The non-owner occupied properties are a huge market across the United States. It provides investors the power to acquire a property and rehab it back to livable standards. Jen Du Plessis interviews Jeffrey Tesch, the CEO of RCN Capital, about this great niche. RCN Capital is a company that does small commercial loans to fund the purchase and rehab of this type of residential and commercial properties. Covering the basics, Jeffrey starts by talking about who fits this market and who does not in relation to the mortgage lender. He taps into the best way for loan officers to transition and bring this product up and shares the reasons why people should take advantage of this market space in the coming 2020. Offering help to those who want to dive into non-owner occupied properties, Jeffrey also talks about the services RCN Capital have to offer and more.
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Diversifying Your Business Through Non-Owner Occupied Properties With Jeffrey Tesch
Chat With RCN Capital CEO
I am excited to have Jeffrey Tesch with us. He is the CEO of RCN Capital and it’s a company that I’ve had some affiliation with over the last several years. As I’ve moved from company to company and then subsequently moved out of lending altogether as an originator of no longer doing that. RCN does small commercial loans anywhere from $50,000 to $2.5 million to fund the purchase and rehab of non-owner occupied residential and commercial properties, provide bridge loans and issue real estate-backed lines of credit.
These are non-owner occupied only, no owner-occupied whatsoever and therefore are not subject to all of the crazy mess that we’re all involved in with QM and non-QM loans. There’s a lot of flexibility in these types of loans. If your niche is in investors, which is what my niche was and how I originally found our RCN years ago in Vegas. If that’s your niche and you’re tapped out at DTI, a number of properties financed or assets available, for every property that’s finance or credit issues or any of that, this is the place to go. This is where you need to be maneuvering. This is a great niche to be in. It’s a huge market across the United States and you’re going to tell us about that too, Jeff, about how we aren’t bound to our own city or our own licensing. Thank you so much for taking the time to join us and welcome to our show.
Jen, thank you so much. It’s a pleasure to be here. Thank you for all the kind words. We do go back quite a ways. It’s been great to see the evolution of your career. Some of the different educational things that you’ve been doing are tremendous.
Let’s jump right in and talk about who this is for and who this is not for as it relates to the mortgage lender, then we’ll go into the same question for the consumer.
A high-level view of our company is we started our company back in 2010 as a private family office that was going to deploy capital into the non-owner occupied residential space. That means people who were buying distressed assets, which there was a tremendous amount as we all know, coming out of the great recession. There was an amazing opportunity for investors to buy properties all across the United States, rehab them and put them back into the marketplace for families to live in. Because this is a very specialized loan, we thought it would be a great time to start a company focused on just that, which is a short term, twelve months, interest only bridge loan to give investors the power to not only acquire the property, but also provide the capital they need to take that property back up to livable standards and put it back into the marketplace. For the independent professionals out there, the mortgage people, this was an opportunity for people to begin originating product that was well outside the traditional residential guidelines that we’re all accustomed to. That’s how we got started in a very organic fashion.
I love getting the emails from you about sharing what the financing is that you’ve done over the last few months or so. I love looking at those because it opens up many opportunities. It helps more and more families, especially investors, to create more wealth for themselves. Mortgage professionals, let’s talk about that. This is specifically for mortgage brokerage firms and the employees that work there.2020 is the year to diversify your business with investor residential and commercial loans Click To Tweet
Many people have seen me all across the country. Jen, our paths cross all the time at the various mortgage origination conferences from coast to coast. I’ll take us all back to how we thought about building the company. When we were building out the company starting back in 2010, we had a choice. That choice was, are we going to hire loan officers and deposit them all across the country or are we going to empower the independent brokers that were already in place in every community across the United States? As you can probably guess, we chose the latter, which was to build our lending programs so that independent originators could easily sell these products to their customers and be compensated quite handsomely for doing it.
When we talk about them so that we’re clear on this, if you work for a bank or an independent mortgage lender, this is a product that you’d have to go to your lender and figure out whether or not they’d want to participate in this. You could call Jeff and find out ways that perhaps you could participate as an independent. Generally, this is for mortgage brokers and their employees only. I want to make sure we get that clear. It’s a great opportunity if you can make this happen. It’s a wonderful opportunity. When we talk about offering this product, as a residential loan officer, I know that this is something that you’ve had to train a lot of people on.
The mindset of a residential loan officer reminds me of the old days because I’ve been in the business forever, way back in the ‘80s when realtors said no to VA loans because they didn’t understand them. Someone said no to a NegAm loan because they didn’t understand it. Even now, perhaps someone saying to an adjustable rate because they don’t understand it. To put those walls downs for the readers, what are you finding is the best way for loan officers to transition and bring this product up? Is it a last resort bring up? Is it something where someone has to make a conscious decision to market this so that they can increase their business? Is it a combination of both?
The latter is 100% correct. We find independent mortgage brokers all across the country that are very busy with the low-interest rates on acquisitions, especially on the refis over the last few months. As rates have come down to numbers that we haven’t seen in 30 or 40 years, everybody got very busy and had very full pipelines. However, as 2020 comes along, it’s extremely important that people think about adding other products to their mix to help diversify what they are selling in their communities. What I like to talk about a lot when I’m going around touring the nation and educating the independent brokers is there is no reason for your company and you as an individual loan officer to ever say no to a non-owner occupied commercial loan.
The reason for that is it is super easy to get signed up with a company such as RCN Capital, understand our product mix, get the introductions here internally, and then when those opportunities come along, you will immediately have the ability to be able to get those deals funded. To answer your question directly, the time is now to add this product to your mix, whether or not you choose to market it. That’s a business decision on your part. We have full white-label capabilities to be able to meet up with the local loan officers, give them all the materials they need to market it, but that’s not needed out of the gate. What is needed is the initial education, getting you or your company signed up, so that when these opportunities come along in your local communities, you can take advantage of them.
I think that’s key. I’ve been talking about short-term gain for long-term paying. A few years ago we were in long-term paying because everyone was saying, “I’m not funding anything. I don’t have any business. I don’t know what to do.” I’ve run across people that have said, “I’m having my best year ever.” I’m happy for them and I’m pleased but it’s temporary. It’s only because the market is in our favor. These are great fundamentals and foundational products and services that you can offer that differentiate you and separate you in the marketplace. That is one of the things that we are constantly talking about and there’s only a handful of people that take advantage of making themselves different and shining a light on what their capabilities are.
I love that you said that. It’s a class that I’ve given too. I can’t even think of the name of it, but it was all about investors. I literally went from the wannabe investor who’s never had an investment property and how the mindset has to change because it’s not the emotional connection. It’s all about the numbers all the way to you and other companies that do this service in what I would call a world that most loan officers don’t even know exist. I play in that market because I do a lot of wraps in subject-to and that’s how I buy my properties. I was already in this market and it was easy for me to make the transition, but I do agree that it’s a mindset shift here for everybody. Why do you think 2020 is going to be instrumental? We know that interest rates are probably going to drop a little bit more, so it’s still going to continue. Why do you think this is the time to be introducing this type of product when you think about 2020 and beyond?
What I’ve found, and this goes for any business career that you’re in, whether it be mortgages, real estate or selling sandwiches on main street somewhere is that it is much easier to diversify your product offering when times are good. When times are good, your bank account is flushed with cash. You’re thinking about how much longer this is going to last and enjoying the good times. You’re not worried about how am I going to pay my staff or do I have to make layoffs? These are all horrible decisions that are made when you’re wondering where the next wave of volume is going to come from. What I often say in my various contacts with brokers across the country is please take advantage of the good times to think about how you’re going to set yourself up for success when this refi boom ends. I believe the purchase market is going to stay strong in 2020 and beyond.
There are generally not enough single-family houses in the United States in most MFAs for the demand that is there. The reality is the refi boom is what’s powering a lot of these over the top earnings with independent professionals. It is time to think about non-owner occupied origination and adding it to your product mix. In the third quarter of 2019, all the single-family 1 to 4 transactions, almost under 18% of all the transactions in the United States were for some commercial purpose. What I mean by that is it could be the short-term fix and flip, meaning the twelve-month buy, renovate and sell, but also in the area that’s growing tremendously. I can’t even believe how quick it’s growing. People are beginning to aggregate single-family 1 to 4 homes for long-term rental income.
Here in RCN, 35% of all our originations were for long-term single-family non-owner occupied rental debt. The market is really exploding. It is time for the local originators around the country to add these products to your mix and take advantage of it. If you think about it, it’s 18%. That’s almost 1/5 of all the transactions in the United States. If you’re not originating non-owner occupied commercial, you are throwing these away. The time for that to end is now. It is time to be thinking about how I can begin capitalizing on that growing marketplace.
Speaking of stats, let’s talk a little bit more about stats as it relates to that. Why is it that you’re getting so much of this business? We talked about 35% of your business came in as long-term. The average loan officer is saying, “If it’s 1 to 4, why aren’t they getting just a regular loan?” What are some of the stats as to why people are coming into this market space? If rates are that low, why are the stats like this for the buy and holds?
Non-owner occupied capital marketplace has evolved. What I mean by non-owner occupied capital marketplace is when we started our company back in 2010, I mentioned family office. What family office means is we put together our own cash, significant amounts of equity and began lending it out as our own money. There was no leverage, but as interest rates have slowly declined since the crash, the capital marketplace has found commercial non-owner occupied lending to be a very attractive place to begin deploying significant amounts of cash.It is much easier to diversify your product offering when times are good. Click To Tweet
What we’ve done at RCN is we’ve used our extremely solid cash position being a family office and began partnering with Capital Partners out of New York, mostly hedge funds, to drive down our cost of capital, especially on the 30-year, non-owner occupied long-term rental to the point where we are competitive with local lenders. I never liked to talk about rates and points as the point of why you need to do something, but the fact is we’re putting out capital anywhere between 4.75% and 5.25%. locking those rates in for 30 years. There are no five-year arms or anything like that. You’re locking in at these crazy low rates, which 4.75% on a 30-year fixed for a rental is tremendous.
They’re not going through the calls for underwriting.
That’s exactly right. To answer your question, why do people wouldn’t go to a local community bank for the 30-year? There are a couple of reasons. One is our ease of underwriting. There’s no personal debt to income for the long-term rental. Meaning I don’t care how much you made or lost on your 1040. Mainly because we don’t collect it. What we are concerned with is your credit history. Are you paying your bills on time and how well is that single-family home going to cashflow once you get a renter in there? That’s what we’re concerned about. It makes the process so much easier than going to a traditional bank.
That addresses the primary focus on the consumer. I want to talk about that a little bit more. You’re doing buy and hold. For those that don’t understand what that means, they’re buying investment property and holding it for however period of time if they want to hold the property to grow well, to pay off the debt, to have equity, to have cashflow, to leave it for their family members, whatever their case may be. There’s also the fix and flip or rehab, renovation, that type of thing. Think about if you’re in that space of renovation loans with Fannie or with FHA, this is a great opportunity for you to piggyback on something you’re already familiar with and that’s doing the same type of thing but on the investor side with the fix and flips. What else are you doing besides that? You mentioned something about bridge loans but help us understand how we could do bridge loans with you as well, maybe an investor or maybe an owner-occupied.
We are a non-owner occupied lender. One of the reasons many independent professionals love to add this product to their mix is it frees them from all of the things that we’ve been implemented, Dodd-Frank and all the rest of it. It simply does not apply to commercial lending. It’s not because the government thinks what we do isn’t important. The way it’s looked at is it’s one business entity dealing with another business and its entity. It is two businesses acquiring debt for a business purpose. For us, that is what differentiates us from the traditional residential mortgage place. To answer your question on how we add different products, the fix and flip is the bread and butter. It still is the majority of what we do. The long-term rental is growing in popularity and wherever you’re from, I don’t care if it’s from Sacramento, California, Key West, Florida, Spokane, Washington, there are investors aggregating single-family homes.
To add another layer to this, what about just straight up bridge loans for investors? We have found that many investors acquired properties during the crash, shortly after the crash and have seen a tremendous bump in the equity that they have available in those homes. Some of the people have paid their debt down to zero. Other people had their debt paid down to a very minimal portion in comparison to how much equity is available in the property. What we do is we offer bridge loans to people who already owned properties and are looking to take cash out of those properties and move them into another transaction. It could be buying more properties or investing in a family business. If that opportunity comes along where investors own properties and they’re looking to take some equity out and move on to another opportunity, a straight-up bridge loan is certainly an opportunity that we’ve been able to capitalize in a growing area.
How long is the bridge loan?
Typically, the bridge loan is going to be a short 12 to 24 months loan. What it’s doing is providing cash to someone to take advantage of that opportunity that they see. It could be rehabbing another property. If they’re cash poor but equity rich, it gives them the ability to be able to capitalize on that next opportunity without having cash in the bank.
That’s without having to eliminate that particular property. When it comes around for a due time, either they’ll sell that property and take whatever cash out or they would have already fixed and flipped another property and paid that off. As we talked about commercial and not to get too technical in this because commercial is a whole different thing. I used to do a lot of B&Bs years ago. What are you seeing in the commercial space that you are doing? Are you seeing small little anchored malls? Are you seeing 7 to 9-unit multifamily? What are you seeing mostly in what your definition of commercial is?
I can only speak to what we’re lending on, which is we are aggressively lending on multifamily repositioning loans. Once again, all across the country, there are many small to mid-size apartment buildings. They were built in the ‘60s, ‘70s and ‘80s. Many of these are the existing owners and they have a tremendous amount of units that haven’t been rehabbed and have gone vacant. They could be retiring, cashing out of the property. What we’re dealing with was investors coming to us saying, “I’ve got this twenty-unit apartment building somewhere in the suburb or downtown of any city in America.” I want to buy it. I want to convert those units that are dated to standards. I need an acquisition loan. I need bridge lending to rehab those units and then I will take this loan out long-term.” What you’re looking for there is a 24-month multifamily bridge loan that looks very much like the single-family 1 to 4 fix and flip loan where we’re giving acquisition dollars as well as those rehab dollars to be able to bring those units up to standard. We’re seeing a lot of that, Jen.
In a traditional commercial loan from a local bank, there’s going to be a review of everybody’s documentation; their credit, P and L, balance sheet, a whole renew usually in that 3 to 5 years span. What are you doing on those types? Are you following suit with that and re-introducing and making sure it’s still on track? Are you letting that loan sit there for the 30 years or whatever term they’ve gotten?
It’s dividing it up into two areas. One is the short-term fix flip, which we’ll call bridge lending and then the long-term 30-year rental. On the fix and flip, we are super involved with these properties. We service all of these loans in-house. We don’t sell off the servicing to another lender on the short-term bridge. What it means is if you buy a property, I’m going to put $50,000 into it and I think I’m going to be able to sell it for $250,000. We fund that loan and then immediately you go to work fixing that property. What you’re going to do is we fund 100% of the draws. What you’ll do is as each segment that you determined is a good time for you to request more money because we’re only charging interest on money that is dispersed. We’re not charging full boat at closing.If you make yourself the expert, the business will follow. Click To Tweet
You can control the amount of money that you need. You will reach out to our servicing department and say, “I’ve finished the kitchen. Can you please send out an inspector to inspect this property? I’m going to need a draw for $10,000” We send out the money. We send out our inspector. They review and then we will immediately wire that money within 72 hours to your account. You control the process of that fix and flip. Switching gears to the 30-year, it is a straight-up rental loan where there is no rehab going on. All we’re concerned with is that property is tended up at closing and then once that lease is in place, we securitize these loans and they get bundled into the secondary market and then long-term servicing will take over on those properties.
To be clear, there’s no looking at everything every 3 to 5 years. People need to understand that’s what happens with traditional commercial loans. The bank is wanting to refresh and re-look at everything every 3 to 5 years because they have these clauses on them. Even though they call it a long-term, they have these 3 to 5 years review. That’s a huge benefit as well. I want to switch gears quickly as we finish up our time and that is if a loan officer is reading this, they’re going to have to go to their broker manager, get signed up and all of that. If they work for a bank, they can give you a call and find out what they can do.
I want to know what would be the next step for someone to introduce this to their realtor-base. I know that when I introduced it to my realtor-base, one of the challenges I had is that realtors come around and they are like, “I’m a realtor. I’m a real estate agent.” I go, “How come you’re not doing real estate on every real estate? Why are you only doing residential? If you could do more, wouldn’t you want to do more and have more opportunities?” It was a little bit of a challenge because like residential loan officers, we have this mindset of QM, who’s got to fit by the rules? All of this is a little new to some people. They’re saying, “This is even out there.” How would a loan officer or what are you guiding your loan officers or having your staff do to guide loan officers to be introducing this to make that mark in the business and to the real estate agents that they’re working with as a means to help their business grow?
Realtors are a great point. We were out in San Francisco at the National Association of Realtors Annual Convention. What we do with the realtors is we try to educate the realtors as to say why would you limit yourself to owner-occupied? You should be seeking out investors in your community and saying, “I have a pipeline of deals that get listed with me and my company. I want you to be able to work with me to find that end buyer that will absolutely take this distressed asset or rental and put it into the community.” In general, if you sat down at your computer at home and Google in your community investment clubs, there are many investment clubs in every corner of our country. If the realtor or mortgage professional engages with these local mortgage origination investment clubs, you will be amazed at what you will find is going on in your community. One of the largest is known as REIA, Real Estate Investment Association. Google that. There are chapters all over the country.
They have a national cruise too. I’ve been on it. They take all the national REIA on a big cruise. They have lots of speakers and lots of deals are getting done. The money is flowing back and forth. It’s exciting. REIA is definitely one of the best ones around. I would caution everybody, there are a lot of investor wannabes. You have to grab the bull by the horns and be the leader in the relationship with the investors as consumers as well as anyone else who’s in there trying to get business. I will tell you that it’s very rarely do you see another loan officer on there. It’s not lending. I never see realtors in there. If I do, they don’t even usually own their home, let alone invest in a property.
What other tips you might have if we wanted to talk to the realtors that we already have in our database? This is a great time to be talking about what my plan looks like. I know I’ve been guiding all of my coaching clients to be sitting down with their partners and saying, “What’s your goal? How can I help you get there? Here are my goals. How can you help me get there?” How would I be introducing this to my residential real estate agent who I have a good relationship with? I feel like a lot of loan officers live in that scarcity mode. They’re afraid to muddy up any waters and introduce something new to their realtors that maybe they’ll go elsewhere, which is a bunch of cockamamie. I’ve done it myself. I’ve introduced my realtors to this. What suggestions do you have to broach that conversation and introduce them?
Especially for the mortgage professionals that are going to reach out to their realtor contacts, the first thing you want to do is get educated on the product mix with your private lender. In RCN Capital, we take that very seriously. Our marketing department goes above and beyond to be able to provide you easy to use white-label documents that you will be able to share with your realtor partners so that they begin to understand how easy it is to market to investors. That’s what we’re talking about here, which is every level of the food chain marketing to investors, which is a completely underserved marketplace when it comes to independent brokers and especially realtors.
Realtors are focused on lunch and learns with local people. Let’s try a completely different attack, which is how about lunch and learns for investors? Reach out to your local business groups and they’re everywhere, Lion’s Club, the financial planners, the list goes on of all of the usual people that people need to do business. If the mortgage brokers educate using the simple white-label documents that we provide, you will find that the little light bulbs go off and everybody said, “I heard about a deal and I told them we didn’t do that.” Once again, that needs to add.
I remember that too. I remember bringing this up and saying, “I had this guy and I’m already working with an investor. He doesn’t even look at properties.” Whenever I get a pocket listing or a regular listing, I send it over to him. He runs the numbers and we close on them. These are deals we never see because the guy’s paying cash, they’re getting money from you already. There are deals that we don’t see. I have one other quick question I want to ask you. You mentioned listing agents. One of the things that I focus on with my high-level coaching clients is working with listing agents. I think realtors go to school and they’re told to say three things, “I already have a lender, I have an in-house lender and I’m a listing agent,” and that the loan officers should put their tail between their legs and run away.
I like to be a disruptor. I’d say, “You’re a listing agent. I’ve been looking for one.” I catch them off guard. I developed a lot of things that I could put into working with the listing agent. To what capacity do you think this works for listing agents as much as it does for the buying side of things? You’ve talked more about focusing on the owner-occupied. Do you see that this could be a great way for them to get new listings or take on listings they normally wouldn’t have because this opportunity is available and there’s knowledge provided by the loan officer as they approach them in the relationship?
One of the things that we talk about in our presentations around the country is the local mortgage professional wants to become the go-to expert in a specific area. If you can become the expert in non-owner-occupied commercial lending, whether if you’re in a small branch, a big branch, whatever your community is. If you’re the go-to person for that knowledge, reach out to your local paper that only serves your town and offer to write an article on an investment that you saw happen and maybe you participated in. All of a sudden, you’re the local expert in this particular segment of the mortgage place. You’re going to be the one that’s like, “I heard Mary over here at so-and-so mortgage shop is the go-to for this product,” or, “Joe over at this realtor is the go-to to list my investment property when I want to sell.” If you make yourself the expert, the business will follow.
It’s always been that way. I used to do the best customized 30-year fixed-rate loan in the marketplace. Most loan officers don’t think you can customize a 30-year fixed loan. I would change the words and we’re customizing them all the time, but I want to do it better than anybody else. I want to be the best at doing a customized 30-year fixed-rate loan than anybody else. Mine was always investor anyway because I had my own need to put it together. Jeff, it’s been fantastic talking to you. Tell us a little bit about you. I want to know something about you. What is one of your personal goals for 2020? What books are you reading that’s having an impact on your personal or professional life?If you can make the customer experience the unbelievable, your company will absolutely grow. Click To Tweet
It’s interesting, we’re getting ready to set our goals for 2020. For the company, we sat down with our manager at a round table and that was the topic. Each department of our company, whether it be finance, marketing or technology, what is each department going to do to move that ball forward for the company? One of the things that we’ve always tried to do here at RCN is taking the absolute granular customer experience and trying to make it unbelievable that those customers will never want to leave. What I mean by that is when you’re selling money, everybody’s rates are the same. You might be a little better here, a little worse here. When I use the word customer, I’m not just talking about the end-user. I’m talking about mortgage professional partner. I’m talking about referral agents, all the way down the food chain.
If you can make that experience unbelievable, the company will absolutely grow. That’s what we’re working on for 2020. We’ve done a great job with it in the past few years and our reputation. We like to thank that propelled us to the great growth we’re seeing. It’s always about what’s next in that customer experience. That’s where we’re working on. As far as what book I’m reading, I had the pleasure of seeing Gary Vaynerchuk at AIM. I had seen him on LinkedIn and how powerful he is with some of his ideas on empathy and growing a business. I picked up his book and I’m just getting into it. The thing I love about it is it’s straight forward, no-nonsense.
What’s the title of the book?
I can’t remember the title, but it was released in 2018. What I’m finding out about it is he goes into some of the granular ideas of how important it is on customer engagement and how empathy can power not only your own organic business but that customer relationship and bring it to the next level.
It even goes beyond engagement. It’s not just what we do, looking at them and engaging them, but it’s their involvement in our success. Their involvement in all the things that we do in our practice. I love that and I want to say thank you so much for joining us. His website is RCNCapital.com. You’ll be able to go there as well if you want to reach out to his company. You probably won’t get the CEO and that’s okay. Their whole team is incredible. They all know what they’re doing. Reach out to them and see if this is an opportunity that could stretch your business beyond. Thank you, Jeff, for being here.
It’s my pleasure, Jen. Thanks so much. It’s so good to see you.
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About Jeffrey Tesch
Jeffrey Tesch, Chief Executive Officer, is responsible for overseeing the day-to-day operations of RCN Capital LLC, including sales growth initiatives, underwriting review with compliance oversight and leadership of senior level strategic planning. Joining the Company in 2010 as Managing Director, Tesch led efforts to develop a national brand in private lending with the best practices and transparent products for a diverse customer base. Since RCN’s inception, Jeff has personally underwritten over 4,500 loans and overseen over $1 Billion in originations. Jeff’s previous real estate experience was as an investor in both commercial and residential properties, ranging from single family homes to commercial retail centers. Jeff currently serves as a member of the American Association of Private Lenders’ (AAPL) Ethics Advisory Committee.