Well I must say that I was clearly disappointed in the way the MS Development Authority handled Rd. 1 of the SRAP (Small Rental Assistance Program). The MDA in my opinion was a little overwhelmed, however they did recognize this and from what I am hearing from within, is that they are fully preparing for Rd. 2 and gearing it toward more time efficiency for all involved. This Program is without a doubt one of the most lucrative incentives offered by any governing bodies in the history of the industry. It shows how motivated the state of Mississippi and HUD are to revitalizing the gulf coast affected areas of Katrina.
Here is a very good pro form on how the SRAP is going to work. This is based off our clients’ GFE’s (Good Faith Estimates) from their lending source, the increased average rental according to HUD, in addition to our own due diligence on the program.
ONCE APPROVED: The MDA/HUD will offer a forgivable loan for $27,500 per 3 bedroom unit. If the builder completes the unit(s) within 180 days from pulling permit, you will be issued a completion bonus in the amount of $9,000. Let’s take a duplex for instance. A duplex has 2 units, right? If you build a duplex and each side has 3 bedrooms, your “funds” issued will total $73,000 if completed within given time parameters. $73,000 UPFRONT! Technically, you get half of the amount minus the bonus at permitting. However, when the MDA issues you the funds, they are going to place an immediate subordinate lein position on the property. Many investors will make the mistake of doing this. At completion and their lender assigns the mortgage to an end-loan provider, no lender will take a property with a subordinate lein….SO…..you must wait until completion to get the entire thing.
If your mortgage amount is $220,000, let’s look at the following pro forma:
Principal & Interest Amount: $1,500
Real Estate Taxes: $150
Property Mgmt: $150
Total Operating Expenses: $ 2,050 Monthly
Your NET monthly rent in compliance with the MDA SRAP rental limits and also taking into consideration market rent for the area: $1,800 +/-
Remember you have to hold this property for 5 years.
Debt + Operating Expenses of $2,050 less your monthly rent of $1,800 equals $250
which is your monthly negative cash flow.
Over 5 years or 60 months, your negative cash flow is $250 x 60 = $15,000.
So you are negative $15,000….You are obviously subsidized a full $73,000 upfront so technically you are not in the red.
At the end of 5 years and your negative cash flow being subsidized by part of the $73,000, your leftover funds after 5 years is $73,000 less $15,000 equals $58,000.
At the end of the 5th year, the subordinate lien is forgiven and the investor gets to keep the remaining balance leftover. Of course if you want to put more money down out of pocket to reduce your principal balance upfront, you may, which will ultimately get you a higher net margin over and beyond $58,000.
Take this in addition to a Go Zone Accelerated or Bonus Depreciation and you have yourself one heck of an investment. We were told yesterday that approvals were likely this week or next which has now happened. We are looking forward to working with the next round of investors who would like to apply for the Mississippi Small Rental Assistance Program.