Magnolia was property No. 5 and it is by far my favorite property.
Depending on who you ask, this may or may not be a good investment. We ran into a few hiccups and made some stupid mistakes on this purchase. However, it still checks all the boxes. It fits perfectly within our investment criteria.
We acquired this property after the sale of our Florida duplexes. The timing worked out perfectly.
One of the reasons we moved to Georgia was so that we could grow our portfolio faster. Florida is a good appreciating market, but we wanted more cash flow and Georgia offered us affordable properties with much better returns than Florida.
Our first Georgia property was Big Horn. The plan was to continue buying in Conyers, GA. However, prices started to go up and we couldn’t find anything worth buying. Hence, the shift to Macon, GA.
If you browse in BiggerPockets forums, you will see a lot of negative remarks about Macon, GA which is the reason we steered away at first. However, with the 2020-2021 real estate market craze, it became a necessary evil.
Before we decided to invest in Macon, we explored several markets: Athens, Griffin, Monroe, Decatur, and Lithonia. Macon checked all the boxes starting with the price points and cash flow.
We got Magnolia under contract site unseen. We didn’t even drive by the property before going under contract. A few months back, we had visited Ocmulgee Mounds National Historical Park in Macon. This property happened to be right next to the park. If that wasn’t the universe sending us a message, then I don’t know what is. This property had been in the market for a while but only came on our radar because of a $10k price drop. The numbers were solid. It seemed low maintenance. The only unknown was the value of the property. There were no comparable properties, so we had to go by the numbers and our gut feeling.
Here are the deal details.
This property was listed for $139,000. Three of the units were rented with two of them being 100% subsidized by section 8. Total rents for the 3 units were $1,580 which is above the 1% rule of thumb (divide monthly rent by purchase price and you get 1.13%) and that’s not even counting the 4th unit. We felt confident that we could potentially increase rents to $600 per unit and be at $2,400 per month.
Tenants were responsible for all of the utilities. All we needed to worry about was the lawn maintenance.
After the sale of the duplexes, we had enough cash to repay all of the debt associated with the duplexes and re-invest the profits. Magnolia (a Fourplex) not only replaced the two Florida duplexes but brought in twice the cash flow. This was a home run.
This was a cash-only deal. We didn’t have enough to cover the $140,000 so we did what we do best: borrowed money. We got a $70k SOFI private loan and a $20k draw from our business Wells Fargo line of credit. The remainder came from the money we got from the sale of duplexes.
Similar to the other deals, the plan was to do a cash-out refinance right away. We used the same lender: Fairway Mortgage Corporation to do the refinance using the Fannie Mae Delayed Financing Program. If you want to learn more about the program, read here. Basically, the bank lets you refinance without waiting the usual 6-12 month period as long as you purchased the property with cash (doesn’t need to be your own cash).
The property didn’t really need much, but we still did some improvements. We wanted to increase the value of the property by doing a light uplift. All we did was clean up the yard and paint the building with our signature colors.
We also had to finish the renovation of one of the units. We got a credit of $3,000 from the seller for this.
We were done within two weeks and the vacant unit was rented for $750 which was $150 more than expected.
The timing of this purchase was not ideal. Both Ryan and I were slammed at work and juggling several projects at a time. As you will read later, we were in the process of buying another 2 properties at the same time.
We were not 100% focused and dropped the ball a few times.
Issue #1 – The property did not appraise. The valuation came back at $115k which is $22k less than the purchase price of $139k. This meant that we would not be able to get the loan amount we needed to pay off all of the loans we took to get the property. This was a bit disappointing because the property looked so much nicer with the facelift we gave it and that made no difference. It sucked, but we weren’t really worried because even then, the numbers still worked. It would just take a bit longer to pay off the loans.
We bought this property knowing there was a risk it wouldn’t appraise, so we embraced it.
Issue #2 – Turns out, the AC for the vacant unit didn’t work. This was a very stupid mistake because the inspection noted this and we missed it. If we had carefully read the inspection report, we could have requested a credit for it.
It was an oversight, but let’s assume that we had noticed the AC issue and requested the credit. If the seller had declined the credit, we still would have gotten the property. We would never know, so there is no point in dwelling on this. At some point, we were going to have to replace it anyways.
How it’s going…
Other than the two issues noted above, things are running smoothly.
The mortgage for the property ended up being $80k with a $600 monthly payment. This leaves a good cushion for operating expenses and payment of the loans used to acquire the property.
Even though we are only 1 hr and 1/2 away, it is not worth driving back and forth. We needed someone local to handle the day-to-day management of the property so we hired a property manager.
This is the first time dealing with a property manager from the landlord’s perspective so it took a bit to cease control of the operations.
I am glad we hired a property manager. Even after retirement, I think we would keep a manager. It’s not worth the headache. The 10% management fee is money well spent.
Until recently, maintenance issues were nothing out of the norm. Small plumbing leaks or appliance issue. Unfortunately, we had a recent pipe burst in the main line which is unexpected large expense issue. We are going through the insurance, so hopefully we will get this approved and we can move on.
The three units with pre-existing tenants are rented in total for $1,580. The plan is to bring up the rents to market rent of $750 per month per unit which would bring up rents for those three units to $2,250. That would be $640 extra rent per month or $8,000 a year. There is still time left so not in a rush.
This means that gross rents for this property with all four units will be $3,000 per month. That’s $600 above our initial projections. This takes us closer to our early retirement cash flow goal.
Anyways, there you have it.
A property appraised below purchase price is not necessarily a bad thing for a rent and hold investing strategy.
Pay careful attention to the inspection reports and ask the seller for a credit at closing.
The numbers don’t lie. You can follow your gut feelings when investing, but be sure to back up your decisions with numbers and be conservative with your estimate. Assume the worst-case scenario when running the numbers.
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