Why is Value-Add Multi-Family Acquisition So Hard in the Southeast?

[Levi Bennett]

Since I get almost daily messages regarding small multi-family opportunities in Charlotte and find myself repeating much of the same information on the phone during intro calls, I figured I would go ahead and put my experience into writing for others who are doing research. Particularly those from out of state and not familiar with the Charlotte (or Southeast) market. I also would love to hear (read?) feedback from successful small Multi-Family investors in the Charlotte MSA and Southeast to gain your thoughts, experience, and outlook on the current and future market for this kind of product.

First, allow me to define small value-add Multi-family, I speak with a broad brush.. anything legally zoned duplex up to 50 units (I'm excluding Class A-B big MF) 

To set some context, most of the investors that reach out to me are not from Charlotte, or are not intimately familiar with the market here. So this post is to be mainly geared toward to help set expectations for out-of-state investors, and I'm hoping for some solid contributions from people who are actively (or recently) involved in successful acquisition/disposition of smaller MF in the Charlotte MSA (broker, owner, lender.. etc). 

My goal here is to keep it real. 

Many people have read books, or taken a class or signed up for a guru or coach on the benefits of MF investments, and certainly is evidenced by the recent rise of syndications in the MF space in the last few years. With this knowledge, it seems as though out-of-state investors are analyzing markets that have great job growth, high appreciation, low unemployment, low taxes, but are still "affordable" compared to standards in more expensive parts of the country. Most investors I talk to who find me here on BP are from New York/New Jersey or California or the Middle East. According to their research online, Charlotte ends up appearing fundamentally as an affordable option with great fundamentals. Right? 

Here's the problem: Inventory. Or, more specifically, density.  

Smaller multi-family is significantly more common in the Northeast, Midwest, and Western cities who had their economic boom in the roaring 1920s-60s and thus, tons of high density zoning was developed across the country (but not the South). This perception in the investment community is often with the presumption that cities like Charlotte, Jacksonville, Orlando, Tampa, Atlanta, etc, are all cities similar in population to other cities across the US.. but if the populations are comparable, what is the catch? The catch is that the populations are all recent.. recent as in, massive booms in the last 40 years when suburbs ruled the development world, and density didn't necessarily increase except in the most urban and highly commercialized sections of the city (city centers primarily, which is mostly class-A prime real estate). 

So where does this leave us? Thousands of investors nationally and internationally, not from the South, see the growth, economic advancement, and solid fundamentals, and see the opportunity in Multi-Family without considering inventory available in these cities. This has created, since about 2016, an asset class of very limited MF properties in the Southeast that trade at unreal cap rates. Value-add opportunities in the form of Class D, C and B properties is one of the most desirable and heavily marketed asset classes in the country, and few people talk about this (which I felt the need to post this).

I have brokered several small multifamily properties in the Southeast. The reason I pulled back from my marketing to owners of these asset types, was when I began hearing that they were getting anywhere from 3-10 offers per week from would-be investors.. and that was in 2017. It has not slowed down. Many owners have received thousands of offers for their small MF properties in the course of a year. 

I'm not saying it's impossible to get small, value-add MF in the Southeast, but I am saying that most people I talk to have no idea what they're up against and often have unrealistic expectations of what they can buy here for the money. From an ROI perspective, there is much more money to be made in development, or investing in the booming short-term rental market in the Southeast where laws are significantly less restrictive (particularly in North Carolina, where municipal permitting is illegal). This is where my niche has evolved. MF is still, and will always be very attractive, but most trade off-market and requires a huge time investment to build relationships with current owners. Most everything "on-market" is priced at an impossibly low cap rate and doesn't make sense for the average investor. 

This is not to discourage the determined investor, but I only think it's fair that people realize the competition in our market for this asset type. I also want to suggest other ways of getting the 1% rule in the South (which is still achievable), and set some expectations for this interesting market and economy that we all find ourselves in. 

I would love to hear the thoughts and comments of people investing in real estate in the Southeast and get some other opinions! Cheers.