Yeah, you read the title right.
If you have $15,000 available to invest, you’d be better off (in some cases) putting your money into a solar system for your house than investing that same money in the stock market.
“How is that possible?!”
I’m here to walk you through it and show you the numbers. I have been a professional investor my whole career—having worked in investment banking and then venture capital—but the nice thing about numbers is that you don’t need to believe me. You can see for yourself!
Don’t worry, it’s not that complex.
The thing is, the ROI on solar is only better than the stock market in some cases (when you can get solar at the right price). We will explain more about that at the end of the article.
But first, let me give you a baseline understanding of how to measure investment performance.
(Notice: This is not investment advice!)
The basis of understanding any investment and its performance includes: 1) How much you put in, 2) How much you got out, 3) When (1) and (2) occur, and 4) How much risk or volatility was involved.
How much you put in is the initial dollar amount put into the investment. Sometimes this is a one time lump sum and sometimes it is spread out over many years (like contributing to a 401(k)).
How much you get out is the amount you are able to pull out or that you get back during or at the end of the investment period. Similarly, it can happen in one lump sum and sometimes the return can be spread over many years (like dividends from stocks or bonds).
When both of these occur is also vitally important.
Imagine you invest $1 and you get $2 out. Sounds pretty nice!
But what if it was 20 years from the time when you invested that $1 until you got the $2 out?
Not so great if you ask me. That’s only a 3.5% annually compounded return, barely beating normal inflation (let alone the inflation we have in 2022).
But what if it was only 5 years in between the investment of $1 and getting $2 out?
That’s a 14.9% return! Pretty good in my book.
However, those examples above need to be weighed against the risk taken with the investment.
Understand that no investment is completely risk free (aka “guaranteed”), but there are certainly investments with more assured outcomes than others.
So if that 3.5% return over 20 years came with close to no risk (maybe a US treasury bond), then that wouldn’t be too bad.
But if that 14.9% return over 5 years came from a risky investment (betting on a startup), then that would be a pretty sucky return.
It all has to be weighed against the risk.
“So if I invest $15k in a solar system, when exactly am I getting my money back?”, you might ask.
You get your money back in two forms: 1) You avoid the cost of electricity for many years and 2) You increase the value of your home when you go to sell.
It might be hard to understand, but avoiding the cost of electricity is a real return on your investment. It’s a form of an opportunity cost in the sense that if you hadn’t invested in solar you’d have to be paying your energy bill. And when it comes to investments, avoiding a $1 expense is treated the same as gaining $1.
Human bias makes us feel like these are different things, but in reality, they are the same. Those who understand this get rich, and those who don’t end up poor.
And with inflation increasing the cost of energy every year, what you are saving (essentially earning) is going up and up and up.
Also keep in mind that most solar panels have a warranty (including ours), guaranteeing that the panels will produce at least 80% of the rated output by year 20, often producing for many years after that. Meaning, you’re savings will be around for a long time.
In addition to all this, the value of your home will increase by about as much as what your solar cost you. And due to that warranty I spoke of, it holds onto its value for many years.
Whether you plan to move out of your home before you pass away or not, it will be producing energy for years to come and will be an asset to the people you pass your home onto.
So let’s get into the actual numbers here.
We are going to use a 10kW system for our example as that is close to the average solar system size for our customers in the United States.
At our (DIY Solar’s) current prices, and considering only federal tax incentives, a 10kW system will cost you about $13,000 (get a free solar quote from us to get a closer estimate for you).
As for what you are saving, a 10kW system will offset about $250 of electricity costs every month, or $3,000 a year, which is growing at about 3% each year due to inflation.
Assuming you are in your home for 10 more years, you invest $13k today and get $3,000 in savings the first year, $3,090 the second year, and so forth until you sell home in 10 years for $13k more than if it didn’t have solar.
This ends up equating to a 25% annually compounded return (IRR)!
Even if you take away the government incentive and assume that electricity prices stay flat, you are still looking at an 18% annual return!
(We quote even less on our home page just to be extra conservative)
And the great thing is, this return is relatively risk free. Again, no investment is truly risk free, but solar is fairly close. The only risk is that electricity prices fall precipitously and you are stuck with solar panels you already paid for, but that seems like a really low risk according to past evidence.
There is also the risk that the sun burns out, but you’d have worse problems than worrying about your investments if that was the case.
Of course, we now have to compare this to what you would get in the stock market.
The average return of the S&P 500 has been around 10.7%.
With that, we can easily see that solar beats out the stock market!
Not only that, it beats the stock market with less risk.
Over any given 10 year period in the stock market, the returns can be drastically different. Over one 10 year period you might get a 17% annual return but for another you might only get a 4% annual return. This places a lot of pressure on you to time the market right, which isn’t a good strategy.
Solar on the other hand is pretty stable. You aren’t going to be getting much higher than a 20% annual return and you likely aren’t going to be getting less than a 14% annual return.
This all assumes that you can get solar at a reasonable price though...
You being able to buy solar at a reasonable price will determine whether you can get these sorts of returns.
With traditional solar companies, you are looking at spending about $35k for a 10kW system. $35k for the same electricity savings that I spoke of earlier.
This ends up equating to a ~10% annual return on your money, a little less than the stock market.
And in many cases, that $35k we quoted for solar from a traditional full-service company is at the low end of what your system can cost, dragging down your annual return closer to 8%.
Not bad, but not as good as it could be.
“So why the hell were you talking about getting solar for only $13k?!”, you might ask.
Because that is about what you’d be spending with us at DIY Solar! (after federal incentives)
We are deeply discounted from traditional solar companies because we give you the power to install solar yourself with our DIY kits.
You avoid all the middlemen associated with traditional solar and get BIG savings along the way.
If you want to see for yourself, get a free quote or contact us with questions!