Dave:
Hey, everyone. Welcome to On The Market. I’m your host, Dave Meyer, joined by Kathy Fettke today. Kathy, how are you?

Kathy:
I’m doing great. Excited for this conversation.

Dave:
Me, too. You’re wearing a shirt today. I think I just bought a shirt that perfectly matches that shirt, and I think next time, we’re going to both wear it.

Kathy:
Absolutely. I can’t picture you in green and flowers, but I would love to see that.

Dave:
It’s like a Hawaiian-y kind of shirt, dark green, but you’ll see. I think we’ll match well together.

Kathy:
That episode should probably be filmed in Hawaii, I think.

Dave:
Oh, okay. I’m into it. I think that’s the furthest possible place I can fly from Amsterdam. I think it’s directly halfway around the world, but maybe I’ll meet you somewhere else tropical, and we’ll have a good time.

Kathy:
There we go.

Dave:
All right. Well, today, we are bringing on two lenders to help everyone navigate the confusing housing market and some of the challenging lending conditions that are out there today. Both of these guests are friends of yours. Is that right, Kathy?

Kathy:
Yeah. I’ve been doing this a long time, and I’m pretty familiar with lenders who specialize in working with investors in the one to four-unit world, and they’re able to bring a commercial loan product to that residential industry, which one to four-unit is considered residential. So it’s helped me. It’s helped a lot of members at Real Wealth. So I can vouch for these two. They’ve helped a lot of people.

Dave:
All right. Well, I think everyone is going to love this show because it helps explain a lot, like how important interest rates even are. Everyone wants to know what interest rates are, but we talk a lot about the different variables that actually impact the profitability and positive or negative leverage of your loan that go beyond interest rates. We go into a lot of different types of loan products. I think a lot of new investors think there’s just one kind of mortgage. There are plenty of different types of loan products out there for investors, and so if you are considering buying in this market, which is getting hotter and hotter right now, I think you’re really going to like this episode with Caeli Ridge and Tim Herriage. Caeli, just so you know, is the president and CEO of Ridge Lending Group. She’s a real estate investor herself. Tim is also an investor and is the executive director of RCN Capital. We are, of course, going to take a quick break to hear from our sponsors, but then we’ll be back with Caeli and Tim.
Caeli Ridge, welcome to On The Market. Thanks so much for being here.

Caeli:
My pleasure, Dave. Thanks for having me.

Dave:
Of course. Tim Herriage, thank you for being here as well.

Tim:
Thank you. I’m looking forward to it.

Dave:
Great. Well, Caeli, let’s start with you. Can you tell us a little bit about yourself and what you do at Ridge Lending Group?

Caeli:
Yes, sir. I would love to. So in addition to being a lender that really focuses a lot of its attention on investors, people find it unique that I am a fellow real estate investor. So I would want to share that with the listeners first and foremost. We have a nationwide platform, so we’ve got lots and lots of different options all over the country that we provide for our real estate investors. I’ve been in this space and working with investors for about 25 years, so I have a good amount of experience. I think some of that adds to the credibility and what we offer because I can see it from both lenses, right, being an investor and a lender focusing on investors. Because we focus so much of our attention on our clients’ education, they know that it’s coming from a place of experience, right? My personal firsthand, wins and losses, good and bad, I think that that helps with who we are and what we can do for our clients.

Dave:
What came first, lender or investor?

Caeli:
Lender came first, and organically, we got into non-owner-occupied and maybe not so much organically. I think early on… We’re a second generation company. I don’t think I mentioned that. My father founded the company, but together, we identified quickly that we didn’t want to be in the mix with just all the owner-occupied. The competition was very, very fierce, so we thought, “Okay. How do we reinvent ourselves or make ourselves unique?” So investors was something that we got hooked up in. Quickly, we could see, right? As the lender seeing it from up here, we get to see the rents, and appreciation, and all the different factors, tax benefit, so we thought, “Okay. This is something that we want to get into, too.” So lender first, but very, very quickly, we transitioned into investors ourselves.

Dave:
Tim, what about you? Can you tell us a little bit about yourself and your work at RCN?

Tim:
Yeah. Absolutely. So, about 21 years ago, I started in real estate investing, started out as a project manager for a house flipping company here in Dallas, quickly moved out on my own, started buying and creating owner-financed notes, keeping some rental property, flipping houses. I’ve been a home investor’s franchisee a couple times. The Great Recession was a little road bump there, but got into lending about 10 years ago when I formed and created B2R Finance with Blackstone, which then became Finance of America, which we took public in 2021. Then, now, I’m the executive director at RCN Capital. Really, just focused on strategy, but also making sure everything we do aligns with the customer needs versus our needs. So really just trying to marry that boots on the ground mentality with what’s happening in the boardroom.

Dave:
Great, and what type of loans does RCN specialize in?

Tim:
We only finance investors. So like this month, we’ll do about 700 loans. I would say probably 550 to 600 of those will be DSCR 30-year mortgages for investors. There’s still a lot of BRRR activity out there that we’re capturing on a weekly and monthly basis. We do fix and flip loans. We also do ground-up construction loans. We’re in 45 states, so almost national, but not quite.

Dave:
Chile, how does that compare to the type of loans that you offer investors?

Caeli:
So it’s not entirely different. Though that’s his wheelhouse and exclusively what he’s doing, it is, in some ways, part of what we offer. We have a very diverse menu of loan programs for real estate investors. I would say just as a quick overview, you’ve got your conventional Fannie/Freddie, and most people are familiar with those golden tickets as we call them, highest leverage, lowest interest rate. But we also have debt service coverage ratio on the non-QM product side, bank statement loans, asset depletion, commercial for residential if that was applicable for some kind of cross-collateralization or blanket loan, some investors look at that for scaling, recourse, non-recourse, some bridge products for fix and flip and BRRR, like Tim mentioned. That would be Buy, Rehab, Rent, Refi for any of those that aren’t familiar with that. Then, my favorite, my very favorite, least I forget is the all-in-one First Lien HELOC. That is, I think, an incredible tool, but that would be a high-level overview of the products that we offer.

Kathy:
What kind of interest rates are you seeing today for one to four-unit product?

Caeli:
I know that interest rates are a really hot topic. I totally get it, but I want to preface and maybe add something that interest rates are very subjective, and they’re not created equal like anything. Okay? As you can imagine, Tim and I are both having this conversation every day. In fact, it’s probably the first thing that people want to talk about. But unless you have some baseline information, it’s very difficult to put an actual number to a question, “What are rates today?” To quantify that, I will just say that we want to understand what the transaction type is. Is it a purchase? Is it a refinance? is it a rate and term refinance? Is it a cash-out refinance? Is this for a primary mortgage? Is it for a rental, which we’re talking about today? What’s the loan size? What’s the credit score? All of these variables will ultimately dictate what an actual interest rate would be. But instead, without having those details or that baseline, we can give a range, and I would say that a one to four-unit, 30-year fixed, depending on the variables, we’re probably going to be six and a quarter to seven and a half is where we would be right now for a conventional type loan, which is also important to mention.

Dave:
I just want to caveat so everyone knows we’re recording this at the end of June because things do change quickly.

Caeli:
Yeah. Good point.

Dave:
So I just want to timestamp this before you answer, but go ahead, Tim.

Tim:
Yeah, and important delineation there. So we don’t do any of the Fannie Mae or Freddie Mac products, and so our leverages or the loan amounts, the loan-to-value is going to be lower than some, and that’s what she was saying. Of course, Kathy led with the interest rate question, but-

Kathy:
I know. Sorry about that, guys. I was a mortgage broker. I hate that question, too.

Tim:
It’s subjective. I mean, on the 30-year fixed, if you’re looking for a 55 or 60 loan-to-value and you have a 750 FICO, we’re seeing some rates in the high fives. If you have a 680 credit score and you want a 75% cash out refinance, you’re probably going to pay in the high sixes or even low sevens, so I think that’s… Ultimately, my whole point all the time on lending is you need to talk to someone that can answer your questions and run the scenarios because the higher rate loan may be a better loan for your situation or what you’re trying to accomplish in your business.

Kathy:
Yeah. Tim, when you said that you… I forget how many loans you said you did this month.

Tim:
700 last month in May. So we’ll do about 650 in June.

Kathy:
Yeah. So I often hear complaints from investors saying, “Oh, it just doesn’t make sense anymore with rates so high and cash flows low. If you can’t get cash flow as high as the debt, why are you doing it?” So I’m curious about the volume. That seems like high volume to me. What kind of loans are they getting, and what are those kinds of deals that they’re getting?

Tim:
The primary loan right now, over 65%, are refinances, and more than half the investors say that they are refinancing so they can buy their next property. It’s interesting. I think the investors out there that, number one, don’t have so much recency bias, they actually remember six and a half on an investment property loan is actually pretty good over our career. They’re looking at some of these major metros where you can buy a house for 15% or 20% less than you could this time last year. So I think the investors that see… The Chinese symbol for chaos and opportunity are the same. I think the investors that see the opportunity in today’s market are full bore chasing the good deals that are mark-to-market discount from last year.

Kathy:
100%. Yeah. Caeli, what about you?

Caeli:
I would probably add to that that it’s going to be specific to the transaction or the investment strategy itself. I know everybody focuses on interest rate, but I’m the first one to stand up and say that it is a lot less materially significant than I think people place importance on. Interest rate has its place, but it’s really the math that they need to be looking at. If they’re not doing the actual math, then they’re not doing it right. So here’s what I would add about interest rates. They’re fluid, obviously. When they go up, they don’t stay up. When they go down, unfortunately, they’re not going to stay low indefinitely. So we know that there is a wave of up and down that we have to contend with.
Real estate investors that are serious about real estate investing aren’t going to focus too much of their attention on that actual number. They’re going to be looking at the rate of return. Remember, too, you guys, there’s so many other facets related to the rate that we need to be accounting for. As an example, what happens… tax-benefit-wise, what happens to our deductions when we have a higher interest rate? Our interest deduction is going to be much higher if we were paying 8% than, say, 6%. So if you’re really going to do the math and stretch it out to its conclusion, you need to be factoring in that piece, too. I think that where rates are concerned, the nice thing for investors is it’s a much smaller part of the big picture if you’re really looking at it from that overview lens.

Tim:
Yeah, and I’ll just add. You also have to look at some of the prepayment features that a lot of these loans have. Our primary loan, the DSCR, the 30-year rental loan, it comes with as little as three, as high as five year prepayment penalty, and so that may be why the rates are low, a little lower sometimes on the DSCR product than a Fannie or Freddie because there’s no call, there’s no prepayment there. So I think we also do see a lot of investors that would rather go the route of no prepayment in the hopes of rates coming back in in a couple years, and then being able to refinance. So I think, like Caeli was saying, you have to really balance out your strategy and all the products available to you when making those decisions and don’t let the rate be that primary driver.

Dave:
Tim, you just hit on two things that I’m hoping you can help explain to us and our audience. The first is you said DSCR. Can you just explain that one? Then, secondly, I think one of the most overlooked elements of these types of loans or commercial loans, people talking about pre-payment. Can you just help us understand the implications of pre-payment and why you would want to avoid that or why you might be comfortable with that?

Tim:
That’s a great question. I think we all have to realize how lucky we are that this time around, during a financial crisis, there is still money available for real estate investors because in ’08 and ’09, there was no money for us normal people that are trying to build a legacy, and that’s ultimately what opened the door for the big hedge funds. So these DSCR, Debt Service Coverage Ratio loans are loans that are basically… You qualify for them based off the cash flow of the property. The easiest example I always say is you’ll hear some of the DSCR ratio, right?
So if they say a 1.2 DSCR, you have to think of it like this. The loan you’re taking from a lender like RCN… Let’s imagine that your principle, your interest, your taxes, your property taxes, your insurance, and your homeowners associations all equal $1,000. Well, we want to see that house rent for $1,200. So 1.2 times that PITIA, Principal Interest, Taxes, Insurance, and Any Associations. You may be thinking it’s hard to get $1,000 mortgage payment, so we’ll just say if your mortgage payment is $2,000 in this case, including all your escrows, we would want to see the house rent for $2,400 on a 1.2 DSCR loan.
So it’s almost like a debt-to-income ratio for the property because on the typical DSCR loan, it’s made to a business, not an individual, big differentiating fact from some of the Fannie/Freddie stuff, and it’s based on the cashflow of the property, not… We don’t look at your W2 income or your personal tax returns. So those two things are really important, and that’s what makes it a commercial loan, and it’s so confusing. It has been for 10 years. We say commercial loan. They’re like, “Oh, for commercial property?” You’re like, “No, for residential property.” “So it’s a residential loan?” “No. Actually, it’s not.”
Anyway, what we did 10 years ago, we took, basically, the same type of loan that a hotel would get, and we changed the paperwork to make it where an investor could get it on a cash flowing real estate piece of residential real estate. So that’s where that DSCR thing is. So some of the other differences. It’s in your company name, typically, not to your personal name. You can do it in a trust. You can do it if you’re a foreign national. Let’s see. What’s the other… Oh, and there’s always a prepayment. There’s a prepayment because the loans are all bundled up and sold to commercial real estate investors and bond buyers, and those commercial real estate bond buyers, they like and need there to be a prepayment, a call protection is what they call it, the prepayment penalty in there.

Caeli:
I can add to that. So for our Debt Service Coverage Ratio, an easy way that I try to explain it to investors is gross rents divided by the PITIA like Tim had described. But if you know what your gross rents are and you have an idea of what your total mortgage payment is, divide those two numbers, and it’s going to give you your ratio. Similar to probably what I assume Tim has, we’ll go as low as 0.75 on that debt service ratio. So if the rents gross rents were 750 and the PITIA was 1,000, that actually is a viable product. The higher the debt service coverage ratio, the more attractive the rate and terms are going to be, right, the lower. So, keep in mind. If you have a lower Debt Service Coverage Ratio, you’re going to need to expect a higher interest rate as a result of that, but you still have options that will go, in some cases, to the 0.75.

Kathy:
Caeli, I just want to give one example of how a DSCR loan really helped one of our members at Real Wealth where when you do a 1031 exchange, you have to get replacement property of the same value of what you sold or more, and you also have to have the same amount of debt or more, or you get taxed. Now, a lot of the conventional loans, they max out at 10, so a lot of people forget this little piece. They want to do the 1031 exchange, but where are they going to get the debt for that if they’ve already maxed out? Caeli, I could just say, personally, you came in when somebody was really panicking and were able to close those loans really quickly, more quickly than a conventional loan. Do you remember that?

Caeli:
I remember vaguely, but yeah, we have both options so we can evolve with our investors as they max out. We have those other options that go beyond because you’re right, Kathy, on the commercial end, the debt service coverage ratio products or non-QM products, they don’t have the same rules as a conventional Fannie/Freddie, and they don’t care how many finance properties you have. You could have 100 finance properties. As long as the property pencils, that’s a loan. I mean, credit and assets still have to be in place, but yeah.

Dave:
Just so everyone understands. Super useful, very popular loan product right now among investors, and I think I heard you both starting a little bit of a debate here that I want to expand upon.

Kathy:
Ooh, a lender debate.

Dave:
From my understanding, the higher the DSCR, the lower the risk to the lender, right? Basically, there’s more income, there’s more revenue coming in to cover the debt service, and so Tim, it sounds like you bottom out at one, which is basically you would have an even revenue to debt service. Caeli, you said that you go even… You would write loan even below the total revenue. Can you explain why you would do that?

Caeli:
So, a lot of times, it might have more to do with the current market rent versus what’s coming from an appraisal, the 1007 on an appraisal. That’s just the number on the form that gives us the median rent, so maybe what real market it hasn’t caught up to itself. So it can have something to do with that, but then also, the strength of the individual. If the individual has really high credit scores, they’ve got 30% down, skin in the game, real strong assets, that’s going to be a safe bet for them.

Dave:
So you’d lend to Kathy on a [inaudible 00:20:35]?

Caeli:
I would lend to Kathy at no debt service coverage ratio.

Kathy:
All right.

Dave:
Okay. All right. At zero? Okay. Kathy gets it at zero. Tim, why do you bottom at one?

Tim:
We know what we’re good at, and we stick with that. We know of the products out there that we could originate, but we’re a balance sheet lender, so we use our own cash to fund every single one of our loans, and we own our loans for a good period of time. So it’s when you look at the risk profile, specifically in nationally, right now, I mean, look, we have declining rents in some markets and declining values in some markets. If someone gets upside down on their monthly cashflow, it presents a risk, and we take a lot of pride at RCN of not being a loan-to-own company. We don’t want to go through that. So it’s just a risk profile that we approach, but it’s also… It’s about scale.
We’ll do more than one and a half billion this year in loans. I think we should do two, right? We’ll do over two next year. I think we should do five. So, to achieve scale, sometimes, I think in all businesses, you just have to take some of the options off the table and get really good at what you’re good at. I mean, that’s really why. As an investor, I love the 0.75 DSCR loan. I mean, I’ve got an Airbnb property, 150-year-old historic house that I’m sitting over here like, “I’m going to give her a call tomorrow.”

Kathy:
Ooh, it sounds like Tim is going to call Caeli. I love it.

Dave:
I love it.

Caeli:
If I could just add a piece to that really quickly, and the difference is that what… so those out there listening can understand more from a basic level. If Tim is holding this paper for a longer period of time, that’s probably a big reason if… So we fund on our warehouse lines, right? It’s our money, but we’re not holding these. We’re bundling these mortgage-backed securities, and we’re reselling them on the secondary market to investor servicers. If we weren’t doing that, we’d probably be in Tim’s camp where we would have that benchmark minimum, but we have access to sell them off our warehouse line and free up our capital again. So that’s probably the difference between why we’ve got the 0.75 versus just the standard one.

Kathy:
Now, a lot of people don’t understand what QM is, and that’s Qualified Mortgage that’s conventional, and there’s all kinds of other loans out there that investors need to know about. I know one of you mentioned blanket loans. What is that? How does that work for someone’s portfolio, and how can that help people increase their portfolio?

Caeli:
Tim, do you guys offer that?

Tim:
Yes, we have a portfolio loan product. Fun fact, I was part of the team that created those in 2013 with Blackstone through B2R Finance, and we did this first ever securitization of those portfolio loans in April of 2015. It’s been fun to watch the product evolve, but when you look at these portfolio loan products, if that’s what you’re referring to as a blanket loan, it’s, in general, a commercial loan. It’s going to have 10-year features. Most of them are going to have a 10-year balloon payment. There are some 30-year options out there. We originate the 30-year ones. Depending on how many properties you’re trying to do at a time, that can change. I think if it’s over like a hundred properties, then you can’t do the 30-year fixed. I can’t remember the exact number, and rates are a little higher, but then you can really get into non-recourse. You can get into cash management where… I mean, they get really complicated, but they’re a great tool for people.
We have a good friend of mine. He does about a hundred of these a year with us, and he fills up his bank line for all of his fix and flips, and gets all the houses rented up, and then just moves 50 to 80 houses at a time over into a portfolio loan. So you save on closing costs, you save on appraisal cost, you save on… Frankly, you only have to write one check instead of 80. So there’s a lot of scale and efficiency that goes into it. Personally, anytime I can, I try to talk people out of them because they, in general, are complicated, and if it’s not something that you feel really… I don’t like them. I’ve been doing this 20 years. I’ve done billions of dollars in real estate. I bought thousands of houses, and I hate the portfolio loans, and I wouldn’t take one.

Caeli:
I would add just one thing. I’m curious though. Tim, the 30-year, is it a fixed, or is it just the 30-year am? Are you guys fixing those for 30?

Tim:
There are some smaller portfolio loans that we can fix for 30. Yes.

Caeli:
Wow. Okay. Very cool. So here’s what I would add in terms of the education and the strategy that we try to support our clients with from that cross-collateralization blanket commercial loan perspective. As long as it’s a non-recourse product, and there may be some other reasons to look at this product on a recourse, and just to identify or to define that for the listeners, a recourse blanket loan means you’ve signed a personal guarantee. It is a business loan, it is to your LLC, et cetera, but you have personally guaranteed that loan. A non-recourse is the flip to that. There is no personal guarantee associated with it.
So one of the strategies for those that want to maybe free up more golden tickets. Let’s say they’ve got 20 properties. Okay? They’ve stabilized. They’re doing well. If the numbers work, a non-recourse cross-collateralization product, we might be able to take 15 of those 20 and put it into this blanket loan as a non-recourse. It will now free up more golden tickets, Fannie/Freddies, for this next phase of acquisition. Tim had touched on this earlier, and I still believe that this is, in some markets, what we’ll see. We haven’t seen it yet to the degree that many had predicted, but I think that some values are going to come down. So I think a lot of investors are going to be in a great position to be purchasing, right, again, at the lower price point levels. If they wanted to do that using Fannie/Freddies, that would be a good tool or a good strategy in which to open up if they had maxed them out. Just something that we talk about on occasion with our clients that have bigger portfolios.

Kathy:
Caeli, Is there something you know that I don’t know? Why did you say that you think values are going to continue to decline because we are seeing the opposite?

Caeli:
In some markets, I think that the consensus that a lot of people predicted that home values will start to decline because of the higher interest rates and all of the variables that come with that inflation, et cetera, I think that there is an inevitability to it. I don’t think that… and I don’t know that I agree that it’s healthy to continue to see the way we saw home values increase at the pace that we saw. I think that it’s fantastic that they started to level a little bit and that the trajectory is more sustainable, but I still do think there are some markets that are going to start seeing some devaluation of value. I don’t think that’s necessarily a bad thing. I think that that’s the cyclical nature of real estate, and it’s going to be necessary in some cases. So anytime I hear someone blanket statement or just give an over… let’s say the entire nation, and they just make one statement, I know that they’re not very well-informed because it’s very specific to the market, and every market is going to be different.

Kathy:
Which markets are you more concerned about, and are you not lending in some as a result?

Caeli:
We are lending in all. Well, 47. There’s three states that we’re not in, New York, North Dakota, and Vermont. But I think in some cases, there’ll be many markets that might see some of this, and then it’s going to be specific to the areas in the states. The ones that typically we see decline are the ones that have the hottest and the fastest appreciation. A lot of the Sun Belt states are typically… I hesitate to try and zero out on one because if I say one state, everybody is going to… There’ll be riots in the streets.

Kathy:
Panic.

Caeli:
Yeah, and it isn’t going to be subject to the entire state. I think that there are hotspots where we might start to see some values level off and come down a little. I’m not talking to the level that we saw ’08, ’09. Okay? I survived barely ’08, ’09, and I had million dollar properties that we purchased that I could not short sell for $300,000. I’m not talking numbers like that, but I do think that we’re going to start to see some relative decreasing in value in some markets, and I think that’s good.

Kathy:
Do you agree, Tim?

Tim:
Yeah. I mean, look, we have certain loan-to-value overlays in certain markets. It’s no secret that Austin, Boise, Salt Lake City, Phoenix, Denver, San Francisco… I mean, look. I mean, there’s definitely pockets of every market that are struggling. There’s definitely pockets of every market that defy trends. I completely agree that painting a broad brush of real estate is always the wrong thing to do. One of my favorite things to do is every month when the National Association of Realtors Report comes out, say, home values went up by one-third of a percent or whatever, or went down by 1%, well, the next page, it breaks it down regionally, and you may see the Northeast is down 2% year over year for that month, and then Midwest is up 5%, and the South is up 5%, and the West is down 5%. Right? But then, you drill in even deeper, and you find out that San Diego and Orange County are doing great. LA is pretty okay, but San Francisco isn’t.
We’re still lending everywhere that we’re licensed. Just like she said, we’re not in Vermont or North Dakota. I guess we need to get a lender on the show up there. We’re not in South Dakota, or Nevada, or Alaska, and that’s just by choice. So, look, I think in general, prices continue a gradual incline, nowhere near the pace they were at. There will be pockets that are not good, and there will be pockets that are fantastic, and that’s why I’m just such a huge proponent of education and information.

Caeli:
For the pockets that are going to come down because I strongly believe that that’s going to happen in some markets, that’s good news for us. I don’t think that that’s a bad thing. Some investors may lose a little bit of equity, but they should have been preparing for that. They should have been paying attention to the signs, and pulling out the equity, and harvesting that equity prior to this happening because we’ve been beating the drums. For the rest of the investors, guess what? Now, we get to take advantage of the lower price points and get in at those lower levels. I think that it benefits all the way around personally.

Dave:
I want to get back quickly to some of the loan products we’ve talked about. You guys have shared some really interesting information about different loans. Tim, let’s start with you. I’m curious. What is the most popular loan you’re seeing right now, and has that shifted recently?

Tim:
I have been shocked at the market share… When I look at our loan book on a monthly basis, I have been shocked how many less fix and flip loans we’re doing versus refinances on 30-year fixed. We run some customer surveys, and I talked to a lot of investors. I go to trade shows everywhere, and it’s interesting. There’s a lot of investors that got caught with some inventory that they refinanced and even bringing cash in, but it has been very, very interesting how many people are still refinancing their investment property and even pulling cash out at 6.5, 6.7, even in the low sevens was about as high as we got at RCN because they’re just bullish. They are excited about the market, and they want to go buy more houses. By far, I think 82% of our volume last month was 30-year rental loans, and of that 82%, if I remember correctly, more than 60% of that was refinanced, not purchased. The investors, overall, they say they’re going to buy more houses. They feel like real estate has already been discounted.

Dave:
Caeli, are you seeing this similar… Any changes in what loans are most popular among investors?

Caeli:
Everybody’s circumstances, and needs, and goals are going to be uniquely different, so no, not necessarily, Dave, but we see a pretty steady stream of… and because we’ve got so many, I think from all of those different facets, we’re still doing a lot of that business. I would like to touch on what Tim was saying. A lot of people will listen to that, and they’ll think, “Who didn’t refinance in 2020-2021? Is there anybody that didn’t refinance and get 2% interest rates or 3% interest rates?” I think pretty much everybody did, and to hear Tim say that people are refinancing out of those 4% interest rates or 3% interest rates into a five, or six, or whatever, they’re going to say, “Nah, probably not.”
I absolutely believe that, one, because I’m doing it, and two, because statistically speaking, guys, the percentage of people… I don’t care what the interest rate was that you secured originally. The percentage of people that start with a 30-year fixed mortgage and make 360 payments later to pay that mortgage off is a fraction of a percent, especially for real estate investors. I think that the current shelf life… and we have some historical atypical non-norm things that happened over the last couple of years, but I think the shelf life for a 30-year fixed investment property loan right now is five years.
I think that that’s going to probably come down in the coming months because I do think that we’re going to start to see interest rates, that might be a good segue, start to fall back off a little bit. But if the investor is a true investor, and they’re smart, they don’t care that they gave up a 4% interest rate to get a 6% interest rate. Borrowed funds are non-taxable. They’re going to take that equity, and they’re going to put it into something else that’s going to yield a higher return to make up for what they lost, and maybe that means that diversification, which I am huge on preaching about. For a long-term rental, maybe they’re going to start looking at a mid-term or a short-term, or maybe they’re going to look at real estate notes. I mean, there’s so many different variables, and facets, and strategies of real estate that the educated investor is not going to worry about giving up some golden 4% interest rate.

Dave:
So last question before we get out of here. We’ve been hearing a lot about liquidity issues or potential, let’s say potential liquidity issues in the market. Tim, do you think there’s any risk of liquidity drying up, like you said, in 2008, or what are you seeing?

Tim:
So, a couple weeks ago, I was in New York, and I was having lunch with a fellow from one of the top five investment banks, and he’s predicting that even more liquidity is coming to the single family investment space, and here’s why. There are a lot of large institutions that have raised a lot of money for commercial real estate debt and acquisition. If you open the newspaper or your app these days, all you see is commercial doom and gloom. Well, the way it works, if you’re a bank, you make money off of having other people’s money, so you don’t want to give it back to them.
So it’s our prediction that there will be more, and more, and more capital coming to the space for real estate investors. There will be more capital that comes to the industry for the iBuyer and large institutions. It’s just happening. So, personally, at RCN and me personally, after 21 years of doing this, there’s no crash coming. That’s our opinion, and we think rates are going to go down this year. We think values will be up. In general, there will be some markets that are not, but in general, values and rents in the good markets where there’s people that need a job and live are going to keep going up, and there’s never been a better time to invest.

Caeli:
I like that answer.

Dave:
Caeli, what do you think? Is there any risk of liquidity?

Caeli:
Well, I’m going to agree. Yeah, I agree with what Tim said, but I’d also add that real estate investors from a lending perspective, we take it in shorts a lot. When they make oversweeping, overhauling legislative changes and stuff, it’s the investors that usually get cracked down on first, and I find that interesting because we tend to be the lower risk. If you think about what’s being lent out there and liquidity for an owner-occupied, they’re constantly trying to open up for the minorities and disadvantaged, which I get, but those are higher risk borrowers. Okay? It’s not an opinion. It’s a fact. Very low down, much lower credit score requirements.
The playing field in which investors are made to play is that we have to have a lot more skin in the game, our credit profile has to be a lot more substantial, credit scores have to be higher, assets and reserves have to be way more substantial than you would have over here. So, in terms of liquidity and what’s going to be available for investors, I believe, is only going to continue to grow because I really feel like, in fairness, we are probably a safer bet in most instances.
Secondary markets, I think, look at risk from an investment standpoint based on much older criteria to qualify. I don’t feel like they’ve come online to what the new standard is. Right? I think that their ideals and their thinking for risk for investment or investor loans comes from 15 years ago where 5% down was okay, and those stated incomes, stated asset loans were okay. That’s no longer been the case. It hasn’t been the case for many, many years. Right? You have to walk on water to get mortgage loans, go through the process of underwriting, et cetera these days. So that was a long-drawn-out way to say I think liquidity is only going to increase. I agree with Tim, and I think for those additional reasons, we’re going to continue to have lots of options on the loan side of real estate investing.

Kathy:
That’s fascinating because Realtor.com just came out with an article saying that loans for… and maybe this is true or what you just said, but loans for properties under $150,000 are getting harder to find the liquidity. Are you seeing that?

Dave:
Are there properties for under $150,000?

Kathy:
I mean, we’re still buying them. Not very many.

Caeli:
I have not seen anything to the sort, Kathy, and I’ll tell you. Conventionally speaking, when we look at interest rates, not to go back to interest rates, but the LLPAs, Low Level Price Adjustments, for us, seem to be less harsh on a smaller loan size conventionally than on the bigger loan sizes. So I’m not seeing that in any regard on my end. My spectrum doesn’t show that.

Kathy:
Tim, why did you say you think rates are coming down this fall?

Tim:
Well, not to be too nerdy, which you know I can be, Kathy. The spread, the markup on the 10-year treasury is normally around 1.6% to 1.8% higher than the 10-year treasury for the 30-year mortgage. So the way that works here at the end of June, right, the 30-year fixed mortgage rates should be in the fives. It’s not because right now, the spreads, what the bond buyers, the markup, that’s a… Just think of a spread as a markup. The bond buyers, they want that to be a 3% markup. So that’s what has a lot of the rates in the high sixes, low sevens right now because the 10-year treasury is hovering in the high threes right now. We should realistically… In a good market of markups or spreads, rates should be in the fives right now, and so what we believe is going to happen is over the next three to six months, the Federal Reserve will definitely not hike aggressively, but they should slow down.
I mean, I think there may be another hike or two just to prove a point coming, but I think we’re pretty much done with that. As soon as that stabilizes, it’s the best… We don’t need the Federal Reserve rate to go down. We just need it to stop going up. If it will stop going up, it gives these bond buyers a little more confidence that the rates they’re seeing now are good for 5 or 10 years, and then they can reduce that markup or that spread. So we think even though the Fed rates may go up another quarter point or even a half a point by the end of the year, we think that the spreads will come down, which should lower the 30-year homeowner rates into the fives, and it’s just going to be just like 2018 again.
Every time it dips below six, there’ll be a mad rush to buy houses, and then it will go back up, and it will slow down, and then it will dip again. So we’re back to normal. We’re excited about it. I mean, rates in the fives are great. 4% is never coming back. We’re done with that. It’s gone. It’s over. Just kiss it goodbye, but rates in the fives would be historically 2.5% less than the 50-year average. So I think homeowner loans get down to the fives at the end of the year. I think the investor loans stay in the mid to low sixes, and that’s great for everybody. That’s a healthy market, and we can all go make money.

Caeli:
Agreed.

Dave:
I hope you’re right. You are more optimistic than I am about rates this year.

Caeli:
I think Tim said that beautifully. I would add that the markets where rates are concerned, secondary markets, there’s always that lag, right? Tim touched on this. The Feds went as fast and furious as we’ve ever seen in the history of this country from last year until what? A couple of months ago in terms of the severity in which they were putting their feet on the gas for higher interest rates. We’ve never seen anything like that. So I think that we’ve leveled out even if they… They’ve really started to slow in the capacity of how much they kept jacking those rates, and as you guys remember, they took a pause or a skip, whatever you want to call it, last month. July? Maybe there’s another one, but maybe it’s only a quarter. They were jacking those things a half and three quarters, et cetera.
So I agree with Tim that we’re probably right on the precipice of seeing interest rates come back down, but remember, like I said, they come down a lot slower than they go up, so I wouldn’t expect. Even if we start seeing them come down a little bit, I wouldn’t expect them to just fall through the floor. The other thing I just want to mention so that people put this into perspective because everybody is so consumed with interest rates, very largely dependent on your loan size guys. A quarter of a percentage point or a half of a percentage point on $100,000 is probably 25 bucks a month, but you have to be doing the math. Do the math, and try to not get so fixated on just that one little piece of real estate investing.

Tim:
Well, and the biggest impact that we’re seeing on DSCR loans specifically this year and that we’re watching heavily in third quarter is property taxes and insurance rates because in taxes, Kathy, I know you have a lot of houses here, the certified tax rolls come out in July, and my personal portfolio… I mean, my tax bill is going up 20% or 30% next year, and I couldn’t argue with them. Some of them were still underappraised. So property taxes are going up, rents are… I mean, insurance rates are going up across the board, and that’s going to have a lot larger impact on investors’ ability to cash flow than interest rates.

Dave:
All right. Well, thank you both so much for being here. Tim, if people want to learn more about you and RCN, where should they do that?

Tim:
Yeah. I’m super easy to find. I think I’m the only Tim Herriage in existence, so I’m @timherriage on all those social media platforms, and then @rcn_capital on all the social media platforms or rcncapital.com.

Dave:
Great. Thank you for being here. Caeli, where can people learn more about you?

Caeli:
They can check us out on our website, ridgelendinggroup.com. They can email us, [email protected] Toll-free is 855-74-RIDGE, which is an easy way to remember. Of course, like Tim, we’re on all the media platforms. You can just google “Ridge Lending Group.” You’ll find us.

Dave:
All right. Well, thank you both so much for being here. This has been a super helpful conversation. We appreciate it, and hopefully, we’ll have you both back on sometime soon.

Caeli:
I’d love it. Thank you, Kathy. Thanks, Dave.

Tim:
Thank you for having us.

Dave:
Well, that was a lot of fun. I learned about some new loan products. How do you feel about it?

Kathy:
Oh, it’s always confirming to hear mortgage people talk about rates coming down because I believe the same thing with this, the margin, the spread being so wide right now that people… Investors are just so nervous about what the Fed is going to do next, but I am holding the faith.

Dave:
I am not as convinced.

Kathy:
I know.

Dave:
I know the spread needs to come down, but I think the reason that the spread comes down is because there’s more stability in the market, right? There’s less risk of recession. There’s less inflation. If that happens, then yields could rise. So even if spread comes down, yields go up, that still equals higher interest rates. So I think it will come down. I actually think through 2023, it’s going to remain somewhere near where we are now. I do think it will come down, but I’m not sure it’s going to be this year, maybe next year, but hopefully, Tim is right. Hopefully, you’re right. I would like that, but I also like… I guess I don’t know what I want because I agree with Caeli that I think some price decline is healthy in some markets. Some prices are really unaffordable, and I don’t think it would be the worst thing if we saw some easing of prices throughout the rest of this year.

Kathy:
Yeah. Just selfishly, I prefer rates be higher right now because it just makes buying easier. There’s less competition, especially when you’re coming in with cash like our fund, so I agree with you. On the one hand, for my own personal portfolio, it would be fun to be able to refi into better rates. But on the acquisition side, they can wait a little bit because I just know if mortgage rates come down, it’s going to be another frenzy.

Dave:
Yeah. Yes, that’s definitely true. All right. Well, regardless of rates, we always have to talk about rates. I thought this was just a lot of fun, this show, because just super knowledgeable lenders explaining some really cool loan products. Hopefully, people out there learned a bit. I have never done a DSCR loan, but I’ve always been interested in it. I think it’s super beneficial and something people should definitely consider if they are up, they’ve already used 10 conforming loans, or maybe that they want to buy a property that won’t qualify for a conforming loan. So, hopefully, everyone learned a lot about that. Have you ever used one?

Kathy:
Yeah. I mean, if you just want more privacy, you can get the loan in an LLC so nobody knows it’s you, and that’s hard to do unconventional. That’s impossible. I mean, I think you can put it in a trust potentially, but anyway, yes, there’s a lot of reasons why people do it. A lot of people I know just prefer that.

Dave:
Well, hopefully, this convinced all of you that finding a very knowledgeable and investor-centric kind of lender is very valuable. If you want to find a lender that knows how to work with investors, BiggerPockets recently just released a new lender finder tool which helps match people for free with really qualified investor lenders just like Tim and Caeli. You can find that at biggerpockets.com/lenders, and go check it out if you’re interested in finding a loan.
Kathy, thank you so much for being here. We really appreciate it, and thank all of you for listening. We’ll see you for the next episode of On The Market. On The Market is created by me, Dave Meyer, and Kailyn Bennett, produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, researched by Pooja Jindal, copywriting by Nate Weintraub, and a very special thanks to the entire BiggerPockets team. The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.