February 27, 2024

JF3463: Ditching Student Rentals, Navigating Tenant Delinquency, and Letting Geographic Focus Drive ft. Mac Shelton




Mac Shelton — founding partner at Sweetbay Capital, which focuses on multifamily value-add deals in Virginia and the Carolinas — joins host Slocomb Reed on the Best Ever Show. In this episode, Mac discusses investing in student rentals before reading Joe Fairless’s Book — the Best Ever Apartment Syndication Book — and how the lack of scalability in student rentals led him and his partner to pivot to multifamily syndication. From niching down and investing in familiar markets to overcoming tenant delinquency, Mac shares his experience buying multifamily deals in the challenging landscape that defined 2023.

Mac Shelton | Real Estate Background

  •  Founding Partner at Sweetbay Capital

  • Portfolio:

    • 131 units with 60 more under contract
  • Based in Raleigh, NC

  • Say hi to him at


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Slocomb Reed (02:30.463)
Best ever listeners. Welcome to the best real estate investing advice ever show. I'm Slocomb Reed. Today we are joined by Mac Shelton. Mac is joining us from Raleigh, North Carolina. His company is Sweet Bay Capital. They are a value add multifamily sponsor focused on Virginia and the Carolinas. The current portfolio consists of three apartment properties, totaling 131 units. And they have another one currently under contract. Mack, can you tell us a little bit more about your background and what you're currently focused on.

Mac Shelton (03:02.894)
Sure. So I started out my career in private credit before moving to corporate private equity. So we were doing leverage buyouts of companies as opposed to real estate, but had been investing in real properties on the side along with my current business partner for a few years before sweep a closed our first deal in 2021. And as you mentioned, we currently focus on value at multifamily in Virginia and the Carolinas. Typically, we're looking at properties between 50 and 200 units. And our main criteria is sort of that we're within commuting distance, maybe half an hour of a major population center. It's got positive demographic trends and typically are shooting for at least an 8% stabilized yield on cost.

Slocomb Reed (04:03.391)
Given those metrics, Mac, well, let me ask, you're the founding partner of Sweet Bay Capital. Is that a general partnership with a handful of members or are you typically the entire GP?

Mac Shelton (04:16.942)
So right now there's two partners in SweepA, myself and my co-founder Dr. Thompson. And we're the only GPs in the group. We raise most of our equity from LPs that come from a network we've built up over the years, but we're the sole GPs right now.

Slocomb Reed (04:38.179)
What is your specialty within Sweet Bay? What are your primary responsibilities?

Mac Shelton (04:44.318)
Yeah, so we split things up pretty evenly. I think the biggest difference between my focus and Tucker's is he's typically taking lead on sourcing new deals in Virginia Whereas I usually take lead on the Carolinas. He's from Richmond. I'm from Raleigh. We you know have our networks in those states, but We're both underwriting deals. We're both raising capital and we're Both heavily involved in the day-to-day operations of all our properties

Slocomb Reed (05:19.967)
Gotcha, so most of the responsibilities of a general partnership, the two of you are doing in tandem, just with your partner more focused on Virginia and you focused more on North Carolina with acquisitions.

Mac Shelton (05:32.75)
That's right. We look at South Carolina as well. We our first deal was in South Carolina, but we haven't closed anything there in the last couple of years. We're hoping that 2024 is the year for the next one.

Slocomb Reed (05:45.215)
There are quite a few markets in those three states. I guess I have kind of two questions here. Are there specific markets within those states that you focus on and why is it that you picked all of, or why is it that you picked those three states?

Mac Shelton (06:03.35)
Sure. So I think I'll start with the second question. We really picked those three states after our first deal was a student rental investment, right? And we had invested in student rentals on the side for years before that and had done really well in that space. So when we initially got started, our thought was to look for more student rentals. We quickly realized that the one student rental deal that we did close with sweep a, uh, it was proprietary, it was at a great price.

It was the kind of deal that you can't see enough of to build a sustainable business off of. And for us to build a pipeline of student rentals was gonna require us to basically look across the entire country, which we tried for a while, eventually realized it didn't really make sense and decided we needed to focus geographically. And actually part of that was summer of 2022, we read the best ever apartment syndication book, the Joe Fairless book. And that was pretty instrumental in sort of shaping some of the key strategy tenants that we came to, but one of those was geographic focus. And we're fortunate to be from areas of the country that have experienced, like we were talking about before the podcast, right? Some incredible growth over the last 10, 20 years and are continuing to see that. And so we lined up kind of like the the best ever book recommends, right?

We lined up probably 40 markets that we thought we might be interested in across the country. Most of them were located in the Southeast and compared lots of different metrics, whether it was vacancy, new supply, population growth, job growth, all those sorts of things. And the end result of that was a list of four or five. And all but one of those was in Virginia and the Carolinas. So we decided, okay, let's focus on these three states where we have a network already, we know the markets and we can get really anywhere in those three states by car and back in a day. And that's kind of what led us to focus on those geographies.

Slocomb Reed (08:15.659)
That makes sense. Three deals currently under management. Do you have you all gone full cycle yet?

Mac Shelton (08:26.686)
We have on our first investment, so it's not in the portfolio today, obviously, right, because we've been full cycle. But our first deal, we closed in October of 2021. This was the student rental deal. It was initially 11 units. We ended up adding two more throughout the whole period, but we held it for 15 months, ended up being a home run deal that really launched Sweep A and allowed us to keep fundraising and growing. We generated a 77% IRR, basically double the equity in 15 months.

And the common, we closed that in January, we closed that exit in January last year and then closed on two of the three properties that we own today landed in Briskwood the following month and 1031 proceeds into those properties. And that was really the

Slocomb Reed (09:14.803)
The entire, the entire syndication 1031 over. Nice.

Mac Shelton (09:19.53)
Yep. We had to get unanimous. Fortunately, there weren't that many investors in that deal, but we rolled all those proceeds over and raised about another million and a half of equity to buy those 41 units, Langdon and Briskwood. And that was really the point where we decided, okay, we can build a viable business out of this. Let's go full time and make this our focus.

Slocomb Reed (09:44.231)
Nice. The properties that you have currently now that you're not doing, um, student rentals anymore - when did you acquire them?

Mac Shelton (09:56.81)
So first I just say we would still do student rentals. We just haven't found one yet that's really worked for us. But we bought Langdon Square and Briskwood Place together in February last year. So we've owned it for just under a year now. And Mount Pleasant Villas, which is 90 units, also at Roanoke, Virginia, we acquired in December.

Slocomb Reed (10:25.087)
Gotcha. You know, there have been a lot of apartment syndicators, frankly, who have felt like 2023 was just a bad time to buy, especially with the debt issues that we've been facing kind of felt like there was a bit of a relief with it. Possibly with your December, 2023 deal.

Couple of questions here. The first one I should ask though is what kind of business plan and returns were you projecting when you acquire these three properties in 2023?

Mac Shelton (11:01.454)
Sure. So our typical minimum, we market net returns to our investors, right? So the return they're actually going to see after fees and promoter, anything that we would take out. We shoot for a bare minimum 14% net IRR and typically at least 6% average net cash yields over the life of a deal. Our typical hold period is three to seven years.

And both of those were in that ballpark. I think Langdon and Briscoe was 14.4 and Mount Pleasant-Villes was like 15.6. But, you know, generally in that mid-teens IRR range. And, in both cases, it was very apparent that there was a ton of upside on rents, especially in the amount, they're really very different deals in the sense that Landon and Briskwood were underutilized in the sense that they haven't pushed, they hadn't pushed rents in a very long time, but it was 100% occupied and they've been doing well with collections. There weren't delinquency issues. It was a really easy to manage tenant base.

Mount Pleasant had less rent upside, still very substantial, but not quite as much as Langdon and Rosewood. But they were, I think, 89% occupied when we went under contract and collections were an issue. They had no onsite staff for a 90 unit property, which didn't make sense, right? And the tenant base was challenging, still is challenging. We're working through that now. But in both cases, the business plan was to go in.

Start with exterior renovations and then move into unit renovations. And, you know, we formulate pretty detailed budgets for each unit and every property that we buy. We get hard quotes from contractors for all the work that's to be done before closing. And we rely on our own research and rent comps to figure out what, you know, rents are achievable once we've done those renovations, but we also lean heavily on third-party property managers in a lot of cases.

We actually in for landing in risk would, we didn't really believe our property manager when they told us what they thought they could get for rents. And I think we under wrote like a hundred dollars a month less than they told us was achievable. It turns out they were right. And we're, we're well ahead of what we initially under wrote there.

Slocomb Reed (13:32.363)
Nice. So what have the biggest challenges or hurdles been for you with these properties in the almost year and the last few months that you've owned them?

Mac Shelton (13:45.878)
So it varies by property for sure. I would say.

Mount Pleasant right now, it's the tenant base. We've made a lot of progress on delinquency. I think we had 13 tenants that were at least $100 a month behind when we closed and we're at three or four now. So that's moving in the right direction, but we're still working on filling the property with tenants that the type of tenant that pays our market rent wants to live with, right? So that's been a bit of a challenge and it will be until we get through all 90 units there. Landon and Briskwood, honestly, it's been a lot easier than we expected.

I mean, we did have, we had some turnover early on where we had a part-time property manager that basically realized that he wasn't gonna have the bandwidth that he thought, but we ended up swapping him out and the guy we've got now is awesome. And we were really pleasantly surprised there with the renewals that we got. We initially budgeted, as we almost always do, renovating all.

Slocomb Reed (14:58.227)
Hey, Mac, can you tell us a little bit more about that on-site personnel and why you needed to change them over? How did you identify that?

Mac Shelton (15:06.423)
Yeah, so. The when we toured the problem we did our unit walks right of all 90 units We talked to a lot of tenants and we could see evidence of trying to be PC here, but just behaviors that were not conducive to a, you know, a safe and comfortable environment for tenants, right? The kind of thing that would not happen if you had somebody on site enforcing the rules.

You know, there's, there was graffiti in the laundromats, for example, there was drug use going on. Um, people living in units that weren't on the leases that shouldn't be there. And. Include also, you know, a big one is just delinquency, right? People not paying their rents on time.

And not having someone on site at a property this size with that type of tenant base, I'm surprised it went as well as it did for them. We've made a lot of progress already just having somebody on site for two months, but it's just at a property that size, you really have somebody that's on site that can answer any questions and make sure the rules are being enforced.

We also heard from some of the tenants that there was previously on-site management. And since they had removed on-site management, things had really gone downhill. So that was an obvious indicator that it would have made a lot more sense to have somebody there.

Slocomb Reed (16:49.119)
That makes sense. Thinking about the value that we can offer the best ever listeners, Mac. Unfortunately, as fun as it is to talk about everything going according to plan, it's, um, our listeners get more out of, uh, learning when things have gone, uh, the opposite, not according to plan and figuring out how they can adapt to similar circumstances. So why don't you tell us a little bit more about the student rental, uh, property.

You said you, um, you decided to get out of that niche just because it wouldn't scale, but also you said that you, you just kind of threw out there that you added two units and it went from 11 to 13. Can you tell us about that?

Mac Shelton (17:40.566)
Sure, so this one was a little bit complicated. I didn't want to bore you with all the details, but basically we bought 11 units within a built-to-rank community of about 200 units where the developers that built the community didn't have the liquidity initially to finish the entire project before selling because it was like their second project. So what they did was sell these units off individually.

A lot of the buyers were parents of students that went to University of South Carolina. There were also some investors. And I kind of stumbled across this development in 2019, or I guess 2018. And basically I found a three veteran that was, I think listed for 130 and was running for like 1600. It didn't seem right. So I called the broker and he said basically that because of the appraisals where appraisers were only looking at comps within the community, it was difficult for those prices to continue going up. And as a result, the rents continued to grow. 

They were 100% occupied for almost 10 straight years. And the values that people were paying for these just didn't jive with the VNOI they could generate.

But he told me the five bedrooms were even better because the square footage wasn't that much bigger than the threes and the appraisals were all based on square footage, but they had two extra bedrooms and they were all running out by the bedroom, right? So anyway, we, Tucker and I bought five of those as personal investments over the following couple of years. And that ultimately led to an opportunity to buy 11 of them from the developers that built them. And these guys have killed it since this project, right? So they really didn't care about these.

Slocomb Reed (19:28.199)
Is that 11 single-family homes?

Mac Shelton (19:30.91)
Yeah, basically. I mean, it runs like an apartment complex and they've got common amenities and things like that. There's an onsite manager, but they look like single family homes. They've all got small yards, porches, that sort of thing. So we bought 11 and within a month of closing, we had sold the only two bedroom in that portfolio, which was the smallest and least profitable unit for I think about 25% more than we paid for it. We actually had it under contract before we closed on the deal.

And we quickly 1031 those proceeds into a five bedroom, which, you know, had a lot more in all I do it. And we did the same thing moving from a three to a four a couple of months later. Um, so that took the total up to 13.

Slocomb Reed (20:21.823)

I believe you mentioned this already, but with your current apartment portfolio, uh, do you have one manager for all three properties? Uh, or are you working with three different managers?

Mac Shelton (21:06.198)
We have one management company that handles our current portfolio because it's all in the same market. So all 131 of those units are in Roanoke, Virginia. And we've been working with Greenbrier management. It does a great job up there. And there's, there's one community manager that currently covers all 131 units. I don't think that would have been doable if we were implementing our value add plans at the same time, Langdon and Briskwood were basically done, you know, with the renovations and turnover now. So they are a lot less time intensive than non-pleasant fellows. Um, but yeah, so we just have the one manager there and then we'll be working with a different property management company for the North Carolina deal. We're under contract.

Slocomb Reed (22:00.083)
Gotcha. Well, Mac, are you ready for the best ever lightning round?

Mac Shelton (22:03.55)

Slocomb Reed (22:05.447)
What is the best ever book that you recently read?

Mac Shelton (22:09.954)
So I mentioned the best ever apartment syndication book. I feel like I'd be remiss not to on this podcast, but it really was instrumental in getting us started and kind of giving us a playbook for how to get something like this off the ground.

A book that I've recently read though that has been very relevant to us right now. I actually reread Good to Great by Jim Collins. We're at a point now where we're thinking about potentially making our first hire and the sort of strategy-oriented discussion and advice in that book is really helpful, I think, for businesses at that stage of growth. One thing they talk about is focusing on first who and then what, right? Figuring out who you're going to do, whatever it is you plan on doing with before you nail down all the specifics. And that's something that really resonated with me, that we're taking into account with considering our first hire.

Slocomb Reed (23:08.691)
What is your best ever way to give back?

Mac Shelton (23:11.99)
So I've been fortunate to learn from a lot of other investors, even starting as far back as 2017 with the first property I ever bought, that I've kind of been there and done that. And so we really try to do the same thing and help out new investors, whether it's advice or we've looked into co-GP opportunities, guaranteeing loans, that sort of thing to help people get started. But that's something that has been very helpful for us. So we try to give back whenever we have a chance to do that.

Slocomb Reed (23:50.739)
Mac on the properties that you and your partner have acquired. What is the biggest mistake you've made and the best ever lesson that resulted from it.

Mac Shelton (24:02.67)
That's a great question. I'm already a second to think about that one. So, I'm going to go ahead and start with the question.

Mac Shelton (25:20.718)
This isn't really directly related to the properties we own, but I really think the biggest mistakes that we've made and that I can remember making throughout the time I've been investing in real estate is it took us longer than it needed to, to get to where we are today. Because we weren't willing to kind of test the limits of what we could fundraise, you know, what we can manage until pretty far along in our, our time doing this.

I mean, I've been, you know, buying rental properties now for seven or eight years. And, uh, we, we could have done this a lot earlier. I think if we had had a better understanding of the network that got available to us. And, you know, just the idea that if you have a deal that, that makes sense and is compelling, I don't want to say you can always find the money because it depends on a lot of different factors, but if you have a network and you're reputable and people trust you and you've got a deal that is exciting, you can probably raise more money than you think you can.

So don't wait.

Slocomb Reed (26:33.107)
Gotcha. That works better as best-seller advice than it does as a mistake that our audience can learn from.

Mac Shelton (26:45.546)
You know, we're early on with Mount Pleasant Villas. We've been fortunate that the three deals that we've owned for more than two months so far have all gone really well.

I think one mistake that I think we made, especially with Landon and Briskwood, and I don't know that we could have known this in hindsight, but our exit cap rate, right? We spent a lot of time trying to figure out how to underwrite exit cap rates because if you're IRR driven investors like we are, it's one of the most important inputs to your underwriting. And we assumed a six and a half exit cap on that one when we closed on it.

And in hindsight, that was too low, right? We'd been told by brokers for two years at that point that our exit gaps were too high, we were never gonna buy anything. Well, they weren't, they were too low. And right now I think those properties are probably closer to like a low sevens cap rate, which makes a big difference, right? I mean, we're already ahead of the NOI that we projected to be at when we sold these properties in 2027.

But because we were basically wrong on that exit cap rate, the value we could get for them right now is not what we hope it will be down the road and we modeled for 2027, right? So just having a good, as far as like what, how that could be translated to advice for other investors, don't just look at a costar report and figure out what the consensus is around trends for cap rates. Think about the buyer's perspective when you go to exit, what are they gonna be looking for and why would they buy at the projected exit value that you got in your underwriting, right? And if you can't justify somebody paying that price, then you should probably rethink it.

Slocomb Reed (28:43.611)
Last question, Mac, where can people reach out to you?

Mac Shelton (28:47.49)
So you can check out our website. We're also on LinkedIn at Sweet Bay Capital. And people can feel free to email me at macshelton at sweetbaycapital.com.

Slocomb Reed (29:03.443)
Those links are in the show notes. Mac, 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 that you know we can add value to through our conversation today. Thank you and have a best ever day.

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