540 -- California Tax Table: Fill & Download for Free

You don't say whether your single, married or head or household, so I can't give you an exact number.There is no San Francisco income tax return for you to file, but since you're in California, you will have to file a California state income tax return, Form 540, with the Franchise Tax Board.The tax rate tables are here.2014 California Tax Rates and ExemptionsAlso, keep in mind that your 'taxable' income should be applied to these tables, not your gross salary.

The answer is the most forceful possible no.Solar power itself is a good thing, but Germany's pro-renewables policy has been a disaster. It has the absurd distinction of completing the trifecta of bad energy policy:Bad for consumersBad for producersBad for the environment (yes, really; I'll explain)Pretty much the only people who benefit are affluent home-owners and solar panel installation companies. A rising tide of opposition and resentment is growing among the German press and public.I was shocked to find out how useless, costly, and counter-productive their world-renowned energy policy has turned out. This is a serious problem for Germany, but an even greater problem for the rest of the world which hopes to follow in their footsteps. The first grand experiment in renewable energy is a catastrophe! The vast scale of the failure has only started to become clear over the past year or so. So I can forgive renewables advocates for not realizing it yet -- but it's time for the green movement to do a 180 on this.Some awful statistics before I get into the details:Germany is widely considered the global leader in solar power, with over a third of the world's nameplate (peak) solar power capacity. [1] Germany has over twice as much solar capacity per capita as sunny, subsidy-rich, high-energy-cost California. (That doesn't sound bad, but keep going.)Germany's residential electricity cost is about $0.34/kWh, one of the highest rates in the world. About $0.07/kWh goes directly to subsidizing renewables, which is actually higher than the wholesale electricity price in Europe. (This means they could simply buy zero-carbon power from France and Denmark for less than they spend to subsidize their own.) More than 300,000 households per year are seeing their electricity shut off because they cannot afford the bills. Many people are blaming high residential prices on business exemptions, but eliminating them would save households less than 1 euro per month on average. Billing rates are predicted by the government to rise another 40% by 2020. [2]Germany's utilities and taxpayers are losing vast sums of money due to excessive feed-in tariffs and grid management problems. The environment minister says the cost will be one trillion euros (~$1.35 trillion) over the next two decades if the program is not radically scaled back. This doesn't even include the hundreds of billions it has already cost to date. [3] Siemens, a major supplier of renewable energy equipment, estimated in 2011 that the direct lifetime cost of Energiewende through 2050 will be $4.5 trillion, which means it will cost about 2.5% of Germany's GDP for 50 years straight. [4] That doesn't include economic damage from high energy prices, which is difficult to quantify but appears to be significant.Here's the truly dismaying part: the latest numbers show Germany's carbon output and global warming impact is actually increasing [5] despite flat economic output and declining population, because of ill-planned "renewables first" market mechanisms. This regime is paradoxically forcing the growth of dirty coal power. Photovoltaic solar has a fundamental flaw for large-scale generation in the absence of electricity storage -- it only works for about 5-10 hours a day. Electricity must be produced at the exact same time it's used. [29] The more daytime summer solar capacity Germany builds, the more coal power they need for nights and winters as cleaner power sources are forced offline. [6] This happens because excessive daytime solar power production makes base-load nuclear plants impossible to operate, and makes load-following natural gas plants uneconomical to run. Large-scale PV solar power is unmanageable without equally-large-scale grid storage, but even pumped-storage hydroelectricity facilities are being driven out of business by the severe grid fluctuations. They can't run steadily enough to operate at a profit. [2,7] Coal is the only non-subsidized power source that doesn't hemorrhage money now. [8] The result is that utilities must choose between coal, blackouts, or bankruptcy. Which means much more pollution.So it sucks on pretty much every possible level. If you're convinced by these facts, feel free to stop reading now, throw me an upvote, and go on about your day. This is going to get long -- I haven't even explained the half of it yet. There are lots of inter-related issues here, and the more you get into them, the worse the picture gets.Issue 1: Wrong place, wrong tech to start the green revolutionRenewables advocates constantly hold up Germany as an example of how large-scale rooftop solar power is viable. But the problem is, Germany's emphasis on solar power is bad policy. I'm pretty sure other countries can do solar better, but that isn't saying much because German solar is just awful. To be blunt, it's a stupid place for politicians to push solar panels. I was there all last week for a work meeting and I didn't see the sun the entire time. From talking to the locals, it's overcast for about a third of the year in the region near Hanover where I was staying. Their solar resource is simply bad, nearly the worst of any well-populated region in the world:Annual Solar IrradianceBetween the northern latitude, the grey weather, and the Alps blocking much of the diffused morning sunlight from the south, Germany is a terrible place for solar power. When you put the US side-by-side on the same scale, you realize that Germany has the same solar power potential as dismal Alaska, even worse than rain-soaked Seattle:Solar Radiation MapI look at this and ask, "what on earth are they thinking?" They couldn't have picked a worse generation technology for their climate.But most people seem to look at it and say, "if Germany is investing so much in solar power, then it's obvious the US should build solar panels too." I insist we examine the contrapositive: if solar power is only taking off slowly in the US, even with significant subsidies/incentives and one of the world's best solar resources, then the Germans should be building even less solar capacity. It's clear their market must be severely distorted for them to pursue such a sub-optimal energy policy.You're welcome to disagree with my thought process here, but the simplest proof can be seen in the capacity factor, which is the percent of the nameplate capacity that is actually generated over the course of a year. The existence of nighttime means solar capacity factors must be less than 50%, and when you add clouds, dawn, dusk, dust, and non-optimal installations, 18% is the average capacity factor for panels in the continental US. [9] In contrast, Germany's total solar capacity factor in 2011 was under 9%! [1]German residential solar panel installations today cost about $2.25/watt capacity, [10] versus a hair over $5/watt in the US. [11] (Numbers vary over a considerable range. Most of this is labor/permitting costs.) But German panels generate less than half as much actual power over time. So when you normalize the panel install cost by capacity factor, US and German solar power generation are already at cost parity. The payback periods for solar investments are about the same in California and Germany. This is surprising to most solar advocates, who tend to blame higher costs for the low uptake rates in the US. But system economics alone do not explain disparities in installation rates.So why does Germany have 16 times as much nameplate panel capacity per capita as the US? [12] Yes, permitting is much easier there, but that's mostly captured by the $/watt costs since installation companies usually pull the permits. And I don't think the German people are that much more pro-environment than the rest of the world. There's no good reason for the disparity that I can find -- it ought to swing the opposite way. Solar just isn't a good power source for a cold, dark country that has minimal daytime air conditioning load. Solar in Phoenix, Arizona makes sense, but not in Frankfurt. The only conclusion I can come to is that Germany's solar power boom is being driven entirely by political distortions. The growth of solar is not economically justified, nor can it continue without massive political interference in power markets.Many people are surprised to hear that Germany only gets a tiny 2.0% of its total energy / 4.6% of its electricity from solar power (in 2012). [5,13] All the headlines about new records on peak summer days make it seem more like 50%. Despite all the cost and pain and distortions, PV solar has turned out to be a very ineffective way of generating large amounts of energy. They could have generated at least four times as much carbon-free power via new nuclear plants for the same cost. [14] (Nuclear would have been a better option for a lot of reasons. I'll get to that later.)With subsidies for new solar systems phasing out over the next 5 years, solar growth has already started to decline. The installation rate peaked and is now dropping. [13, 15] Despite falling panel and installation costs, the majority of new German solar projects are expected to stop when subsidies end. They're already on the downward side of the technology uptake bell curve:(Data after 2008 from [14], prior to 2008 from Wikipedia)If you pay close attention, all the pro-solar advocates are still using charts with data that stops after 2011. That's because 2011 was the last year solar was growing exponentially. Using data through July 2013 and official predictions for the rest of this year, it's now clear that solar is not on an exponential growth curve. It's actually on an S-curve like pretty much every other technology, ever. Limitless exponential growth doesn't exist in the physical world. [13]Also note the huge gap on that graph between the actual generation and the nameplate capacity. That's where the miserable capacity factor comes in. (I think this is the source of a lot of misplaced optimism about solar's growth rate.) Green media outlets only report solar power either in peak capacity or as percent of consumption on sunny summer days. Both of these measurements must be divided by about 10 to get the true output throughout the year.In reality, solar is scaling up much slower than conventional energy sources scaled up in the past, despite solar receiving more government support. This graph shows the growth rate of recent energy transitions in the first 10 years after each source reached grid scale (1% of total supply):[13]I think this chart is the best way to make an apples-to-apples comparison of uptake rates. Only about a quarter of the "renewables" line is due to solar (the majority is biomass, wind, and trash incineration). So the true solar growth rate from 2001-2011 is only 1/4th as fast as nuclear from 1974-1984, and 1/6th as fast as natural gas from 1965-1975. [13]When a new energy source is genuinely better than the old energy sources, it grows fast. Solar is failing to do so. Yet it's had every advantage the government could provide.What this all implies is that without government intervention, PV solar can't be a significant source of grid power. The economics of German solar have only made sense up til now because they tax the hell out of all types of energy (even other renewables), and then use the proceeds to subsidize solar panels. Utilities are forced to buy distributed solar power at rates several times the electricity's market value, causing massive losses. The German Renewable Energy Act directly caused utility losses of EUR 540 million in August 2013 alone. [16] It's a shocking amount of money changing hands. When you strip away the well-intentioned facade of environmentalism, this is little more than a forced cash transfer scheme. It's taking from utilities (who are losing money hand over fist on grid management and pre-existing conventional generation capacity) and from everyone who doesn't have rooftop panels, and shoveling it into the pockets of everyone who owns or installs panels. Which means it's both a massive market distortion and a regressive tax on the poor.This explains why per-capita solar uptake is so high in Germany. The government has engineered a well-intentioned but harmful redistribution system where everyone without solar panels is giving money to people who have them. This is a tax on anyone who doesn't have a south-facing roof, or who can't afford the up-front cost, or rents their residence, etc. People on fixed incomes (eg welfare recipients and the elderly) have been hardest hit because the government has made a negligible effort to increase payments to compensate for skyrocketing energy prices. The poor are literally living in the dark to try to keep their energy bills low. Energiewende is clearly bad for social equality. But Germany's politicians seem to have a gentleman's agreement to avoid criticizing it in public, particularly since Merkel did an about-face on nuclear power in 2011. [17]Issue 2: Supply VariabilityOne major problem with all this solar-boosting, ironically, is oversupply. It's mind-boggling to me that a generation technology that provides less than 5% of a country's electricity supply can be responsible for harmful excess electricity production, but it's true. On sunny summer afternoons, Germany actually exports power at a loss compared to generation costs: EUR 0.056/kWh average electricity export sale price in 2012, [18] vs EUR 0.165/kWh average lifetime cost for all German solar installed from 2000 to 2011. [14] (This is optimistically assuming a 40 year system life and 10% capacity factor -- reality is probably over EUR 0.20/kWh.) German utilities often have to pay heavy industry and neighboring countries to burn unnecessary power. On sunny summer days, businesses are firing up empty kilns and furnaces, and are getting paid to throw energy away.You can argue that this excess summer solar generation is free, but it's not -- not only is this peak summer output included in the lifetime cost math, but excess solar power actually forces conventional power plants to shut down, thereby lowering the capacity factor of coal & gas plants. Yes, this means large-scale solar adoption makes non-solar power more expensive per kWh, too! On net, excess solar generation is a significant drag on electricity economics. You're paying for the same power generation equipment twice -- once in peak conventional capacity for cloudy days, and again in peak solar capacity for sunny days -- and then exporting the overage for a pittance.Why would they bother exporting at a loss? Because the feed-in-tariff laws don't allow utilities to shut off net-metered rooftop solar. Utilities are forced by law to pay residential consumers an above-market price for power that isn't needed. Meanwhile, Germany's fossil-burning neighbors benefit from artificially-low EU energy market prices. This discourages them from building cleaner power themselves. It's just a wasteful, distorted energy policy.Remember, electricity must be used in the same moment it's generated. [29] The technology for grid-scale electricity storage does not yet exist, and nothing in the development pipeline is within two orders of magnitude of being cheap enough to scale up. Pumped-hydro storage is great on a small scale, but all the good sites are already in use in both Europe and the US. The only plan on the table for grid-scale storage is to use electric car batteries as buffers while they're charging. But that still won't provide anywhere near enough capacity to smooth solar's rapidly-changing output. [19] And if people plug in their cars as soon as they get home from work and the sun goes down, the problem could get even worse. California's regulators have recently acknowledged that the generation profile at sundown is the biggest hurdle to the growth of solar power. The classic illustration is the "duck chart" (shaped like a duck) that shows how solar forces conventional power plants to ramp up at an enormous rate when the sun stops shining in the evening:[29]People often complain about wind power being unreliable, but when you get enough wind turbines spread over a large enough area, the variability averages out. The wind is always blowing somewhere. This means distributed wind power is fairly reliable at the grid level. But all solar panels on a power grid produce power at the same time, meaning night-time under-supply and day-time over-supply. This happens every single day, forever. At least in warm countries, peak air conditioning load roughly coincides with peak solar output. But Germany doesn't use much air conditioning. It's just a grid management nightmare. The rate of "extreme incidents" in Germany's power grid frequency/voltage has increased by three orders of magnitude since Energiewende started. [20]The severe output swings have even reached the point where Germany's grid physically cannot operate without relying on neighboring countries to soak up the variability. The ramp-down of solar output in the evening happens faster than the rest of Germany's generation capacity can ramp-up. (Massive power plants can't change output very quickly.) Which either means blackouts as people get home from work, or using non-solar-powered neighbors as buffers. Here's one day's generation profile for German solar power, showing how net electricity imports/exports are forced to oscillate back and forth to smooth out the swings in production:[21]If Germany's neighbors also had as many solar panels, they would all be trying to export and import at the same time, and the system would fall apart. The maximum capacity of the entire EU grid to utilize solar power is therefore much lower than the level reached by individual countries like Germany and Spain.Solar boosters often say people need to shift their energy consumption habits to match generation, instead of making generation match consumption. That's feasible, to an extent -- perhaps 20% of power consumption can be time-shifted, mostly by rescheduling large consumers currently operating at night like aluminum electrosmelters. But modern civilization revolves around a particular work/sleep schedule, and you can't honestly expect to change that. People aren't going to give up cooking and TV in the evening, or wait three hours after the sun goes down to turn on the lights. And weekends have radically different consumption profiles from weekdays.It all adds up. PV solar output doesn't properly sync up with power demand. That severely limits the maximum percentage of our electricity needs it can provide. Germany hit that limit at about 4%. They are now finding out what happens when you try to push further.Issue 3: Displacing the wrong kinds of powerYou may have noticed in the daily generation chart above how wind power is throttled back when the sun comes out. Residential solar has legal right-of-way over utility-scale wind. A lot of the power generation that solar is displacing is actually other renewables. Most of the rest is displacing natural gas and nuclear power. Coal power is growing rapidly. [6,8]Here's what the weekly generation profile is predicted to look like in 2020:[22]Notice the saw-tooth shape of the big grey "conventional" (coal/gas) category. What all this solar is doing is eating into is daytime base load generation, which seems good for displacing fossil fuels, but in the long run it's doing the opposite.The majority of electricity worldwide comes from coal and nuclear base load plants. They are big, efficient, and cheap. But base load generation is extremely difficult and expensive to throttle up and down every day. To simplify the issue a bit, you cannot ramp nuclear plants as fast as solar swings up and down every day. It takes several days to shut down and restart a nuclear plant, and nuclear plants outside France are not designed to be throttled back, so nuclear cannot be paired with the daily oscillations of PV solar. Supply is unable to match demand. You end up with both gaps and overages.Most people think Germany is decommissioning its nuclear fleet because of the Fukushima accident, but the Germans didn't really have a choice. They are being forced to stop using nuclear power by all the variability in solar output. That's a big, big problem -- Germany gets four times more electricity from nuclear than solar, so the math doesn't add up. The generation time-profile is wrong, and the total power output from solar is too low. They have to replace nuclear plants with something else.The normal way to handle variable power demand is via natural gas "peaker" plants. But Germany has minimal domestic natural gas resources and load-following gas plants are very expensive to operate, so what they're doing is building more coal plants, and re-opening old ones. [6,8,22] It's expensive and inefficient, but you can run a coal plant all night and then throttle it back when the sun comes up. It has better load-following capabilities than nuclear (although worse than gas). The German Green Party has been fighting nuclear power since the 1970s, and has finally won. Nuclear is out, and coal is in.If you're a regular follower of my writing, you'll know what a terrible idea this is. [23] Replacing nuclear power with coal power is unquestionably the most scientifically-illiterate, ass-backwards, and deadly mistake that any group of environmentalists has ever made. It's unbelievable how much cleaner and safer nuclear power is than coal power. The Fukushima meltdown was pretty much a "worst case scenario" -- one of the largest earthquakes ever recorded, the largest tsunami to ever hit Japan, seven reactor meltdowns and three hydrogen explosions -- and not a single person has died from radiation poisoning. [24] The expected lifetime increase in cancer rates due to the released radiation is somewhere between zero and a number too small to measure. [25] Even spectacular nuclear disasters are barely harmful to the public. Studies are now showing that the stress from the evacuation has killed more people than would have been killed by radiation if everyone had just stayed in place. [26,27]In comparison, coal power kills about a million people per year, fills the oceans with mercury and arsenic, releases more carbon dioxide than any other human activity, and is arguably one of the greatest environmental evils of the industrialized world. [23]This is counter-intuitive, but second-order effects are enormously important. Expansion of photovoltaic solar power past 1-2% of total electricity demand means less nuclear, and more coal. The amount of damage this does completely overwhelms the environmental benefit from the solar panels themselves. You have to avoid building so much solar power that it destabilizes and eliminates other clean power sources. When you get to the "duck chart" stage, things start to get bad. Otherwise you'll end up worse off than when you started, as Germany has found out to its dismay.So that all sucks a lot. German solar power is hurting people and the planet. But there's more.Issue 4: The kickerThe category for "biomass" power you see in all these charts is actually firewood being burned in coal plants. 38% of Germany's "renewable energy" comes from chopping down forests and importing wood from other countries. [28] Effing firewood, like we're back in the Middle Ages or something. Due to overzealous renewables targets, and a quirk in the EU carbon pricing system that considers firewood carbon-neutral, Europe is chopping down forests at an alarming rate to burn them as "renewable biomass." The environmental movement has spent most of the last 200 years of industrialization trying to fight deforestation, and that noble goal has been reversed in an instant by bogus carbon emission calculations.In the very long run, over 100 years or so, firewood is close to carbon neutral because you can regrow the trees and they absorb CO2 as they grow. Unfortunately, using firewood for fuel destroys a living carbon sink and releases all its carbon to the atmosphere right now. When you consider that you're destroying a carbon sink as well as releasing stored carbon, firewood is actually much worse than coal for many decades thereafter. [28] The next few decades is humanity's most critical time for reducing carbon emissions, so this policy is mind-boggling lunacy.Germany is so focused on meeting renewables targets that it is willing to trample the environment to get there. They've managed to make renewables unsustainable! It's tragicomic.To summarize: Energiewende is the worst possible example of how to implement an energy transition. The overzealous push for the wrong generation technology has hurt citizens, businesses, and the environment all at the same time.I want to make it clear that I'm not saying we should abandon solar. It should definitely be part of our generation mix. Due a mix of bad climate and bad policy, Germany ran into problems at a very low solar penetration, and other countries will be able to reach higher penetrations. But even if we ignore cost, there is still a maximum practical limit to solar power based on the realities of grid management.You can't build more PV solar than the rest of the grid can ramp up/down to accept. The necessary grid storage for large-scale solar power is a "maybe someday" technology, not something viable today. Calls for 50% of power to come from solar in our lifetimes are a fantasy, and we need to be realistic about that.You can't force utilities to buy unneeded power just because it's renewable. The energy and materials to build the excess capacity just goes to waste. That is the opposite of green.We have to learn those lessons. We can't sweep this failure under the rug.Every time a renewables advocate holds Germany up as a shining beacon, they set back the credibility of the environmental movement. It's unsupported by reality and I think even gives ammunition to the enemy. We have to stop praising Germany's Energiesheiße and figure out better ways to implement renewables. Other models should work better. They have to -- the future of the world depends on it.[1] Solar power by country[2] Germany's Energy Poverty: How Electricity Became a Luxury Good - SPIEGEL ONLINE[3] German 'green revolution' may cost 1 trillion euros - minister[4] Global Warming Targets and Capital Costs of Germany's 'Energiewende'[5] Germany's 'Energiewende' - the story so far[6] Germany: Coal Power Expanding, Green Energy Stagnating[7] Merkel's Blackout: German Energy Plan Plagued by Lack of Progress - SPIEGEL ONLINE[8] Merkel’s Green Shift Backfires as German Pollution Jumps[9] Capacity factor, Price per watt[10] German Solar Installations Coming In at $2.24 per Watt Installed, US at $4.44[11] It Keeps Getting Cheaper To Install Solar Panels In The U.S.[12] Germany Breaks Monthly Solar Generation Record, ~6.5 Times More Than US Best[13] Germany and Renewables Market Changes (source link in original article is broken, here is an updated link:http://www.bp.com/content/dam/bp...)[14] Cost of German Solar Is Four Times Finnish Nuclear -- Olkiluoto Nuclear Plant, Plagued by Budget Overruns, Still Beats Germany’s Energiewende[15] 313 MWp German PV Capacity Added in July 2013 - 34.5 GWp Total[16] EEG Account: 5,907 GWh of Renewable Energy in August Sold for EUR 37.75 at Expenses of EUR 399.52 per MWh - EUR 540 Million Deficit[17] Germany will dilute - not abandon - its Energiewende plan[18] German power exports more valuable than its imports[19] Ryan Carlyle's answer to How large would an array of solar panels have to be to power the continental US? How much would such an array cost to build? What are the major engineering obstacles to powering the US this way?[20] Electricity demand response shows promise in Germany[21] Energiewende in Germany and Solar Energy[22] Problems with Renewables and the Markets[23] Ryan Carlyle's answer to What are some policies that would improve millions of lives, but people still oppose? Why do people oppose them? What is the one area where you wish politicians and the public would pay attention to scientific consensus or other data?[24] Stephen Frantz's answer to What is a nuclear supporter's response to the Fukushima disaster?[25] Fukushima Cancer Fears Are Absurd[26] Evacuation ‘Fukushima’ deadlier then radiation[27] Was It Better to Stay at Fukushima or Flee?[28] The fuel of the future[29] Fowl Play: how the utility industry’s ability to outsmart a duck will define the power grid of the 21st century

Here is a discussion that will hopefully put to bed the annoying quarrel that people outside of real estate just don’t get. I’m going to show you the hidden ways you make your money on real estate rentals that blow REITs, Crowdfunding deals, and Real Estate Notes out of the water.There are potentially better investments (risk divided by reward) backed up by a hard asset, however, those deals are not obtainable by the average individual who does not have access to a rich and powerful network of people and who does not have a net worth exceeding $1-million.The simple rental is something that is accessible to everyone and today we are talking about the math behind it. So put on your propeller hats, because we’re about to talk numbers.As a rental investor you make your money four ways:Cash flowAppreciationTax BenefitsPrincipal Reduction/Debt Paydown1) CashflowCashflow is your income (rents), minus your expenses and mortgage. For example, if your tenant pays you $1,000 a month and if your monthly expenses including principal, interest, taxes, insurance, and maintenance/occupancy reserve are $800 a month, then the $200 difference is now income in your pocket. It is what you are left with on a monthly/yearly basis with little to no action on your part. The goal is to keep acquiring rentals that will increase your passive cashflow. It is this cashflow that is the money that you will live off of to be able to quit your day job. As in the board game ‘Cashflow,’ you win when your cashflow is greater than your expenses. When this happens you have “escaped the rat race” and able to spend your time doing things that are more meaningful to you.I recognize that in the Real Estate investing community there are two camps A) Cashflow-focused and B) Appreciation-focused. Sort of like a political debate, you can’t tell the other is wrong for obvious reasons. A) Cashflow-focused bandwagon. We believe that acquiring assets that increase your cashflow is the way to go despite the fact that it is often a slower, more prudent road to take. Folks in the Appreciation-focused group feel that buying homes in the Midwest is silly because those “fly over States” never appreciate, and they fail to see the hidden benefits of real estate, as stated in this article. I buy, knowing that the home I purchase for 80k today will sell for 85k, 20 years from now. I underwrite my deals to look at the bigger picture knowing that it is the cashflow that will eventually replace my day job income. I admit that this will widely depend on what you use as the assumed average appreciation for the purchases in markets with more rapid appreciation, but appreciation is not constant- it is cyclical, and I prefer to see a steady rise. By purchasing in cashflow markets, the highs aren’t as high, but corrections aren’t as painful.This is a little off topic but I run a passive investor Meet-Up in Seattle, and there is always an old-school investor who is investing for appreciation and was one of the unlucky folks. Basically, what happened is that they bought during the wrong time in hopes that the market would go up 5-10% every year, but instead, they are underwater, and to add insult to injury, they bought it with negative cashflow and are still losing money every month. What is most important is the aftermath, and now that investor/gambler is in the doldrums for nearly a decade unable to do anything in terms of building his/her portfolio. Kind of like that idiot buddy of yours who went all-in early in a friendly game of poker, and now he is sitting on the couch by himself like a jackass while you and your other friends are still playing for a couple hours. Here is another analogy… appreciation is like a 3-point shot in basketball, where a team can choose to jack up 3-point shots all game. There is a saying “live by the 3, die by the 3.” Now, I know the Golden State Warriors are debunking my analogy with all their 3-pointers, but if I were the coach I prefer to just pound it in the low-post for the higher percentage shots – maybe that’s why I like the low appreciation-high cashflow rentals because they prefer the high percentage shots – the slam-dunks.Example:$30K initial investment creates $3,600 per year profit (cashflow)3,600/30,000=12% is the Cash on Cash Return2) AppreciationThis is the famous topic of dinner/cocktail parties where people brag that they bought their home for 200k and now it’s worth 400k and how they had incredible foresight. Well congratulations, appreciation “floats all boats – even ones with holes.” Despite how cool it sounds, appreciation is a hidden benefit that you only realize when you sell your investment property for greater than what you bought it for – it’s a paper gain. Even though you can’t live off appreciation like cashflow (well you can via HELOC or refinance but that’s a topic for another day), let’s attempt to quantify it. So if you bought a home for 100k and it went up by 5% which is a pretty good year, your property would be worth 105K… but wait…your initial investment was 30k so now you have 35K. Here is the math.Example:$30K initial investment creates $5,000 this year in equity gain5,000/30,000=16%, is the appreciation return (3x on a 5% market gain)I’m not a fan of including this in my underwriting because I believe it is gambling but just wanted to show you the math behind it so you can see how your leverage is at work with Government subsidized loans. Another reason is that I like to sleep at night, so I don’t care about appreciation. Plus I don’t have a crystal ball. It’s interesting to note that when the market goes down, more people can’t afford homeownership and turn to renting, which is good for the landlords. Thus, while an economic downtown is generally bad for those banking on appreciation, my monthly cashflow is more resistant to economic changes.3) Tax BenefitsYour rental is a business, and if your expenses are tracking ~50% of your income, then you will be running at a near zero profit business on paper and not have any taxable income. If you are super-sneaky, you can also pass expenses through this business of yours, but work with your CPA first and don’t get greedy. Taking illegal shortcuts will definitely cost you in the long run.But wait… the cool thing about real estate is that you can take a depreciation deduction off your taxable income. This amount is dictated by taking 1/27.5th the building value of your property for the first 27.5 years of ownership. With the expenses negating your income this depreciation incentive is taking that amount off your W-2 day job income. (Side note – unlike stocks/other assets when there is a capital gain you pay taxes on the gain you can defer capital gains tax when you sell by using a 1031 tax exchange.)Example:100K home has a typical building value of ~$70k$70k/27.5=$2,600 per year that you are able to write-off$2,600 at the 25% tax rate is savings of $650 per yearGoing back to the original investment: 650/30,000=2% is the tax benefits. Not bad but I’ll take it.4) Principal ReductionWhen you rent out your home, your tenants are paying down your mortgage a little bit each month with their hard earned money – not you. You can download a great mortgage/amortization spreadsheet by signing up with your email on the sidebar menu. In the beginning of a mortgage, most of the payment is going toward the interest payment side as opposed to the principal pay down/equity for you. Just know that you don’t realize any of these gains until you sell/refinance the property but it’s there.100K home (with 25% downpayment) has a typical PITI payment of around $550/month. Of that 550 only ~$150/month or ~$1800/year is going to principal paydown as equity gain.Example:1,800/30,000=6% is the Principal Reduction benefitsHey there congratulations on sticking with the article. Take a break and the summary of the numbers are below:The ScorecardCash flow=12%Appreciation=16%Tax Benefits=2%Principal Reduction=6%Total=36%In this conservative example, (although there is no guarantee in anything) the totally is 36% return. Pretty dang good with you compare with that mutual funds. The problem is the average person overlooks these hidden ways you make money.Love Hate Relationship with AppreciationWhen I purchase investments I define my goal as cashflow over appreciation. Like many things in life, you can’t have it all, such as both strong appreciation and strong cashflow as described in the Cashflow Quadrants. I invest in the boring “cashflow markets” because I define my endgame as needing passive cashflow that I can live off of. Appreciation is something I cannot live off of since it does not appear in my bank account each month. I see appreciation as the icing on the cake or the dessert with the meal. Therefore, I remove the appreciation from my calculation/underwriting and plan for those projections. For example, if I buy a $80K property in Atlanta today, I do my spreadsheet calculations knowing that I will sell the property for ~$85K 10-20 years from now.I recognize appreciation has the potential to be a very large part of this return in terms of a colossal windfall in a good market (10% equals 40% gain with typical leverage) however there is also the potential for large downswings. Frankly, I try to simplify my life and therefore I am not cool with the volatility and is another reason I don’t use stocks/mutual funds. Every rental will have a different blend of these four ways to make money. In this example above, I plugged in the typical low appreciation potential of “cashflow markets” that one might call “fly-over towns” such as Birmingham, Memphis, Indianapolis, Atlanta, to name a few. These “cashflow markets” typically have boring low single digit appreciation rates (San Francisco might appreciate 15% whereas Birmingham might appreciate 2% in the same year) however in a recession they don’t have the double-digit dips that a California/Seattle market will likely see. I tell a lot of investors who purchase homes with negative cashflow such as a $500k rental in Seattle that rents for $3,000 per month (See Rent-to-Value Ratio) that they need to be conscious of what the numbers are telling them. If they can look me in the face and say they are investing for appreciation then I am cool with that – that is their goal. However, most people in this situation (Mom & Pops who were taught to just buy a property dispite if it made fiscal sense) are clueless that they are losing money to the tune of a few hundred dollars each month in cashflow. If you every played Paigow Poker, investing for appreciation is like the “fortune bet” where you keep paying into the side bet in hopes of hitting it big one. You might hit it big one day, but then you need the wisdom to cash in at the cashier’s cage.The Scorecard (Minus Appreciation)Cash flow=12%Appreciation=16%Tax Benefits=2%Principal Reduction=6%Total=20%, not bad and still greater than the stock market.For those stock-centric folks look at it this way. Appreciation in your home is similar to the gain in the price of a stock like Apple. The price of the stock goes up and down, however, the volatility is much less with rentals. There are some stocks like AT&T that produce dividends and those are similar to the cashflow from a rental. However, I don’t see many dividend stocks producing more than 4% compare with the double-digit cashflow returns from rentals.Other hidden ways you make money that I do not consider: Equity CaptureThis is when you buy a house for less than the market value. Many people say “you make your money when you buy” and this is what they are talking able. Personally, I pretty much buy at market value. I don’t have the time to do any work to find any deals which involve the arduous tasks of doing the direct marketing, tracking down leads, fix properties or any of these active real estate investor past-times.I’m pretty lazy and lazy people don’t deserve much… well unless you’re smart about it, but even then. Another example of this is if you bought a house for $50K, put $30K into rehab (all in for $80K) and now the property is worth 100K on the open market (disregarding transaction costs) – you just created $20K of equity capture. The following way is a great way to acquire assets, but it requires money, time, and effort (that might have a higher and best use at your day job).Other hidden ways you make money that I do not consider: Inflation HedgingWhen your parents bought a home back in 1985, they spent about $30K on the property. Their mortgage payments were ~$100-$125 dollars per month and at that time that made up a noticeable portion of their family budget. Now fast forward to today and they are still paying the same payment (taxes and insurance have gone up). This illustrates how by having a mortgage you are locking in and hedging yourself from the inflations. Here are other reasons supporting inflation is going to be greater in the future:The past 30 years has been a semi-calm era that yielded 3% annual inflation. However don’t believe the BS. Call me a conspiracy theorist but I would argue that it’s much higher than 3% since it is the government that is cooking the data. Just look at the ice cream container, the price has stayed in line with inflation, but the size just keeps getting smaller and smaller. There isn’t even real sugar in the thing.The knee jerk reaction from the US Government is to bailout the big banks from falling by keeping interest rates synthetically low for almost a decade. We will have to pay this back at some point, just look at the Federal Debt Tracker, Government shutdowns, and our Country’s devaluation from the AAA grade. At some point, we will have to pay it back via two options. The one unpopular option is to raise taxes/decrease Government programs, however, that is the quickest way to piss people off so that is not going to happen to the extent it should. Instead, the Government will just keep printing more money which will devalue the amount of money they owe. This will lead to greater inflation however the average American will not see the connection and blame it one those who are in office. What an ingenious way or an insidious way to devalue your debt without taking the blame.We are already seeing some European countries and Japan (cause every new comes from those crazy Japanese) test out negative interest rates. As absurd as it sounds this is where you have to pay money to the bank to allow it to remain there.I’m not saying that it’s going to be a totally new world order but the best day to buy (and lock up 30-year mortgages) was yesterday and the 2ndbest is today. Don’t use the excuse “Oh, I’m waiting for the next crash or evaluations are too high”. Instead, buy on fundamentals with healthy spreads in cashflow so when that next correction comes you are above water in terms of cashflow.The SkinnyRental real estate is the most time-tested wealth-building tool available to the average person. If you weren’t paying attention earlier, here is an acronym for you to explain to your naysayers who think you are crazy:IDEALIncomeDepreciationEquityAppreciationLeverageReal estate (not particularly your primary residence) is I.D.E.A.L.I Stands for IncomeThe property produces income after it pays for expenses. This is called Cash flow and it is what puts food on the table. This is a concept that most investors and regular people never understand… because most invest for appreciation or capital gain which is sort of like gambling. Rule 1 of investing is don’t lost money!D Stands for DepreciationProperty depreciation can shelter the property income that is distributed to investors. The government engineers certain interests through the tax code, in order to encourage us to put our money in particular spaces. By creating ways to write off a portion of their investment cost through depreciation, they encourage people to invest in real estate. House flippers don’t understand this as they make big sums of money (taking large amounts of risk in the process) but pay taxes at the highest rate.E Stands for Equity GrowthEquity comes from the fact that a portion of your mortgage is being paid down by a tenant or someone using the property. How nice of them. You can download a mortgage calculator to know exactly how much money are are making in equity growth based on the amortization schedule by signing up for the Hui Deal Pipeline Club.A Stands for AppreciationHere is the investing for appreciation/capital gain part of the equation. One myth that people don’t realize is that Appreciation is concerned with keeping the value at or above the rate of inflation, and can come from two sources: a natural increase in property value over time (market appreciation), or value-added activities (forced appreciation) such as remodeling, expanding or improving the property in some way. Here at Simple Passive Cashflow - Simple Passive Cashflow appreciation is the icing on to of the cake and we focus on cashflow cause that is what we can control. We also don’t see our primary residence as an investment since it barely keeps up with inflation.L Stands for LeverageLeverage is available via funds from institutions and raise capital from investors. Positive leverage is when the after tax unleveraged yield of the property exceeds the aftertax cost of funds. Taking on more debt is seen by most as irresponsible, almost a sin. But most (of those people) are broke. The truth is that debt is a tool.“In the end, you want to buy direct as possible. Buying REITS is the same thing as buying mutual funds with a bunch of middlemen. Crowdfunding sites remove a few layers but as a syndication working with a Crowdfunding site is very expensive way of acquiring capital. Sometimes I wonder who are the people using this high cost of private equity… Perhaps they are “desperate syndicators?”Q: I have $300k. Why not just buy three $100K properties that rent for 1K/month, rather than ten mortgaged properties? If you suspect there will be little or no appreciation, why not pay in cash and eliminate all risk?I am not a lawyer but, consider another view of risk. The risk we don’t think about is having equity in your property. If there is a lawsuit, you can bet you are a bigger target if you have a bunch of equity in the property. If you have prudently leveraged your investment, it’s going to be a smaller target to go after.A lot of experienced investors and non-experienced investors use large sums of cash to obtain properties at great discounts (70-80 cents on the dollar) via direct sales of pocket listings or auctions. Paying cash commands respect and is seen as a more reliable deal which is the reason for the discount on the property. The following will analyze the numbers behind this strategy and compare it to a typical 20% down payment conventional deal.Scenario A: All CashMarket Value: $100,000Purchase Price = Money in the Deal: $75,000Annual Cash Flow: $12,000 (assuming 1% rule)Cash on Cash Return: 12k/75k = 16%Scenario B: Typical 20% conventional dealMarket Value = Purchase Price: $100,000Money in the Deal (20%): $20,000 + $3000 for closing costs above and beyond Scenario AAnnual Cash Flow: 12 months x ($1,000-540(PITI)) = $5,520 (assuming 1% rule)Cash on Cash Return: 5520/23,000 =24%Under these circumstances, purchasing all in cash would yield 8% less in returns on your principal investment. While the cash-on-cash return will vary between properties (and is only one part of the total sum of ways you are making money as discussed in this article), using leverage will allow your money to go further. However, do the math for yourself.