As one of the leading players in developing investor products along the Gulf Coast, I’ve been on the lookout for another recently approved incentive. As the National Director of Sales 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 HUD’s 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 provide rentals for those earning less than 80% of the median income. HUD wants to subsidize rent and make it truly affordable for locals in need of affordable rental properties. Let me tell you a little about the unique situation. Folks, this is not Section 8. After the hurricane, thousands were left homeless and without a car. Among those thousands, most had to find alternative housing and transportation. With the expenses incurred for that, they had to let go of their home loans and car loans 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 either got that job back or found another.
In addition to those unlucky families/individuals, there is a huge influx of jobs available. One of the biggest demands for employees right now is the hospital in Hancock County. They are begging 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 just isn’t enough. Other than physicians 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 a 90 day completion bonus of an additional $10,000 which is generally only good if you are building modular which is what I am doing. What this means is that for a purchased single-family home, your rent is subsidized at 80% of market rent on 51% of your investment properties in the area. An incentive on top of the incentive is that for 49% of your homes, your rent will be paid at 120% of market rent. The market rent for a 3 bedroom house is $1057 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 $1,057. You will receive a rent check from the tenant each month for $846 per month. For the third house, you will receive 120% of the market rent of $1,057. The tenant will pay you monthly the amount of 80% of the rent of $846; however, on top of that, the state will send you an additional 40%, bringing your total monthly rent to $1,250 per month on that home.
The way the forgivable loan is issued is that you get 50% after your builder issues 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 selected 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 housing 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 will likely 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 in my next post for full details on how duplex situations work.
Here are the criteria. You must maintain the 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’s 100% forgivable and, as reported, it’s not income, it’s a grant. Therefore, the funds are TAX FREE.
Here’s an opinion on what to do with the funds: Get an aggressive construction to permanent loan for a pre-construction house/duplex. You will likely have a prepayment penalty during the first year of your final loan after the home is completed. Your negative cash flow will be between $200 and $400 per month if you consider the 80% subsidized rent. This is fully offset by the forgivable loan. Let’s say (counting the completion bonus) you have $40,000 up front 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% in is about $4,800. Big 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 a stream of income for yourself by making money a month on a loan of $100,000 or so when the house is worth $50,000 and more than your new payment.
This is not too complicated, but it still requires more due diligence. Applications for this will not be available until at least July 16, 2007. Investors, start your engines. Between this new HUD incentive, the driveway cancellation, and the expected appreciation, you may never find yourself in another position like this.