MDA Mississippi Small Rental Assistance Program
As a major player in developing investor products along the gulf coast, I’ve been keeping an eye out for another recently approved incentive. As national sales director for a large bank real estate firm, one of my responsibilities has been to provide the most up-to-date information and key incentives available in the Gulf Coast region. On Friday, July 13, the final amendment for the HUD Small Rental Assistance Program in Hancock and Harrison County, Mississippi was finalized. First, let me start by saying that HUD’s intentions for this program were to attract more investors to build new rental housing and to provide rentals for those earning less than 80% of the median income. HUD wants to subsidize rent and make it truly affordable for locals who need affordable rental properties. Let me tell you a bit about the unique situation. People, this is not Section 8. After the hurricane, thousands were left homeless and carless. Among those thousands, most had to find alternative housing and transportation. With the expenses incurred because of that, they had to let go of their home loans and car loans that they were dragged into. This meant a default on your loan or foreclosure/repo (if that’s what you want to call it). Many of those who lost their jobs last year got that job back or found another.
In addition to those unfortunate families/individuals, there is a large influx of jobs available. One of the biggest employee lawsuits right now is the hospital in Hancock County. They are begging the nurses and doctors to work, however the only obstacle is NO HOUSING. Potential out-of-state employees in the medical field can’t even find a place to rent in the newspapers. It’s just not enough. In addition to doctors and registered nurses, most first-year employees earn 80% or less of the median income of $42,000.
HUD’s Small Rental Assistance Program is once again an incentive for an investor to build a rental property with a subsidized rent. HUD is offering a 5 year forgivable loan in the amount of $30,000 for a single family home with an additional $10,000 90 day completion bond which is generally only good if you are building modular which is what I am doing. What this means is that for a single-family home purchased, your rent is subsidized at 80% of the market rent on 51% of your investment properties in the area. An incentive in addition to the incentive is that for 49% of your homes, your rent will be paid at 120% of the market rent. Market rent for a 3-bedroom home is $1,057 per month. You can see the obvious incentive when building numerous.
Let’s say you own 3 houses. Two of those houses will be subsidized at 80% of $1057. You will receive a rent check from the tenant each month of $846 per month. For the third house, you will receive 120% of the market rent of $1057. The tenant will pay you the monthly amount of 80% of the rent of $846, however, on top of that, the state will send you an additional 40%, increasing your total monthly rent to $1,250 per month on that house.
The way the forgivable loan is issued is that you get 50% after your builder issues the permits and 50% at tenant occupancy. In my opinion, this is a fantastic scatter schedule where you can get much more out of your current and potential equity in the house.
What this does is create truly affordable homes in select counties. The state of Mississippi has allocated more than $220 million for this program and it will likely run this year and next.
Duplexes are slightly different. Since a duplex is 2 dwelling units, the forgivable loan increases by almost 70% in total. It is very difficult to complete a duplex in less than 90 days, so you may not get the completion bonus. But for the few duplex builders available, this is a great opportunity in addition to single-family homes. Since this is brand new and I had more focus on single family homes, stay tuned for my next post for full details on how duplex situations work.
Here are the criteria. You must maintain rent as a landlord for 5 years for the $30,000 to be 100% forgivable. This does not include the $10,000 bonus completion prize. That’s forgivable from the start. If you sell in the third year, you will be able to keep 33% of the loan. After the 4th year, if you decide to sell, you will be able to keep 66% of the loan. After the fifth year, it is 100% forgivable and, as reported, it is not income, but a grant. Therefore, the funds are TAX FREE.
Here’s a take on what to do with the funds: Get aggressive construction to a permanent loan for a pre-construction home/duplex. You will likely have a prepayment penalty during the first year of your final loan after completing the home. Your negative cash flow will be between $200 and $400 per month if you factor in the 80% subsidized rent. This is fully offset by the forgivable loan. Let’s say (counting the completion bonus) that you have $40,000 upfront from the state. If your negative cash flow per month is on the high end of $400 per month, your negative cash flow for the first year on the house you’re 80% on is about $4800. Great deal… Now , instead of $40,000, you have just over $35,000 left. Personally, what I would do is after the first year, refinance and pay down the principal on the house with what you have left. Now you’ve just created yourself a stream of income by making money each month on a loan of $100,000 or more when the house is worth $50,000 and more than your new payment.
This is not too complicated, but it still requires further due diligence. Applications for this will not be available until at least July 16, 2007. Investors, start your engines. Between this new incentive from HUD, the cancellation of the access zone, and the expected appreciation, you may never find yourself in another position like this.