Small Rental Assistance Program

BLOG 3-26-08

Is the loan forgiveness program for you?

The state of Mississippi is forgiving up to $40,000 per unit for providing newly constructed homes for rent in 4 southern counties of the state. They are located primarily in the Ocean Springs to Gulfport areas. This area took a direct hit from hurricane Katrina in 2005. They still have 10,000 FEMA trailers in use. The state would like to get rid of them as soon as possible.

If you agree to 5 years of rent control, the state will forgive up to $40,000 per unit on your loan. ½ of the money is given when your building permit is issued. The other ½ is given when you get your certificate of occupancy. There is a bonus given if your property is built in six months or less. The program is called the Small Rental Assistance Program (SRAP). There is a document you can get on the state’s website that has charts for the dollar amounts by number of units you build and number of bedrooms per unit, plus it has the application form at www.mississippi.org

I’ve been asked to discuss the pros and cons of the program. I’ll start with the cons first.

Cons
The property that cash flow’s the best is located about 2 miles from the Gulf. If you’re a “hurricane-phobic”, this is not for you. If you can’t sleep at night knowing you own investment property in an area that could be hit again, don’t buy there. Although all homeowner’s insurance includes hurricane coverage, any of these areas could be hit. Most policies include six month’s of rental loss coverage. You can discuss with your insurance company what deductible you feel comfortable with. You can add on wind and flood coverage if you like. Some lenders require it. The homes are in compliance with the FEMA flood zone guidelines. Most are being built by companies from south Florida and meet Florida hurricane codes.
Some investors don’t like the elevated, modular product. The advantages of this product are that it can be built quickly and therefore get rented more quickly. The elevation is high enough so your tenants can park underneath the house. This type of construction is the same as the “Key West Style” homes you see in the keys. When the house is a higher end product, the bottom floor is closed in and made into garages and storage. That’s really the only difference. The tenants like having it. If you don’t like that type of construction, there are builders making “stick built” homes on the ground.
Bay St. Louis – This area has mostly blue collar workers who have lived there for generations. The area had aprox 70% renters before the storm. Most of the residents lost everything in the storm, their jobs and good credit records included. The majority are hard working people who need a fresh start. The lots are in an area called Bay Side Park which was subdivided many years ago. The builders selected this because it is in the correct county for the loan forgiveness program and the lots were only $1500 last May. Now they are selling for up to $15,000. Outside of Bayside Park, you’ll see lots selling for $30K to $45K which makes the numbers not work nearly as well.
Will there be too many investors in the area? There probably will be many investors in the area. The state started the program to attract them. With 10,000 FEMA trailers to eliminate, personally I don’t feel that you have too much to worry about in regards to a shortage of potential tenants.
Will you be able to resell the property after 5 years? If everyone tries to sell at the same time, I would imagine so. Investors should plan on keeping it as a long term investment. The area has been appreciating well and jobs continue to move into the area, so I would hang on to it as long as possible. It’s possible to do a lease option to your tenants on a house. You could take title to each side of a duplex separately and resell them as “villas”, which is half of a duplex. You would have to take out two loans for this.

PROs
Short Rental Time – most of the houses and duplexes built have been rented within a couple of weeks from certificate of occupancy. The property managers have lists of hundreds of people waiting for a place.
Money from the state – This is one of the best deals around in terms of incentives for investors. Getting up to $40,000 per unit is not a small amount of money. That means $80,000 per duplex!
Feel Good about helping someone – although it’s not something I usually stress as a reason to invest, there really are so many people who need a place to live. I have seen FEMA trailer tenants interviewed on CNN and seen the trailer farms myself. Believe me, these people do not want to be living there.
With jobs moving back into the area and major employers close by, this should be a great investment. I look for areas to invest in that have businesses moving in and a low cost of living. The Gulfport area has it all. The money from the state is just the icing on the investment cake!
Janet Montano
Broker
Home and Income Realty
www.HomeAndIncomeRealty.com
813-956-3563