June 19, 2023

JF3210: 4 Tips for Scaling Into Multifamily Investing ft. Will Matheson



Will Matheson is the co-founder and managing partner at Matheson Capital, a South Carolina-based real estate investment firm that focuses on multifamily and student housing. In this episode, Will shares the “Matheson Method” for growing into apartment investing as a new investor, including five things not to do. He also discusses the benefits of investing in student housing and how to select the best properties in that asset class.

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Will Matheson | Real Estate Background

  • Co-founder and managing partner at Matheson Capital
  • Portfolio:
    • Total of $100M in AUM
  • Based in: Charleston, SC
  • Say hi to him at: 
  • Best Ever Book: Letters of a Businessman to His Son by G. Kingsley Ward
  • Greatest Lesson: Start small. You can pick up small unit properties as you go, and then brokers will take you more seriously on the larger deals.

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Slocomb Reed: Best Ever listeners, welcome to the best real estate investing advice ever show. I'm Slocomb Reed, and today I'm joined by Will Matheson. Will is joining us from Charleston, South Carolina. He's a co-founder and managing partner at Matheson Capital, a South Carolina-based real estate investment firm focused on multifamily and student housing. Currently, they have just over $100 million in assets under management. Will, can you tell us a little bit more about your background and what you're currently focused on?

Will Matheson: Thank you for having me. As far as our background, we used to be brokers, we being my twin brother, Evan and I, who run the firm. We used to be brokers at Marcus & Millichap, but we decided we wanted to be on the ownership side. So we left brokerage, went to Columbia University's masters in real estate development programs; it's a one-year program, met a lot of great people, got a lot of great exposure... And when we were leaving that program - technically, we were still in the program at the time - we bought our first asset in January of 2018. We held that; it was a duplex, $800,000... So we started about as small as you can, and can still claim it's multifamily. It was two units, we held that for two months, bought it for 800k and sold it for 985k. The IRR looked phenomenal due to that short hold period.

Slocomb Reed: Yeah, I bet.

Will Matheson: So we did that though, and ever since then we caught the bug, so to speak, and we scaled up, bought another six unit deal in May, then another six unit, 15 unit, 24 units, 32, 32, 69 units, and we then got involved in some partnerships with some larger firms. So we were able to partner on some acquisitions of 25 million, 60 million dollars. That was at the end of 2021, beginning of 2022. By then, we'd sold off most of our smaller properties, getting an average LP IRR of 40%. And there we were, 2022, we picked up three more acquisitions, and we're under contract to close on another in the next four to five weeks before the end of June. So that's the long-winded version of saying where we are and what we're currently working on.

Slocomb Reed: That's awesome. So you're actively acquiring right now. What markets are you focused on?

Will Matheson: We're based in the Carolinas, and we primarily look in the Carolinas, but we are actively looking in Georgia, Tennessee and Virginia as well. Everything we currently own is in North Carolina. We owned some South Carolina assets previously, and we sold them... We've been trying to get back in, just haven't been able to make anything work. As far as market specifics, all the major markets - Raleigh, Charlotte, Savannah, Charleston, Augusta, Georgia, Wilmington, North Carolina, the triad etc.

Slocomb Reed: What property size are you focused on?

Will Matheson: We run a pretty decent range. Our most recent closing was 10 million. We're under contract on 16 million, and we're also under contract on a $40 million properties. I'd say that legitimately, if we're in a bidding contest, we're probably not going to win a $40 million one unless it's off market, but we run a pretty good range; primarily, we're folk thing North of 15 to 20 at this point, though.

Slocomb Reed: And you effectively named the Carolinas, of course, but then the state touching them. Are you focused on markets that you can get to in a day? Is there an operational advantage for you there? Or is it purely the numbers?

Will Matheson: It has a lot to do with geography in terms of what you could and could not tour easily. It also has to do with what we consider our ability to [unintelligible 00:05:28.27] Because I know some brokerage firms are different, but if you're dealing with a North Carolina team, at insert-a-brokerage-here, they're going to be very distinct from the Tennessee team, even if it's that same brokerage, or the Georgia team, from that same brokerage. So as soon as you go into a new state, you're really having to win over a completely new set of brokers. And I understand that we can get a kind word endorsement et cetera, et cetera. Let's just say we're talking to the Charlotte team and we try to buy a deal in Nashville... We can sure get a kind word from the Charlotte team. But the Nashville team - they have buyers, they have clients et cetera, et cetera. So we don't want to look everywhere, all at once. We want to be selective about where we're trying to expand, because of one, how hard it is to get there, but two, it's difficult to break into new markets. It just is. There was a saying in brokerage, back when I was at Marcus & Millichap, that the highest price buyers are 1031 buyers are people trying to make a splash by breaking into a new market. So we never want to overpay, so we've got to be selective.

Slocomb Reed: What is it that you're looking for in the properties that you offer on? Is it the roughly five-year hold value-add business plan? Or are you doing something else?

Will Matheson: Historically, we've been very short-term on our holds. We've really only held new properties for more than two years at this point, but that's because when we were starting out, we wanted to buy sell, buy, sell, buy, sell, build track record, and take deals full-cycle so we could show future investors a track record where they would want to invest with us, and also deliver results for our existing investors, making them happy and more likely to want to invest with us in the future. As it sits today, we are looking at your standard, let's say, three to five year holds across the portfolio, so to speak; that's what we're targeting. More of a common private equity approach as compared to what we had been doing, which was just very fast-paced.

Slocomb Reed: Is the track record building the only reason that your hold periods were so short? Or is it also because your targeted return metrics favored a shorter hold period? You made the joke about your duplex and the juicy IRR... Is your investing internal rate of return driven? If so, it would make sense to force appreciation quickly and then sell.

Will Matheson: The answer to your question, it's both for yes of them. When we were originally going out raising money -- we bought our first property when we were 25. That's not exactly a situation in which we were comfortable that a bunch of investors were gonna say "Here's $5 million. Invest it for me for the next 10 years", or anything like that. We were pitching investors on higher IRRs, because we were going to be doing short-term holds. But I would say it's really more of the case that we were pitching investors saying "Give us a shot on this. We know what we're doing. We're brokers, we have degrees, academic, and real world... Give us a shot on this; you're only dating us. We're trying to hold this for one to two years. We're not asking you to marry us for a good 5 to 10. Give us a shot on this, we'll deliver results, and if you're happy, we'll move on to the next one."

So the IRRs are higher because of what we had planned on doing, but we were also selling investors higher IRRs because that was the best way for us to raise money. And again, we didn't want people to commit to us for the next decade, we wanted to prove what we're doing.

Slocomb Reed: You're actively acquiring, you've acquired a couple of properties recently, and you're under contract for a couple more. That would increase your assets under management by over 50%, it sounds like... How has your business plan transitioned into these three to five year holds now that you have a better track record?

Will Matheson: The three to five-year hold certainly allow you to purchase, I would say, different types of assets. Previously, we had to do very significant value-add projects, where you're trying to turn things over very quickly so you can hit that strong return. Now we can afford to look at larger properties, but also more stabilized properties, something where you can build it up over time, as compared to having to get in there, renovate, renovate, renovate, sell. It gives more time to execute business plans, it allows so you don't have to rush things to the same extent.

Slocomb Reed: Is that really it, you just take the 18-month plan and stretch it over three years?

Will Matheson: Well, when you buy a 32-unit property, let's say you're gonna renovate 16 units. You can compress that into a year. But if you're buying 100 units, 150-200 units, we're not planning on renovating half of that property in that time. So the scale determines the value-add plan. So my point about the IRRs and the hold period's going hand in hand; when we started out, we were selling people we were going to be in and out in two years, it's going to show a higher IRR. We're obviously showing more conservative IRRs on that five-year hold period now, and it is going to take longer to execute the business plans, not because we're trying to take the same exact thing and stretch it out longer, it's just because of the size of the properties it will take more time. You don't want to rock the boat, upset the status quo too quickly. You're buying a nice, cash-flowing asset, no need to run it on its head.

Slocomb Reed: You're buying a nice cash-flowing asset. That leads into some answers to the question I really want to ask here, Will...

Will Matheson: Okay.

Slocomb Reed: 32-unit property, 50% apartment turned, 16 units, you can get that done in a year. 150 unit property, 50% apartment turn, why not still do it in a year? I can think of several answers to that question, I can think of reasons why you would do it in the year, but I want to hear Will Matheson and Matheson Capital's reason not to do that in a year.

Will Matheson: The risk premium is just drastically higher at that point. I would say the risk you're taking on clearing out -- you're trying to turn over 75 units in a one-year period, is really significant reputationally; it's a lot harder for properties that size as well. It's much more capital-intensive... And also, to a certain extent, when you're buying 32-unit properties for 2.2 million, you have a very quick set of leasing incentives, you're a very quick leasing cycle away from bringing that thing up from let's say 75% occupancy to 100% occupancy. That's eight leases, if you wanted to get really aggressive with your turns. That is just not the same for 160 units. It can take you quite a while to sign 40 leases, unless you want to just give them away.

So you have a little more latitude on smaller properties to be more aggressive, is what I think. Are there people out there who will go in and turn half of a 300-unit property in a year? They are. I think that's an incredibly risky approach. Now, some people went out and did that in the last five to seven years using XYZ bridge that, whatever it is. We've never been a bridge debt firm. We've always been reasonably levered. So that's just a risk I didn't want to grapple with, and I don't want to grapple with.

Slocomb Reed: Will, can you quantify that risk again for me?

Will Matheson: What, the vacancy risk?

Slocomb Reed: Yes.

Will Matheson: It's just a velocity thing. I don't have an IRR-driven number or anything along those lines... But again, I used 160 earlier, so let's stick with that number. So I brought a 32-unit property down to let's say 25% vacancy. I'd have to lease eight units to bring it back up, which even on a smaller property, it's 25%, but you can lease eight units in a reasonably short amount of time.

Slocomb Reed: Because the greater market can absorb eight units faster than it could absorb 40. Is that what you're saying?

Will Matheson: That's a much more succinct version of what I'm saying.

Slocomb Reed: I was looking for a succinct way to put that, Will, for sure. What you're saying makes a lot of sense. So you're focused on buying properties that already have day one cash flow then. Was that your focus when you were buying one to two-year holds?

Will Matheson: No, we bought one property that was meant to cash flow from the beginning. Maybe two. But when we were doing the one to two-year holds, there could be a cash flow asset, and we did make distributions, but our investors went into that knowing our goal is buy/sell a year and a day, two years get them capital gains, and we'll look to find another investment the next time.

Today we are really focused on how can we get this thing cash-flowing due to obviously the current buying environment, the current lending environment. I think cash flow is pretty important. One broker I talked to joked that he's seeing agency underwriting standards for the first time; he was here since 2019, and we adopted that as a running joke... If it doesn't underwrite to an agency standard, which seemingly nothing did in 2023 and 2022, we're gonna take a step back away from that.

Break: [00:14:26.14]

Slocomb Reed: Speaking of underwriting to an agency standard, how much of your portfolio is student housing?

Will Matheson: The majority of it, just based on size and the partners we had worked with. From an asset perspective, it's the minority of assets, from a dollar perspective it's the majority of dollars. I do like student housing a lot though, depending on which university.

Slocomb Reed: Tell us more about that.

Will Matheson: I always use it as a bit of an example... Student housing is just like multifamily, except it can be easier to operate on a monthly basis, in terms of if you have a really good school with really good supply and demand dynamics, you can almost buy a property and nothing will happen except the pre-leasing cycle. You'll be ticking the boxes, [unintelligible 00:16:03.13] in November, December, January you're vacancies pretty much stays constant. Everyone signs one-year lease. It's very straightforward, until you have that one turn schedule at the end of July, beginning of August. So that part of it's nice, but I say it depends on the school, because - to use an example, if you look on our website, the majority of our portfolio's in Boone, North Carolina [unintelligible 00:16:26.18] I like the market because it has high barriers to entry, so the supply is limited, demand is very strong... There are other schools I'd be less inclined to go after; I can't think of one off the top of my head, but if enrollment has declined in the last decade, which has happened to quite a few schools, you want to stay away from that.

If you're looking at school in a major MSA, let's say Raleigh or Atlanta, something like that, your building fundamentals might be better, but from a student housing perspective you're not only competing with let's just say Georgia Tech's on campus housing - if Georgia Tech has on campus housing; I haven't looked at Georgia Tech - you're also competing with all the other apartments in Atlanta. I should use Raleigh as an example... NC State. [unintelligible 00:17:10.26] NC State for Georgia Tech. It just depends on the school.

Slocomb Reed: That makes a lot of sense. I'm getting a feeling here for a place where I think you can add a lot of value to our listeners. Will, based on the conversation that we've had thus far, I want to ask you to boil down the Matheson method for growing into apartment investing. Let's say I and our listeners want to go from zero to 100 million in five years. What are the steps that need to be taken? And I don't mean, "Here's a book to read. Here's a coaching program." I mean, what kinds of deals should I be trying to do now, year zero? What should my deals be looking like two years from now, so that I can get to the point that I'm looking at, the deals I could be looking at five years from now, when I have a portfolio under management of $100 million? What are those steps?

Will Matheson: I really enjoy this question, because I've got a list of five things you should definitely not do, and I've got a list that I have not enumerated of things that I think you should do. So where would you like me to start?

Slocomb Reed: Well, you can give us the five things to not do really quickly, but then I want to hear steps...

Will Matheson: Okay. So starting on what not to do - don't do ground up construction. That's just a given for me; it's incredibly risky, it's incredibly time consuming. Don't start with ground up construction. So that's one thing I would not touch. Another thing I wouldn't want to do - you have to be very careful that over allocating your personal capital; you get into this business, you raise money, you want to raise money from other people... If you are buying a deal and putting all of your liquid capital into that one property, that's going to stop you from moving forward and growing your portfolio. So don't over-allocate in one deal. Have flexible debt terms; you want to be able to sell your properties. You don't want to get locked in with yield maintenance, because as you're growing - and the hard truth is you buy a 10-unit property or 20-unit property in year two, by year four you're hopefully going to have outgrown it... So you don't want to be continuing --

Slocomb Reed: I have a friend selling out of your three of yield maintenance right now.

Will Matheson: I had a property that we bought in December 2019 that we sold out of yield maintenance... It was in March of '22, so the interest rates did help us there. But it was not a pleasant experience. So don't do ground up, don't over-allocate your capital, be flexible on the debt, don't be too passive... I always tell people, when you get started, you might want to be too deferential to a property manager. You don't want to do that. It's your property more than anybody else's. It's your future on the line. You've got to be very clear about asserting yourself; don't get bulldozed over. Not to say be arrogant or anything, but it's your baby, be careful about it.

And I guess the other thing would be hold for a short-term horizon, which kind of goes hand in in hand with the debt> You do want to buy, sell, buy, sell, make your investors happy, move on to the next deal, etc. Because again, your year one acquisition, you want to be outgrowing by year three and four.

As to what to do - kind of the inverse of that coin. I always recommend, start small, don't go into a market and say "I'm gonna buy a $20 million property." All the brokers know everyone who buys $20 million properties; you're not one of them, so you're probably going to end up overpaying. I started out looking at deals on the MLS. If I could find a deal on the local MLS, I was all over it. I was actually going after a deal on realtor.com not too long ago, because it looked [unintelligible 00:20:37.19] But start small; the equity checks are smaller, the financing can be easier to get... Do the value-add, so you can do your buy, sell, buy sell. I always recommend against 1031 exchanges, because people can do them, don't get me wrong, but the dirty secret of it is if I raise a million dollars, buy a property, sell it a year later, and then I just recycle that million and a half of profit, not through 1031 or anything, but just my investors give it to me again - well, now I've done two acquisitions with the same money, but it counts as two and a half million of equity raised.

Slocomb Reed: Not to mention that there are other -- I'm trying to avoid the word loopholes; I'm not going to avoid the word loopholes. The advantages to the cost segregation of that redeployed capital are not the same as a 1031, but they give very similar tax incentives. We're recording in 2023, so they're giving 80% of the tax incentive right now. But there are other ways to reduce the tax burden from the sale of property number one if you're redeploying into property number two.

Will Matheson: And a few other points that I would make... Invest where your investors are, especially if you're starting out. We bought a lot of stuff in Charleston when we started, because a lot of our investors are based down here, and when they haven't had three successful deals with you, they're gonna want to go kick the tires, they're gonna want to go see the deal. It's a lot easier to get them to tour a property in their local market than one that's five hours away. Don't use your Gmail, get your own email address; it makes you look a little more professional. And this one people disagree with me on. So here's my hot take for you. Do not build a website when you're starting out. The brokers are all going to know that you don't have a ton of experience, because you're gonna have to tell them. But if you build a website, you're just gonna erase all doubt. So that's one of my hot takes - do not start out with a website. We were probably seven acquisitions in before we built our website.

Slocomb Reed: That makes a lot of sense. Will, are you ready for the Best Ever Lightning Round?

Will Matheson: I am. I came prepared.

Slocomb Reed: Great. Well, what is the Best Ever book you've recently read?

Will Matheson: I have a copy of it right here. So this was a gift given to me, "Letters of a businessman to his son." The son actually gave it to me. It's just all these letters a father wrote to his son, talking about various things, starting businesses, et cetera, et cetera. And my favorite message in this book - it's talking about lending, and it says if you go to a banker and he will not give you a loan on it, don't be mad at him; he might be doing you a huge favor. It is his job to deploy money. So that's probably one of my favorite takeaways that I've ever read about lending, which a lot of people are probably experiencing in this environment.

Slocomb Reed: Who's the author?

Will Matheson: It is by G. Kingsley Ward.

Slocomb Reed: And is that the man or the son?

Will Matheson: That's the man. I know the son.

Slocomb Reed: Gotcha. What is your Best Ever way to give back?

Will Matheson: I am on the board of directors for a homeless veteran shelter here in Charleston called Low Country Veterans; we're a transitional housing program, so we can house people for up to 90 or 120 days, we feed them three meals a day, give them a place to sleep... Really just give them a transitional place to come from the streets, get their feet under them, save up some money, and then transition back into normal life, get them apartments, jobs et cetera, et cetera. You learn more about that at lowcountryveterans.org.

Slocomb Reed: Nice. Will, on the properties you have acquired, what is the biggest mistake you've made, and the Best Ever lesson that resulted from it?

Will Matheson: Well, everything I said not to do, I've done at some point, except I never tried ground up development. I watched that one happen. Especially now more than ever, the debt flexibility and watching out for bad neighborhoods... We bought a property with inflexible debt; it was in a very bad neighborhood, so despite the value going up a lot during COVID, we had a lot of crime problems, high amount of our tenants left... Economic occupancy was incredibly low... We ended up selling for a profit, but between the yield maintenance and the money, we had to do to keep it afloat. It was our toughest deal to date. We were thrilled to get out of it with everyone's equity intact. It really drags down our average, but all of those lessons of what not to do we learned in our first two years, and since 2020 we've really been picking up steam.

Slocomb Reed: What is your Best Ever advice?

Will Matheson: My Best Ever advice - start small, like what we talked about earlier. It's hard to jump in and start buying $50 million deals, but you can pick up 10 units, 15 units, 20 units, and as soon as you buy those, the brokers will take you more seriously on the 50 unit deal, and then the 100 unit deal, and then the 150 unit deal.

Slocomb Reed: Where can people get in touch with you?

Will Matheson: I'm pretty easy to find on LinkedIn, Will Matheson in Charleston, and there's also our website, mathcap.com.

Slocomb Reed: Those links are in the show notes. Will, thank you. Best Ever listeners, thank you as well for tuning in. If you've gained value from this episode, please do subscribe to our show, leave us a five star review and share this episode with a friend you know we can add value to through our conversation today. Thank you, and have a Best Ever day.

Will Matheson: Thank you for having me.

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