted to present value. On a lease with 12 years remaining at $150/month, expect a buyout somewhere around $15,000-20,000.
The Cash Flow Math: How to Factor Solar Leases Into Your Analysis
This is where most investors either overlook solar leases entirely or handle them incorrectly. Here's the right approach:
Step 1: Get the Actual Lease Documents
Don't rely on the seller's summary. Request the original lease agreement and any amendments. You need:
Step 2: Calculate Net Electricity Cost Impact
The solar lease payment isn't your true cost. You need to compare:
Net Solar Cost = (Solar Lease Payment) - (Estimated Electricity Savings)
If the lease payment is $120/month and the panels reduce the electric bill by $180/month, your net benefit is $60/month. If the lease payment is $150/month and savings are only $100/month, you're paying $50/month more than you would without solar.
Step 3: Factor Escalation Into Multi-Year Projections
Most solar leases include annual escalation clauses of 1-3%. Electricity rates also increase over time, typically 2-3% annually. Model both over your hold period:
| Year | Lease Payment | Electricity Savings | Net Cost |
|---|---|---|---|
| 1 | $140 | $160 | -$20 |
| 3 | $148 | $170 | -$22 |
| 5 | $157 | $180 | -$23 |
| 10 | $181 | $209 | -$28 |
In this example, the solar lease remains cash flow positive throughout a 10-year hold. The savings grow faster than the escalation, which is the ideal scenario.
Step 4: Add Solar Net Cost to Your Operating Expenses
If the solar lease creates a net cost (payments exceed savings), add it to your operating expenses. If it creates net savings, reduce your projected utility costs accordingly.
Don't treat it as a separate line item that gets forgotten. It affects cash flow every single month.
A Complete Worked Example
Let's analyze a real scenario. You're looking at a single-family rental in Phoenix:
Property Details:
Without Solar Consideration:
The deal is cash flow negative. Now let's add the solar analysis.
Solar Lease Details:
Electricity Savings Calculation:
Revised Cash Flow:
The solar lease improves cash flow by $33/month, but the deal is still negative. However, we should also consider that without the solar, the electricity costs would be $168 higher (assuming tenant pays all utilities, this may not apply). The solar lease is a net positive in this case.
Year 5 Projection (accounting for escalation):
The solar economics actually improve over time in this scenario because electricity rate inflation (3%) exceeds lease escalation (2.9%).
Due Diligence Checklist for Solar Leases
Before making an offer on a property with a solar lease, verify these items:
Lease Terms:
Transfer Process:
System Performance:
Financial Impact:
Common Mistakes When Analyzing Solar Leases
Ignoring the lease entirely. I've talked to investors who found out about the solar lease after closing because they never asked and the seller didn't volunteer it. This can turn a marginal deal into a money-loser.
Using utility savings estimates instead of actuals. Solar companies are notoriously optimistic about production estimates. Phoenix in July produces very different results than Seattle in December. Get 12-24 months of actual production data, not projections.
Forgetting about the escalation clause. A lease that's cash flow positive today might not be in year 8. Model the full remaining term with escalation factored in. A 2.9% annual escalation doubles the payment over 25 years.
Not budgeting for system removal. When the lease ends, who pays to remove the panels if you don't renew or buy them? Most leases require the solar company to remove them at their expense, but verify this. Some older leases put removal costs on the property owner, which can run $5,000-10,000.
When a Solar Lease Should Kill the Deal
Not every solar lease is acceptable. Walk away if:
A bad solar lease isn't just a cash flow drag. It can complicate future refinancing and make the property harder to sell when you exit.
When a Solar Lease Is Actually an Advantage
In the right circumstances, a solar lease can be a positive:
I've seen properties where the solar lease added $75-100/month in net cash flow. That's real money over a 10-year hold.
Running Your Own Analysis
Solar leases add a layer of complexity to rental property analysis, but they're not inherently good or bad. The math determines whether a specific lease on a specific property works for your investment goals.
Get the actual lease documents before making an offer. Calculate the net impact on cash flow using real production data, not estimates. Factor in escalation over your planned hold period. Then decide whether the lease makes the deal better, worse, or roughly neutral.
The single-family rental calculator handles these calculations automatically when you input your operating expenses. Add the net solar cost (or savings) to your utility expense line, and you'll see exactly how it affects cash-on-cash return and monthly cash flow. Don't let a solar lease catch you off guard after closing.