Question

Long-term, which is a better investment: a solar power system for the house or a room/bathroom addition?

Asked by Charlie Truxton
San Diego, CA

I am trying to decide between the two.

Answer

Ryan Flegal

Answered by Ryan Flegal

Los Angeles, CA

Ryan Flegal, Broker - PropertyMix, Inc.

July 3, 2011

Savvy homeowners weigh the financial benefit of their home improvements before starting a new project. We all need to budget for construction, and often that means choosing one improvement over another.

No one can say that a room addition is more valuable than a solar power system for all markets. Nor can the reverse be said. But we can research and evaluate the opportunities in front of us to make the best choices possible.

The financial benefit depends a lot upon your local market and, of course, what price you’d pay (based on your local contractor bids) for each job.

Only a few improvements increase home's resale value

Overall, I think many homeowners would be surprised to learn how few improvements pay back with increased resale value on the national average right now.

Hanley Wood, LLC publishes national cost vs. value reports for home improvements that are often cited by the National Association of Realtors. 

  • These reports give approximate costs for common upgrades and then tell you what the national average is for recouped value upon resale.
  • All but one of the improvements they listed do not pay for themselves in today’s market.
  • (You can read the report at costvsvalue.com.) 

That means that after you spend all that time and money adding a bedroom, you can’t expect to get reimbursed for even your costs when you go to sell the house.

Last year, bathroom additions returned only 53.3% of their cost upon resale, for example. You can see all categories in the report by clicking here.

Cost vs value of home solar

Solar panel installation is not covered in the cost vs. value report.

Way back in 1998, Appraisal Journal printed a report titled "Evidence of Rational Market Valuations for Home Energy Efficiency." The report states: "If home buyers expect stable fuel prices, then the marginal value of energy efficiency in recent years should be $10–$25 for every dollar reduction in annual fuel bills."

Comparing solar with bathroom addition

Ask your solar contractor what your expected annual energy savings will be and then multiply annual energy savings by $10 to $25 to get the range of resale value for your photovoltaic system.

  • Then calculate your return on investment by dividing the resale value by your initial investment cost.
  • Compare that with the -46.7% return on investment for adding a bathroom and you’ll have a reference point.

For your final answer, you’ll need to adjust up or down based on the local market you are in (San Francisco is very different from St. Paul). Ask a local real estate agent to help you better understand the trends in your local market.

Rebates and tax incentives

One thing solar has going for it is that the total cost of the job doesn’t fall on your shoulders.

Utility company rebates and tax incentives mean that you pay only a fraction of the cost for this improvement, yet you may enjoy the full appraised value based on energy savings upon resale. 

Good luck with your project.

 

For more information:

Read "How much will it cost to install solar panels on my 2,000-sq.-ft. home in San Francisco?" a Q&A answered by Christine and Robert Boles.

Tagged In: green cost, solar panels, solar power

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