The Pursuit of Passive Income

A friend told me that you never see the progress when you are knee deep in the process. I use this little pearl of wisdom to explain why some investors and owners are having a tough time seeing positive changes in the housing markets. 

We look for signs of change and benchmarks that are measurable. I’ll share a few that have been shared with me:

- You know when the market has topped out when brokers start buying their own listings. (The drug dealers shouldn’t smoke what they are selling example)

- You know when you hit the market bottom when prices have retreated to the pre-bubble lows. 

- You know when the market has peaked when your mailman starts lecturing you on his investment property portfolio.

I can remember selling lender owned buildings on the I-17 corridor in the early 1990’s for $5,000 per unit. I underwrote buildings in Texas for $4,000 per unit. But…that was 20 years ago. That was when gasoline was under $1.25 a gallon and you could  buy a pack of gum for $0.25. Adjusted to the current market prices for consumer items, wouldn’t a west Phoenix building selling at $11,000 per unit today be equal to that building selling at $5,000 per unit during the last recession? Have we lost perspective? Maybe. I seem to meet many investors that are convinced values can go lower and are waiting for the illusive bottom of the market to jump in. Maybe we’re there?

Here’s another benchmark I’ve been watching for: second generation defaults vs. second generation sales.

Second generation defaults defined as a home or property recently sold as a distressed sale that is again in default by the new buyer. The new buyer is now losing the property. 

Second Generation sales are defined as the resale of a building that had been sold at a profit after the initial flip/fix up sale. 

Both definitions explore the two sides of equity. Assets gaining enough equity that a profit is realized in the second sale or, in the case of the default, the asset is loosing equity so quickly, that the new owner can’t maintain it..

The bad news is that we are seeing Second Generation defaults in the single family home market in Arizona, Florida and Nevada. The good news, I’ve seen some second generation sales in Arizona, Nevada and Florida multifamily sales. 

These phenomenons can be synergistic. A wave of second generation defaults can lead to a “double dip recession”, while a market budding with second generation sales can lead to the growth of value and reinvestment. 

It’s too early to see which effect is gaining and interesting to see them simultaneously in certain markets.  

As always, open to your thoughts and comments.

John

With rising energy costs and soon to follow, rising restrictions I expect to see a lot more legislation passed to save energy. Personally, I’m all for it. However, there is a cost to the conversion and with the budget fight in Washington, don’t expect the folks who pass the restrictions to help fund the conversions.

The last 100 watt light bulbs will be pulled from the shelves in January 2012. You should still be able to buy 75 watt, 40 watt, and 25 watt ones, but the 100 watt ones will be obsolete. (I can see the eBay folks stocking up to sell them in a few years at a premium - like the folks who stocked up on “Old Coke” when the “New Coke” formula was released).

California lawmakers are just about to pass the most agressive alternative energy laws. If passed, California Public utilities will be required to produce one-third of their energy using alternative means- to be phased in over the next few years. Wow….is that even possible? 

I was an early adopter of the CFL bulbs at my properties. We soon learned that the reduced heat produced, significantly longer life and lower energy use made it worth the time to retrofit our fixtures. We also learned that our residents loved these bulbs so much, that they began to steal them. We went one step further, converting our fixtures to the cartridge style bulbs. 

I remember walking into one of my leasing offices with a ceiling dotted with 120 watt reflector bulbs in the middle of the summer. It was really hot and those 20+ bulbs were heating up the place even more. We replaced them with 13 watt CFL reflectors and then replaced/retrofitted all the exterior fixtures. The result was we cut our electric use by 30% and our maintenance staff rarely had to replace a bulb (they last for 10,000 hours). The clubhouse/leasing office was as bright, but noticeably cooler.

Our next step was to work on the water costs. Water is expensive in Phoenix…

We replaced our old toilets with 1.6 gallon ones, added better quality low-flow shower heads and replaced the valve stops for all fixtures with 1/4 turn ball valves. Next we split our water systems, adding a second city meter just for irrigation (is avoided charges for sewer on water that was used for the pool and landscaping).  Our savings were were over 40% - and some cities actually rebated us up to 1/2 the cost of the upgrades. 

We made our landscaper adjust the sprinklers to the minimum water needs of the property and quickly addressed the source of any puddles that formed - chnging broken heads and adjusting flow. 

It didn’t take long before we had our properties running better and with reduced maintenance.

If you own a master metered property, I would certainly suggest these changes plus adding your own interior fixtures that use only energy efficient bulbs. If residents buy their own fixtures, they won’t choose the ones that use less energy and produce less heat. 

It’s clear to me that if we are forcing our utility providers to find alternative sources of energy, it won’t be long before our properties, shopping centers and office buildings will be required to employ them too. 

As always,

Open to your comments and suggestions.

John