Multifamily investment term #2: debt service coverage ratio

We recently wrote about net operating income (NOI), which is the cash that remains after accounting for all revenues and expenses related to a property's operations. Note loan payments are not considered operating expenses; they do not contribute to the expenses that are used to determine NOI.

However, loan payments are used to determine a property's debt service coverage ratio (DSCR). The debt service coverage ratio is a ratio that measures the cash that is available after all loan payments are taken into account. In other words:

DSCR = (Net Operating Income)/(Annual Loan Payments)

The debt service coverage ratio is important because in addition to setting a maximum loan to value ratio, most lenders will require a minimum debt service coverage ratio before a loan can be issued.

For example, suppose a lender requires a minimum DSCR of 1.25.

Now suppose the annual net operating income for the subject property is $150,000, and the annual payments for the desired loan are $125,000.

DSCR = ($150,000)/($125,000) = 1.2

In this case the DSCR does not meet the lender's minimum requirements. The financed amount would need to be reduced in order to bring the annual loan payments down and the DSCR up to the lender's minimum standard of 1.25.

Soon we'll cover another important loan constraint - the loan to value ratio.

Dan Miller, Realtor, Certified Distressed Property Expert, Keller Williams Realty and DaneCountyMarket.com

Dane County foreclosures up 24% in November

Foreclosures were up again in Dane County, increasing from 127 in November of 2008 to 157 last month. November marked the 32nd straight month of year-over-year foreclosure increases in Dane County.

For our full foreclosure report, you can check out the economic trends page at DaneCountyMarket.com .

Dan Miller, Realtor, Certified Distressed Property Expert, Keller Williams Realty and DaneCountyMarket.com

Housing starts sluggish in November

Dane County housing starts were sluggish again in November. A total of 37 housing starts were recorded in November, compared to 35 in November of 2008. The graph below provides a clear picture of how the new construction market has been trending since the beginning of 2005.




Year-to-date, housing starts are down 16.4% compared to the same time period last year.

Thanks to Dominic Collar from MTD Marketing Services of Wisconsin for sharing his data. For more information, you can contact Dominic directly at 920/993-8435. You can also check out our full housing start report on the real estate trends page at DaneCountyMarket.com .

Dan Miller, Realtor, Certified Distressed Property Expert, Keller Williams Realty and DaneCountyMarket.com

Dane County months of inventory DECREASE

Dane County home and condo inventory stood at 10.3 months on November 30th, down from 10.8 months on November 30th of 2008. That's the first time inventory has decreased on a year-over-year basis since we started tracking this statistic in 2007.

Inventory for homes only stood at 7.8 months on November 30th, down from 8.2 months a year ago. Condo only inventory stood at 18.7 months, compared to 18.9 months a year ago.

This is an encouraging trend, but keep in mind much of the inventory depletion has been in the lowest price categories due to the implementation of the first-time home buyer tax credit. As you'll see below, inventory varies significantly by price range.

Here's how inventory varies by price range for homes only.

And here's how condo only inventory varies by price range.

Generally speaking, today's sellers have the most leverage in the home category for properties priced at $275,000 and under. Buyers have the clear advantage in the higher priced home categories, and in all price categories of the condo market.

For information on how home and condo inventory varies by location, you can check out the buying real estate page at DaneCountyMarket.com.

Have a good weekend,

Dan Miller, Realtor, Certified Distressed Property Expert, Keller Williams Realty and DaneCountyMarket.com

Mortgage rates reach all-time lows

If you've been waiting to lock in your rate, the time to act is now.

Mortgage rates have dropped to all-time lows according to the latest weekly mortgage market survey conducted by Freddie Mac. According to survey results released on December 3rd, the average commitment rate for a 30 year fixed rate loan was 4.71%. The average for a 15 year fixed rate loan was 4.27%.

This graph puts current rates in perspective. It shows the annual averages for the years 1992 through 2007, followed by the monthly averages for each month since January of 2008.

For our full mortgage report, visit the economic trends page at DaneCountyMarket.com. You can view the latest mortgage rates updated daily on the mortgage home page at uwcu.org.

UW Credit Union offering $500 off closing costs through April 30th

UW Credit Union is offering $500 off closing costs through April 30th.

In case you missed it, UWCU recently joined our DaneCountyMarket.com web site. Now our web site users can research the market, search for properties, monitor interest rates, and apply for a loan all from one online location.

UWCU will be contributing a number of educational articles to our site in the very near feature. Needless to say we're ecstatic to have UWCU joining DaneCountyMarket.com, making it an even better resource for the consumer seeking comprehensive and reliable real estate information - without any strings.

Have a great day,

Dan Miller, Realtor, Certified Distressed Property Expert, Keller Williams Realty and DaneCountyMarket.com

Dane County multifamily sales down in October

Only 8 Dane County multifamily listings totaling 21 units sold via the South Central Wisconsin MLS in October. As you'll see below, the demand for multifamily real estate has decreased significantly in the last year.

This trend is even more apparent when viewed in the context of the past decade. The 455 units sold over the last 12 months are lower by 58% from the 1,077 units sold during the peak sales year of 2002.

As we've pointed out before, with high supply and low sales, now is a great time to learn more about multifamily real estate. For more on the multifamily market, you can check out our monthly report on MadisonIncomeProperties.com.

Dan Miller, Realtor, Certified Distressed Property Expert, Keller Williams Realty and DaneCountyMarket.com

Dane County commercial real estate sales still decreasing

While sales for Dane County homes and condos have been on the rise due to the homebuyer tax credit, commercial real estate sales in Dane County have fallen dramatically.

Just over $10.1 million in commercial real estate sold via the MLS during the 12 month period that ended on October 31st, compared to $28.1 million from the previous 12 months. That's a decrease of 64%.



Most recently, zero sales occurred via the MLS in September. Two sales totaling $205,000 occurred during the month of October.

For more on the latest commercial real estate trends, visit our commercial real estate update on the economic trends page at DaneCountyMarket.com .

Dan Miller, Realtor, Certified Distressed Property Expert, Keller Williams Realty and DaneCountyMarket.com

Multifamily investment term #1: net operating income

We've covered how the Dane County multifamily real estate market has changed, presenting investors with new opportunities that weren't available a few years ago. Due to this clear market shift, we've created a new web site, MadisonIncomeProperties.com, which we've designed to help Dane County investors with their multifamily real estate goals. We'll be adding more content to our site over the next several weeks, including a multifamily real estate search tool, so please check back often as we round out our site.

One of the tools we'll be adding soon is a glossary of investments terms, and we'll begin by covering these terms one-by-one in our blog. The first investment term that we'll cover is net operating income.

The net operating income (NOI) is the cash flow that remains after a property's operating expenses are subtracted from operating income. NOI is an important investment concept, as it's used as the basis for several other key investment calculations.

Net Operating Income = Operating Income - Operating Expenses

Operating income is the income that results from monthly rents, parking fees, laundry income, parking fees, etc.

Operating expenses are those expenses that are related to the operation of the property, such as taxes, utilities, insurance, maintenance, management fees, payroll and administrative expenses. Note loan payments, amortization and appreciation are not considered operating expenses.

Many times sellers of multifamily real estate publish the net operating income associated with a particular property. As an investor, it's important to know the details behind this number. Specifically:

• Are are all operating expenses realistically accounted for in the calculation?
• Is the operating income based on the ideal scenario with a vacancy rate equal to zero? Or is it based on historical performance which accounts for the actual vacancy rate?

Stay tuned. We'll be covering several other key multifamily real estate terms in the near future.

Dan Miller, Realtor, Certified Distressed Property Expert, Keller Williams Realty and DaneCountyMarket.com

How some investors are using their cash

We recently wrote about 4 brothers who are using their cash to invest in multifamily real estate - a long term approach to real estate investing. Other investors are using their cash in a different way.

We're working with one local investor group that has amassed a large sum of money for short-term real estate investment. The investor group uses its cash to buy distressed properties, which are then rehabbed and sold for a profit. Because this group pays cash for its investments, it can close on a property in a matter of a few days once an offer is accepted. This makes this buyer a good fit for the distressed property owner who needs to unload a property quickly - and without any worry of the deal falling apart due to a financing or inspection contingency.

We're also talking to an out of state investor group about its goals. This group has successfully implemented an investing system in several different markets around the country. In each market, the group uses its cash to buy 3 to 10 properties a month. Similar to above, these properties are rehabbed and then sold for a profit.

The advantage of the buy, fix and flip approach mentioned above is the investor receives a return on his investment in a matter of just a few months. In fact the investor can re-invest his money several times throughout the year for a very nice profit.

The disadvantage is there is more risk. These investors mitigate their risk by having clear standards. They focus on starter homes, where there is a relatively strong demand for the supply that is on the market. They "buy right" (ie at a good price), which gives them some cushion in case something unexpected pops up during the rehab process. They also develop detailed and realistic plans around the acquisition, rehab and resale of their investments, so they can reasonably estimate their returns.

We expect to see more and more short-term investors due to the growing number of foreclosures in Dane County. Even when foreclosures start to subside, distressed properties will continue to play a large role in the market for years to come. Keep in mind foreclosure levels right now are several times higher than they were just a few years ago. Also, it typically takes 6 to 18 months for a foreclosed home to work its way onto the open market. The irony is the number of distressed properties will continue to increase even as the number of foreclosure filings begins to subside.

Dan Miller, Realtor, Certified Distressed Property Expert, Keller Williams Realty and DaneCountyMarket.com

Upcoming Madison first-time home buyer seminars

The home buyer tax credit has been extended and enhanced, but in order to take advantage of the credit you must have your offer accepted by April 30th 2010 and your home closed by June 30th 2010. The deadline is not far away considering all of the steps that go into buying a home.

If you're new to the home buying process, you should consider attending one of the upcoming UW Credit Union or Dane County Housing Authority seminars. Both are no-nonsense seminars that provide a good introduction to the lending, inspection and purchasing pieces of the home buying process. With a little education under your belt, you will have the knowledge you need to go about your purchase in a thorough and efficient manner - and meet the deadline for the tax credit.

The next UW Credit Union Seminar is Tuesday, January 12th from 6:30 to 8:00 PM.

The next Dane County Housing Authority seminar is a two-part series with sessions on both Tuesday, December 1st and Tuesday, December 8th. Both sessions run from 6:00 to 9:00 PM. Click here for more course details and registration info.

Have a great weekend,

Dan Miller, Keller Williams Realty and DaneCountyMarket.com

Two distressed properties, and many more on the way

We recently wrote about two duplexes that are worth a look from investors who are seeking to cash flow multifamily properties. Below are two other intriguing properties, one a home and the other a condo.

This 3 bedroom home at 125 N. 5th Street in Madison is priced at $94,900 and almost $60,000 under assessment.

This large 3 bedroom condo at 619 Wood Violet Lane in Sun Prairie is priced at $110,000 and over $69,000 under assessment.

Both of these properties are lender-owned. And both require some work, so they're a good fit for someone who is willing to invest some sweat equity in order to improve the value of their investment.

There are plenty of properties like these on the market right now. And there will be plenty more coming down the pike as more and more foreclosures work their way through the system and onto the open market.

One of the ways we learn about properties like these is by implementing a key word search of the MLS which sends us an email whenever a listing with one of the key words hits the market (or when an existing listing with a key word match undergoes a price reduction). For example, we have this search currently set up for an investor:

"forecl*, *as is*, *bank*, *corp*, *fixer*, *flip*, *investor*, *lend*, *lien*, *reo*, *short sale*, *subj*,* tlc*"

We'll discuss how this investor is leveraging the market in a future post.

Dan Miller, Realtor, Certified Distressed Property Expert, Keller Williams Realty and DaneCountyMarket.com

Good deals in a buyer's market (two ways to find them)

A few days ago we downloaded from the South Central Wisconsin MLS all of the email addresses for agents with a single family home listing in Dane County. This amounted to almost 1,000 email addresses. Then we sent an email on behalf of an investor letting these agents know what our investor is looking for.

We've received a ton of responses, and they are still coming in. Most of the properties that we have learned about don't fit this investor's needs, but there are a few in our list that we will be looking at more closely.

There are two advantages to the mass email approach that are worth noting. First, for some properties we receive a lot of information that isn't available from the online listing. In some cases the client has given the listing agent permission to share his level of motivation, or the client has given his agent permission to share how low he is willing to go with price. Another nice advantage is we now have a large network of agents that is keeping us in mind as other properties become available in the future.

Over the next several weeks we'll share some properties that show some promise for the buyer that is looking for a good deal. And today we'll start with two duplexes located at 3010-3012 and 3014-3016 Union Street on Madison's East Side. Both buildings are listed at $117,000 with rents on each unit at $600 and higher. Run some numbers on these properties and you'll see they look pretty good, pretty quick. Also keep in mind if you plan to owner occupy a duplex, you could be eligible for the enhanced tax credit.

We learned about these two properties because we have an automated search set up that sends us an email anytime a new multifamily listing enters the Dane County market, as well as anytime an existing listing undergoes a price change. These two properties recently underwent huge price reductions, which is why we're sharing them with you right now.

Have a happy and safe holiday,

Dan Miller, Realtor, Certified Distressed Property Expert, Keller Williams Realty and DaneCountyMarket.com

Strangely enough we're assisting two different pairs of brothers with their investment plans right now.

Pair #1 already owns 2 duplexes and is in the process of expanding its portfolio. Last week these two brothers put in an offer on an 8-unit, and we're waiting to see how this one turns out.

Pair #2 is new to the game. These two brothers are looking to buy their first duplex using the money they have saved between the two of them.

Both sets of brothers are at different points in their investment plans, but they are similar in many ways. They are all planners and goal-setters, and they all believe in the "get rich slow" formula that multifamily real estate offers. All of these brothers are seeking a property that cash flows while they pay down their mortgage and their property appreciates in value over time. They are aware of the tax benefits that come with multifamily real estate, and they plan to leverage their equity in future years to buy additional properties.

Both sets of brothers are persistent and patient. They have clear standards, and they are willing to evaluate 30 properties in order to find the one property that meets their criteria.

As we've stated before, it's a buyer's market in multifamily real estate. The irony is not many people are buying. Here's our latest multifamily real estate report. You'll find more useful information at MadisonIncomeProperties.com, including how we help you buy and how we help you sell multifamily real estate.

Have a good day,

Dan Miller, Realtor, Certified Distressed Property Expert, Keller Williams Realty and DaneCountyMarket.com

Video tours are a great idea for some listings

We're starting to use professional home video tours for our listings because the quality of the product offered by Whirligig Online Marketing is excellent. Video tours are a great fit for homes with quality upgrades and professional staging. They give buyers a closer look at what each listing has to offer. Because of this, we're happy to invest in professional tours as part of our marketing plan.

For example, take a look at the video tours for these 3 new listings (click the "video" tab along the top menu).

• 1714 Bellewood Drive, 5 BR/4.5 BA, Waunakee Parade Home - $995,000
• 1407 Blue Ridge Trail, 4 BR/4.5 BA, Waunakee Parade Home - $765,000
• 3317 Westview Lane, 3 BR/2.75 BA, Madison Arbor Hills - $299,000
  

For a list of over 25 marketing ideas, check out our online marketing plan. You can view it here on the how we help you page at DaneCountyMarket.com.

Dan Miller, Realtor, Certified Distressed Property Expert, Keller Williams Realty and DaneCountyMarket.com