Thank you to our sponsors for this episode, Spiegel and Lightning Docs.
Spiegel Accountancy
Spiegel Accountancy is a professional CPA firm with robust tax and audit practices. They have over 20 years’ experience in private lending and hundreds of clients in the space. I consider Jeff and his team at Spiegel to be an industry-leading CPA firm. They truly understand the tax and audit needs of private lenders. We share several clients of all shapes and sizes. They have over one hundred private lending clients across the U.S., several of whom manage hundreds of millions of dollars in their funds. As a trusted CPA, Spiegel ensures their clients’ financial reporting meets the highest standards. For more information, visit their website at spiegel.cpa. Spiegel Accountancy: your strategic and innovative accounting partner.
Lightning Docs
Lightning Docs is the gold standard in document automation software for producing business-purpose loan documents all over the country. Whether you’re working on a short term fix and flip or a 30 year rental loan, Lightning Docs has you covered in all 50 states. Our staff here at Geraci is constantly working to ensure that Lightning Docs is kept current with all the ever changing laws and regulations. So you never have to worry about your document set being outdated or providing you with inadequate protection.
Our goal here at the firm is to provide our clients with peace of mind, which means that we’re always working to provide you with the best and most streamlined user experience possible. Whether that means getting you set up to pair Lightning Docs with your LOS system, setting defaults in our interview or just changing some of the language in our document set, our staff is always ready and willing to help you with whatever you may need. Whether you’re a private lender, a broker, bank, credit union, title company, you name it, Lightning Docs is the solution to all your loan document needs. For more information, please go to www.lightningdocs.com.
Kevin Kim:
You’re listening to Lender Lounge with Kevin Kim, a podcast dedicated to the private lending industry. I’m Kevin Kim, and my goal is sit down with key figures in the private lending industry to talk about their business and their personal lives. We’ll get their takes on market conditions, the industry at large, and their personal stories. Overall, I really want to learn more about how they started and grew their businesses. So whether you’re a lender, a borrower, a vendor, an investor, or anyone just interested in learning more about private lending, this podcast is definitely for you. Thanks for tuning in and enjoy this week’s episode of Lender Lounge with Kevin Kim.
Hey everyone. Before we jump into this week’s episode, I have a little giveaway contest I want you all to participate in. From January 23rd to February 27th 2023, we’re going to give away a pair of AirPods if you enter to win via the Apple Podcast app. How do you enter to win? You leave a review and you also leave us a five star rating. We’ll enter you automatically and you’ll be entered to win this pair of Apple AirPods. So please join us in this little giveaway contest, we hope to hear from you. Thank you very much. Hey everyone. Welcome to another episode of Lender Lounge with yours truly, Kevin Kim. This time we have a person that everybody knows and a person I’m so proud to call a friend and a gentleman that I look up to in this space, Jeff Tesch. I don’t think you need an introduction, but let’s do it anyway. Why don’t you tell our audience who you are, what you do, and we’ll go from there?
Jeffrey Tesch:
Great to be here, Kevin. I’ve seen your podcast. You’re killing it right now. So happy to be here. So Jeffrey Tesch, CEO of RCN Capital. Love the private lending business. Love all the relationships we’ve built with all of our partners, vendors. It’s a really cool time, Kevin, and even going into ’23, it’s challenging, but there’s so many opportunities. So really psyched to be here and talk with you what we got going on and what we’re seeing in the space.
Kevin Kim:
Right, but one thing that I feel like a lot of the industry don’t know about you, and I got a little snippet of this at the APL conference when I asked you your first job, I realized we don’t know much about Jeff. I was so shocked.
Jeffrey Tesch:
That’s right.
Kevin Kim:
So before we get into all that, I wanted please give us, give our audience who are uninitiated into RCN Capital, give us the elevator pitch. What is RCN? What does it do? And we’ll go from there.
Jeffrey Tesch:
Sure. So well, flashback to 2010, right? So another challenging time in the mortgage world, although we’ll probably get into it, but I would argue a very different time than what we’re in today. But it was a mess out there. Banks foreclosing, banks don’t like to own houses, banks unloading inventory just as quickly as they could into the marketplace. And it was a tremendous opportunity for investors to buy distressed housing, renovate it, and put it back into the marketplace for families to live in. There was one problem, Kevin, and that problem was capital. And myself and the gentleman I started the company with who owns a software company, wealthy guy, we saw this opportunity of deploying capital into an extremely fragmented marketplace. There was no easy solution if you were going to buy a distressed single family home, fix it up and sell it.
You didn’t know where to go. It was old school hard money back there, Kevin. So the idea for RCN was let’s build a commercial lending business focused on a singular product, and that product was buy, fix and sell, so your standard 12 month loan that gives the investor money to buy it, fix it, and sell it. However, what made the opportunity so interesting, Kevin, was I thought there was something that we could do with scale, because of the, I was an investor, horrible experiences with hard money lenders, right?
Kevin Kim:
So you have borrowed money from hard money before?
Jeffrey Tesch:
Right.
Kevin Kim:
Okay.
Jeffrey Tesch:
No commitment lenders, terms changing at the last minute. It was awful. So that was the idea of RCN Capital. The idea was let’s build a commercial lending business that actually acted like a commercial lending business should, and let’s see what we can do. And we started in Connecticut, we’re outside of New York, here in the northeast, very humbly. It was literally myself and a loan officer in a room with two computers and two phones. That was RCN Capital, which people think of RCN today, oh my god. This behemoth.
Kevin Kim:
Well, tell our audience. We have listeners who don’t know who RCN is, and fascinatingly enough, I’ve actually met people like RCN. Hey, you still have some folks to lend to, it’s still great.
Jeffrey Tesch:
It’s very good.
Kevin Kim:
So RCN, are you guys national? Are you guys direct lending? Wholesale lending? Give us that part too.
Jeffrey Tesch:
So I’ll take you through. So we started the company, we were direct to investor, and then as time went on, and really this was like 2014, ’15, the company was by that point, a direct national lender. We were still small. I think by 2014 we were still under 30 or 40 employees, but we were growing pretty quickly. The market had recovered and we were lending money all over the country. But what I realized was there was a real gap in technology empowering individual mortgage brokers, correspondent lenders to have the ability to get into the business that I was in. So the reality is the mortgage industry, especially on the residential side, is often a third party origination business. And I thought to myself, why don’t we become that third party originator behind the scenes that empowers brokers and correspondent lenders to build their businesses? We’ll take care of the technology, we’ll take care of the capital, we’ll take care of the back office. And that’s when things really took off for the races, Kevin. We built out this third party origination system-
Kevin Kim:
And that was in ’14.
Jeffrey Tesch:
[inaudible 00:08:00] the country.
Kevin Kim:
You guys have been direct lender all the way until ’14 when the market really started to take form and become, I guess you can call it the darling of Wall Street, and really become very well respected. So you guys added correspondent then?
Jeffrey Tesch:
Absolutely.
Kevin Kim:
Okay.
Jeffrey Tesch:
Yeah. We added it, that third party origination. And what we began doing is empowering all of our partners to originate our products. Not unlike what you see today on the residential side, whether it’s a Rocket or United Wholesale. They have a huge third… It’s no different for myself. We’ve invested millions and millions and millions of dollars over the past seven or eight years building out really tools and infrastructure so that other smaller lenders can build their businesses, make money, enhance their own brands, but do it with RCN’s help. And that’s how we really got to where we are today. It all went back to professionalizing a marginalized product that was tremendously in demand and elevating it to a commercial loan status. Which folks getting into the business today, they’re like, “Well, hasn’t it always been this way?” And it looks nothing alike.
Kevin Kim:
Well, what’s really funny is you meet… When we were at San Diego together, at the BiggerPockets event, and for me it was fascinating to meet small, tiny lenders who were just doing loans here and there. And I was just like, this part of the market still exists. It’s fascinating that part of the market still exists, which is great because that feeds the industry.
Jeffrey Tesch:
Yeah, absolutely.
Kevin Kim:
And you guys are providing a service to them as well, helping them get their deals done too.
Jeffrey Tesch:
And I can’t tell you how rewarding that is too, Kevin, right? It’s rewarding. Seeing our partners growing, whether it’s direct to investor, but more importantly, the third party origination. They’ll pull me aside at an event and say, “You know where I was three years ago?” And they’ll talk about their story and I get just as fired up as they do.
Kevin Kim:
I love that. So today, RCN Capital’s now in, I think you guys are doing, what, 48 states, something like that? Pretty much national.
Jeffrey Tesch:
Yep.
Kevin Kim:
And wholesale and retail arms the business, still residential fix and flip, construction and rental, right?
Jeffrey Tesch:
Yeah. Certainly rental this year, 2022 has been a bigger piece than years past, which is surprising considering the rise in interest rates. But the amazing thing is investors out there today are finding real workforce housings type single family homes to build out their portfolios. Even in this challenging rate environment, our rental business is better than ever, which is crazy. It’s just crazy.
Kevin Kim:
So I want to go back to the foundation a little bit and ask you, ’cause I’ve always wondered this, what does RCN stand for? I always ask, ’cause people have unique names, and some of them are pretty generic, but RCN’s pretty unique. What does it stand for?
Jeffrey Tesch:
So you don’t know the answer to this, right?
Kevin Kim:
I don’t. I really don’t.
Jeffrey Tesch:
Okay. So it goes back to 2010, once again, myself, a loan officer, two computers, two phones. Now, we had a wealthy investor who gave us the seed money and as the majority partner in the business. But basically I was given a mandate, Jeff, let’s go build this, but we’re not going to spend a lot of money, we got to make money. And that’s always been our mantra along the way, growing as the business demands. Well, with two people in a room, I certainly didn’t have any big budget to go out and figure out what we were going to call ourselves and-
Kevin Kim:
Right, right, right.
Jeffrey Tesch:
Air all kinds of money for a doc-on name. So it just started, and really my thought was, okay, I need to call the company something that would impart upon the customer what we did, and they had to be able to spell it. Which people laugh, but-
Kevin Kim:
Oh boy, that’s so true.
Jeffrey Tesch:
There’s a lot of domains out there with these cool names, but nobody can spell them. So what good is it? So even in 2010, all the good .coms were gone. They really were. I mean, it’s way worse today, but it was pretty bad back then. And I’m like, “What are we doing? All right, we’re going to give out money to investors. We’re going to empower them to build their businesses. We’re going to give them cash. We’re going to give them rehab. Wait a minute, www.rehabcashnow.com.”
Kevin Kim:
Ah, Rehab Cash Now.
Jeffrey Tesch:
So for all of your listeners, if you’d like to go to rehabcashnow.com, you will end up at RCN Capital. So that was the first three years of the company, was the entire brand, 2010, ’11, ’12. I think late ’12, we switched to RCN Capital as we began to get some warehouse lines and became more sophisticated. The whole Rehab Cash Now thing really wasn’t the-
Kevin Kim:
A little bit, yeah,
Jeffrey Tesch:
The outside-
Kevin Kim:
The initials work perfectly. You sound like an investment bank [inaudible 00:13:56] who are these guys?
Jeffrey Tesch:
Rehab Cash Now, is that a 2:00 AM infomercial, or what is that?
Kevin Kim:
A little bit, but RCN capital sounds quite.
Jeffrey Tesch:
But that is how it all started. And we’ll use that in some sort of a trivia game when we’re on the road, Kevin.
Kevin Kim:
I bet. Yeah, we should.
Jeffrey Tesch:
And we’ll see who comes up with it. But that’s how it all-
Kevin Kim:
If you can guess RCN’s initials, what they mean, you win something. That’d be a good game to play at a conference.
Jeffrey Tesch:
Unfortunately, our chief marketing officer does not allow me to use Rehab Cash Now.
Kevin Kim:
Oh, of course. Yeah.
Jeffrey Tesch:
Even though I have a great affinity for it.
Kevin Kim:
Oh, yeah. Because she’s spent so much time and energy and treasure to really build the brand around RCN. But it’s cool to hear that you guys kept the initials at least and that it means something, which is really cool because that’s a good reminder of your roots.
Jeffrey Tesch:
We got some swag still around. I’ll bring you something that [inaudible 00:14:55]-
Kevin Kim:
Oh, hell yeah.
Jeffrey Tesch:
It’s still around.
Kevin Kim:
So one of the things that I’ve always found really fascinating about you, Jeff, is that you’re not from the mortgage world, right?
Jeffrey Tesch:
No, not at all.
Kevin Kim:
Because RCN has become one of the household names in private lending. And you guys are actually pretty well known in the conventional and non-QM sectors. I see you guys at those industry events as well, but you are not from that industry. So where did Jeff cut his teeth before RCN came about? What’s your background?
Jeffrey Tesch:
So went to Southern Connecticut State University in New Haven, Connecticut, got a business management degree. And I graduated from college and I said to my father, I’m like, “Dad, I don’t think I want to go work for anybody. Would you be interested in co-signing a loan for me?” And he said, “Well, what are you thinking about, son?” And I said, “Well, I want to buy a Subway restaurant franchise.”
Kevin Kim:
Out of college?
Jeffrey Tesch:
22 years old.
Kevin Kim:
Are you serious?
Jeffrey Tesch:
22 years old, I went and bought a Subway. And now this was 1990 and it was super growth time for that particular franchise.
Kevin Kim:
Oh, yeah.
Jeffrey Tesch:
They were growing like crazy. And I said, “I think I can build this thing out.” I used to see lines out the door, especially when I was in college and whatnot. And I was like… And boom, I opened my first, got my feet under my ground and then I opened another and opened another. I went partners with my brother for a while. Then he left the business. The cool thing about it was it was a very repetitive system that was something that you could scale with ease. And that’s literally what I did for the first 20 years of my life.
Kevin Kim:
20 years.
Jeffrey Tesch:
20 years.
Kevin Kim:
Wow.
Jeffrey Tesch:
Yep. Bought, sold. That was the other cool thing about that franchise was if you wanted to sell one, you can easily sell it and move the money and go do something else. I invested in some real estate. That’s how I got my start in real estate investing, because I made money owning the franchise and then I took that some of that money and began buying some rental properties. That’s how I got the bug for real estate. My buddy, the software guy, we had known each other for a while, and that’s where he got the idea that we should partner up on something. Even though he knew I didn’t have a banking background, he knew I had the entrepreneurial background on the subway side, but I also have the real estate mind, which I got to tell you, I don’t think I would be nearly as an effective leader if I didn’t have those days in Subway.
Kevin Kim:
Right. Also, I’ve always talked about the importance of what I call retail or food service or anything like that when it comes to hiring. One of the things I look for in staff is someone that’s worked in retail, food service, because they understand what customer service means, right?
Jeffrey Tesch:
Oh, yeah.
Kevin Kim:
You have to. Otherwise, I mean, you’re facing the customer right there, and it’s so important and it’s really hard to learn that skill unless you actually do it, right?
Jeffrey Tesch:
Yeah.
Kevin Kim:
And agree with you 100%. But let me ask you this, owning these franchises, my family’s also in brick and mortar retail, and there are some things that I’ve learned over the years watching and being involved in the family business. What are some things, tangible things that you can talk to our audience about that you took away from being… ‘Cause I think you told me this privately before, that you owned a lot of these things in [inaudible 00:19:01]-
Jeffrey Tesch:
I owned as many as, I think it was eight or nine at one time, especially when my brother was partner with me.
Kevin Kim:
All throughout that area, in Connecticut?
Jeffrey Tesch:
Yeah, throughout a region of Connecticut. The customer service thing is big without a doubt. But really the bigger takeaway for me was being a small business owner, the just tremendous, tremendous respect that you had to have for the teams that you were putting together. And folks that have never experienced that having to rely on people for everything, especially in a small business like a restaurant franchise, you never really know what it feels like, especially when I only had a couple of stores. If the manager was out of town, assuming I had a manager at that point, and the person who was in charge at night called out, well, who do you think showed up and did the work? It was me. And that was never lost on me when I left Subway and started to build RCN Capital.
The just tremendous importance that you must place on building out your human infrastructure, and not just hiring right, but consistently investing in them and really listening to what their needs are, and empowering them. Hiring really smart people and not listening to them is just a really bad idea. So that’s what I learned over the years, was to hire good, kind people, but then listen to them and empower them in whatever decisions that they had to make. And it sounds very rudimentary in food service, but not for nothing. There’s a lot of decisions that can make everything go bad.
Kevin Kim:
Oh yeah. I mean, even the small decisions can affect customer tension, satisfaction.
Jeffrey Tesch:
How the manager’s treating the other employees.
Kevin Kim:
Oh, yeah. And your hygiene issues too in the QSR situation too. So you have to make sure that they’re following code. So there’s a lot of-
Jeffrey Tesch:
But the Kevin, number one takeaway, really number one, two, and three is the importance of investing in your people and consistently not just hiring great, but investing in them over time and really empowering them.
Kevin Kim:
So during this phase of your life, you were also investing in real estate here and there?
Jeffrey Tesch:
That’s exactly right.
Kevin Kim:
Were you flipping or were you just buying apartments or what were you doing?
Jeffrey Tesch:
No, I was never a flipper. I was just buying for rental income.
Kevin Kim:
Okay.
Jeffrey Tesch:
That was it.
Kevin Kim:
Okay. So you said you had borrowed from small hard money lenders back then. So give us a little bit of experience [inaudible 00:22:10]
Jeffrey Tesch:
I mean, hard money. I remember the first time I went to get a private hard money loan, and the guy’s like, “Well, we’re going to need a 1% application fee.” I’m like, “Well, if I don’t get the loan, do I get that back?” He’s like, “No.” And I’m like, “1%. Really?”
Kevin Kim:
[inaudible 00:22:30] fees. Yeah, I remember that.
Jeffrey Tesch:
And then that was the conversation. And then I’m like, “So when do I know how much the interest rate and the fees will be?” “Well, you’ll know that when we get to closing.” And I’m like, “Well, yeah, but that’s…” It was a horrible experience.
Kevin Kim:
Did they even evaluate the property?
Jeffrey Tesch:
Yeah, the evaluation was, oh, I know what that’s worth and we’ll give you 70% of what I think it’s worth.
Kevin Kim:
Oh, wow. And what year was it? This is in ’08 or?
Jeffrey Tesch:
Yeah. This was like ’07, ’08, which was not a great time to be buying real estate. You really wanted to be buying in ’10 or ’11.
Kevin Kim:
Yeah, there’s a lot better opportunities in that. So you went from-
Jeffrey Tesch:
But that experience of talking to those kind of lenders and thinking to myself, there’s got to be a better way.
Kevin Kim:
Right, right.
Jeffrey Tesch:
There’s got to be a better way. And fortunate enough for me, RCN, we literally started with cash. We built the business with literal… You want to really look at us as a family office, literally lending our own money. And that’s really what we did until we got our first warehouse line in 2013, when we began to be able to board loans and use additional financing. Up until that point, it was… And for me, the real weight of thinking to myself, okay, we’re lending out cash. We need to make sure this person pays us back. So I spent a lot of time speaking with experts and underwriting and trying to figure it all out those first few years.
Kevin Kim:
I was going to ask you about that. Learning the mortgage industry must have been very challenging because you’re coming in from a borrower’s perspective, an entrepreneur’s perspective. But there’s nowhere that you can learn underwriting, there’s nowhere you can even understand the rules about these advanced fees or what licenses you need, or is the license needed at all? And all the other things about that. And you had a loan officer. Did he teach you this stuff or did you just go out there and ask everyone? Or you just kind of figured it out, or?
Jeffrey Tesch:
Best thing I ever did was go out and find a local Connecticut commercial attorney that was an expert in closing private loan transactions.
Kevin Kim:
Oh, okay.
Jeffrey Tesch:
When I found this person, they almost became a mentor to me, even though there was a business relationship there, because they did our closings. The wealth of knowledge of best practices that I needed to be putting into RCN, that’s how it all started, was getting that download of, Jeff, you need to do this, you need to think about that, and you need… And then eventually I went out and hired people from the residential world that had that expertise. But in the beginning, it really was using an attorney who had the expertise in the business who could download it to me and basically say, these are the best practices that you’re going to need if you expect to get paid back.
Kevin Kim:
Right. And I think we’ve seen that ourselves as a law firm. We’ve trained and taught a lot of our clients who are starting out, and the company-
Jeffrey Tesch:
Hiring proper counsel from day one is…
Kevin Kim:
Yeah.
Jeffrey Tesch:
Because you’ve seen it all. You’ve done it all. You’ve seen it all. You’ve seen what mistakes lenders have made. That’s probably more important than the best practices is don’t do this. Don’t do that.
Kevin Kim:
Yeah. That’s going to get your lid on fire by the government, yeah.
Jeffrey Tesch:
Yeah, 100%. But that’s really how the core foundation started. Because to your point, I didn’t have any banking background, which I’ve often said and a lot of finance folks have told me this, Jeff, that was the best thing that ever happened here because you didn’t come in with those preconceptions on well, this is what it’s supposed to be like.
Kevin Kim:
Well, I was going to say that. I think that this space, it’s specifically really does allow for creativity. So if you come from the mortgage world and you come into this space, you’re going to struggle because I mean, you can see proof of this today. You see a lot of these conventional lenders trying to figure their way into this space. They really have trouble understanding the ins and outs of it because they think it just translates from their experience. Oh, it’s non-QM. It’s not non-QM. So it’s a whole other beast and so every shop that I’ve talked to that started back then, the vast majority of them, the ones that are still around today, were not bankers. And most of them were not mortgage people. Most of them were not bankers. Most of them were either real estate people or distressed [inaudible 00:27:52] buyers. That’s where most of our guests at least have told us, and a lot of my clients too who’ve been around 15, 20 years now.
Jeffrey Tesch:
It’s interesting because we have a lot of friends on the residential owner occupied side, and once I get to know somebody, I’ll say to them, “Nobody ever graduated from college and say, ‘I’m going to go originate mortgages for a living.’ It does not happen.”
Kevin Kim:
That was my first job.
Jeffrey Tesch:
They get into the business.
Kevin Kim:
I got to college, I was like, “I’m going to be a loan officer.” That’s what I did ’cause my dad was a loan officer.
Jeffrey Tesch:
There you go.
Kevin Kim:
He did it for 40 years and he was like, “Kevin, you should learn how mortgages work.” And that’s how I ended up in this space. ‘Cause I was doing bank loans. I was doing the buildings and the shopping centers and the gas stations. Well, yeah. Yeah. No one thinks that though. Yeah, most people, they don’t.
Speaker 3:
So what is Lightning Docs exactly? Well, Lightning Docs is the gold standard and document automation software for producing business purpose loan documents all over the country. Whether you’re working on a short term fix and flip or a 30 year rental loan, Lightning Docs has you covered in all 50 states. Our staff here at Geraci is constantly working to ensure that Lightning Docs is kept current with all the ever-changing laws and regulations, so you never have to worry about your document set being outdated or providing you with inadequate protection. Our goal here at the firm is to provide our clients with peace of mind, which means that we’re always working to provide you with the best and most streamlined user experience possible.
Whether that means getting you set up to pair Lightning Docs with your LOS system, setting defaults in our interview, or just changing some of the language in our document set, our staff is always ready and willing to help you with whatever you may need. Whether you’re a private lender, a broker, bank, credit union, title company, you name it, Lightning Docs is the solution to all your loan document needs. For more information, please go to www.lightningdocs.com.
Kevin Kim:
All right. Jeff, I got to ask you something about… ‘Cause now I want to transition over to where we are, where we’re headed, because this has been a wild year. For our audience, we’re recording right now in December, end of December. It’s still 2022 right now. This is going to air in ’23, but it’s been a one hell year.
Jeffrey Tesch:
Sure has.
Kevin Kim:
And we’ve had a lot of disruption over the past five years. Ups and downs and ups and downs. Want to get your view and what you guys did also, because we had the pandemic not too long ago and that really threw us for a loop. And then we had ’22 with all these rate issues. How did you guys react, and how did you guys weather with these trials and tribulations a lot of lenders are facing these days?
Jeffrey Tesch:
I mean, COVID was just extremely difficult for everybody in our industry. Anybody that had capital relationships, unless you were a completely fund based operation and you were just lending your own money or a fund that you control, you had a real problem. Cause myself and a lot of my peers got that phone call in late March of ’20 and said, “You know what? Access to any sort of secondary market capital is off for now.” And of course, that’s the gasoline that powers all the rental loans that we do and to some respect, a lot of the bridge business as well. And getting through, fortunately because we were well capitalized, once again, we still lend our own money and we [inaudible 00:31:41] balance sheet stuff. We just made the decision to send everybody home. We were pretty good on tech and say, we’re going to figure this out. Of course then we all thought we’d be back in two weeks. We’re going to go home, it’ll blow over, it’ll be two weeks, it’ll be all good. Nothing could be further from the truth.
And basically we stopped lending for almost three months, and it was an extremely difficult decision. The only easy decision we had was what we were going to do with the employees, which was, okay, employees, you’re going to go home and you’re going to work on process, you’re going to work on manuals, all these things we haven’t had time for because we’re busy.
Kevin Kim:
Downtime. Yeah.
Jeffrey Tesch:
And once again, that was an easy decision. It may have gotten hard after a year, but the reality is we were back lending by July.
Kevin Kim:
July? Okay. So three months-ish. Yeah.
Jeffrey Tesch:
Yeah. It was like three and a half months. And then because we got back into the game pretty quick it really started ramping up.
Kevin Kim:
Oh, yeah.
Jeffrey Tesch:
And that fourth quarter of 2020 was fantastic. And we were prepared for it because we didn’t lay anybody off, we didn’t furlough anybody so everybody was just chopping at the bit, and it ended up being a real solid end of the year. And then of course, as most folks in the business know, ’21 was just a banner year for most lenders, ourselves included.
Kevin Kim:
It was hard not to make money in ’21.
Jeffrey Tesch:
I mean, we had just set ourselves up for success. We did some hiring from other lenders-
Kevin Kim:
Yeah. That downtime was a good idea.
Jeffrey Tesch:
[inaudible 00:33:27] and it was great. Now, ’22, we all knew interest rates were going up. We certainly didn’t anticipate the extremely rapid pace that they were going to go up, and thank goodness we’ve had the capital relationships that we’ve had because that’s really what’s gotten us through ’22. As I mentioned, rental loans for us have really taken off this year and that’s because of our deep capital relationships with folks that still have an appetite to be balance sheeting 30 year loans for non-owner occupied investment properties. Right now, and it’s kind of been this way for the last three or four months, we’re about 70% rental loans and about 30% bridge fix and flip. Whereas, the beginning of the year if you had asked me, I would be like Kevin, I think we’ll end up at 25% rental, 75% bridge. That’s what I would’ve thought.
Kevin Kim:
First two months of the year, the SCR was just flat because we couldn’t figure out what was going to happen to it, but it came back pretty quickly.
Jeffrey Tesch:
It sure did. And a lot of it has to do with the tremendous increase in certain geographies with rents. As the rents have increased due to the lack of supply in not only rental housing, but housing in general, those increased rents have made the increased housing appreciation numbers pencil out. So the rents have really helped out. Now, on the other side of it from an affordability standpoint, the tremendous increase that we’ve seen in wages across the U.S has also helped folks on either the buy side or the rental side be able to afford what’s going on. You can argue rents have exceeded wages, and in some markets they have, but overall it’s especially in that workforce housing like that 150 to $300,000 house in whatever geography we’re talking about. If you buy it right, the deals are penciling out and investors are still continuing to build out those rental portfolios.
Kevin Kim:
And they’re comfortable taking down a rate of five, six now 7%.
Jeffrey Tesch:
They are, because at the end of the day it’s just a math equation to them, right?
Kevin Kim:
Yeah.
Jeffrey Tesch:
As a lender, we’re not relaxing our standards. We’re looking for really a 1.2 minimum on the debt service coverage ratio. Meaning, they’ve got to have a cushion of cash every month from what that property’s renting out at. So we’re not lowering our standards. The reality is the rents if you buy it right are penciling out.
Kevin Kim:
That’s interesting ’cause I’ve always wondered about that. ‘Cause in California, it’s kind of a weird market because of that, because our values are so high.
Jeffrey Tesch:
Yeah, tough to acquire rental housing in California.
Kevin Kim:
Yeah. California is a tough market. Most folks here tell me, I’m covering my mortgage.
Jeffrey Tesch:
We’re seeing, it’s the same old story. They say it’s a smile in the US and everything underneath the smile is the areas. And really start in, I don’t want to call it rural California, but more suburban interior California away from the coast. There are opportunities there and then you just work your way East. Arizona, although the price has got a little ahead of themselves now, but there’s opportunities appearing there. Texas has not stopped, and that includes Dallas, Fort Worth, includes San Antonio, Austin, Suburban Austin, interior Austin has gotten a little ahead of itself and Houston. Alabama, doing very well. Atlanta’s always been a shining star for rental properties. Florida away from the coast, seeing a lot of Panhandle, Jacksonville, northern Florida, the housing numbers really work there.
Kevin Kim:
And it’s because you guys are national I kind of wanted to ask you this, ’cause when we were at BiggerPockets together that was one of those questions I had in my brain. I got to go, we’re in a room full of borrowers. I’m like, I have to ask these people directly, how do you feel about the rising rate environment? How do you feel about it? How have you prepared for it? And a lot of folks were indifferent about it. A lot of folks were kind of like, we knew it was coming, but I’m like, how have your lenders react to it? And then they started laughing. Probably in the summer of this past year, it felt more like lenders were scared to ask. How did you guys react when the rates started climbing? Did you guys just kind of fall suit or did you guys also have to feel it out? Because pricing was hard to figure out at that time.
Jeffrey Tesch:
At the end of the day, the lenders don’t really control the price of the capital. We don’t. We’re at the mercy of what the capital markets dictate for what that risk is going to be priced at. And right now, the Federal Reserve has decided that capital is going to be more expensive. And in turn, the capital markets have followed suit because the Federal Reserve has made that money more expensive on the overnight rate. And then from there, it’s really about, well, where do we think interest rates are going to be at different benchmarks? Where are they going to be in six months? Where are they going to be in 12 months? Where are they going to be in two years, five years? And one of the reasons that we’re still able to do rental loans in this challenging rate environment, and what’s amazing is our rates sometimes are actually below conventional rates.
But there’s one game changer in the commercial non-owner occupied space, and that’s called the prepayment penalty. So insurance companies, REITs, hedge funds, any sort of long-term capital providers that love this long-term debt on rental properties, they know if they’ve put a prepayment penalty on the relationships that they have with RCN we will sell that prepayment penalty and they’ll get a fixed return. Most likely rates are going to be lower in two years, three years, who knows about five years? But they know that that rate is locked in for typically a minimum of five years. And that is what’s giving the certainty to the capital markets.
Kevin Kim:
Oh, I didn’t know that part. That’s interesting. I like that.
Jeffrey Tesch:
Without that, Kevin, the money doesn’t exist.
Kevin Kim:
That’s creating the certainty.
Jeffrey Tesch:
Now, you can go buy a home, a Fannie Freddie loan, there’s no prepayment penalty so all the risk is really on the GSEs that are buying the paper, right? ‘Cause you could decide in three months, you know what? I hate this house. I need to move somewhere else. Pay off your loan. They’re going to lose money on that loan. There’s no getting around it. And move on to another. That’s really where the secret sauce is for the non-owner occupied lenders in today’s marketplace.
Kevin Kim:
Interesting. And that explains a lot.
Jeffrey Tesch:
Yeah.
Kevin Kim:
And when you guys had to tell your borrowers, here’s pricing, generally speaking I don’t want to get into the details about each market, but generally how did you feel as CEO? Were you worried about market reaction or were you kind of like, guys, this is just the way pricing is? ‘Cause to me, I was like, hey, pricing’s up. It is what it is. Cost of money, right?
Jeffrey Tesch:
So one of the hallmarks at RCN that I figured out a long time ago, and it goes back to before RCN, is you just got to be transparent.
Kevin Kim:
Right.
Jeffrey Tesch:
And it’s hard conversations for loan officers, right? Especially newer loan officers, they get nervous. I don’t want to give the customer the bad news, but once they get trained into that ultra transparency, they will find that just almost unburdening themselves of the reality of what the transaction’s going to look like, it makes it so much easier. The customer doesn’t need to have a story told to them. Just tell them what this transaction’s going to look like. And it goes back to even COVID, a lot of lenders were like, “Ah, we’re lending. We never stopped lending.” Well, I just told you, we stopped lending. What’s to be ashamed about that? That was the marketplace. That was it. Be transparent. We’re not lending. We’ll let you know when we are.
Kevin Kim:
No need to run from the truth. No need to be ashamed of the truth.
Jeffrey Tesch:
No. And we’ve done the same thing with rates today. And when we’re a little bit below our competitors it’s great, when we’re above and not so great but it is what it is. That transparency goes a long way.
Kevin Kim:
And borrowers, at least from my perspective, borrowers they’ve told me at least, said, “We don’t understand what the concern is. We’re not consumers. We can do math.” And for them, it’s a report, it’s a formula. If we can make the deal pen…
Jeffrey Tesch:
100%.
Kevin Kim:
Which makes sense why you don’t see as much multi-family right now, it’s not penciling, but residential rental it’s penciling and hence we’re seeing the volume. We’re not seeing these massive portfolios, but it’s penciling and the deals are getting done. Now, the bridge side, that’s a whole other beast and I think that there’s more concern on rate pricing on bridge and construction right now and there’s a lot of uncertainty there.
Jeffrey Tesch:
Well, the bridge, you’ve got the problem of who’s the takeout? The takeout is the homeowner. Who’s going to move in with their family, right?
Kevin Kim:
Who’s going to buy the house. Yeah.
Jeffrey Tesch:
And the question is, what you’re doing to that property and the price you’re going to set to put that property back into the marketplace, can the customer really afford that property at what you’re doing to it in that geography? It’s a tough question right now. Once again, bridge business is getting done in the more workforce housing segments, but the higher end, I mean the-
Kevin Kim:
Luxury housing? Yeah.
Jeffrey Tesch:
Mortgage payments in some areas have gone up 50-100%.
Kevin Kim:
Oh yeah. The time on market for any house over $1M is significantly longer now, and that’s just what we expected it but you got a point. And a lot of our clients are starting to add more of the smaller deals to their portfolio ’cause they’re getting done.
Jeffrey Tesch:
Yeah.
Kevin Kim:
All right. Well Jeff, I want to transition to another topic that I hold near and dear, and I know you’re always out there. I see you travel more than anyone that I know, and I always wanted to ask you. This is more of a tips and tricks kind of a question for our audience because you travel a lot, you go to a lot of these conventions and conferences, but you’re always so energetic. And sometimes you lose your voice, but you’re always so energetic and you’re always out there, how do you stay on top of it? ‘Cause it’s not easy traveling that much.
Jeffrey Tesch:
No, it’s not. And the hardest part for me of traveling actually is mentally preparing myself to get on the road again. It’s like I just-
Kevin Kim:
Because you’re on the road, you’re on the road, you’re not just coming back and forth.
Jeffrey Tesch:
Especially in the fall, the fall’s the worst. It’s just the nature of the mortgage industry. For whatever reason, September, October, November, and even the first week or so of December is just constant industry conventions and conferences and all sorts of things. And for me personally, the hardest part is just mentally preparing oh, I got to get back on that plane again. I got to go. Typically, once I’m there, I’m good. How do I take care of myself?
Kevin Kim:
Yeah.
Jeffrey Tesch:
I really, really focus on hydration, number one. You’ll always see me walking around with a bottle of water. It never ends. Especially because a lot of these events are in arid climates, Arizona, Nevada, even southern California. You got to drink a lot of water. Second thing is I really try to manage my sleep. I am not a fan of staying out post dinner till three o’clock in the morning and then being on the trade show floor at 6:00. That’s a recipe for disaster. You’ve got to manage your sleep. Now, you’re not going to get the same sleep that you get at home, but if you’re not getting six hours minimum you’re setting yourself up for complete failure.
Kevin Kim:
Especially if you’ve got back to back shows, which I know you guys do. That’s [inaudible 00:47:17]
Jeffrey Tesch:
Yeah, it’s hard. I mean, I really worry about those two things the most. And I’ve learned, especially hydration, the power of staying hydrated is tremendous. It really is.
Kevin Kim:
That’s a good tip.
Jeffrey Tesch:
And then from there, being smart about your travel times. I don’t do red eyes ever, even though I really want to get back to the office. You set yourself up for two days of just complete malaise if you do that red eye, at least I do. I mean at my age, I don’t know, it just doesn’t work.
Kevin Kim:
Right.
Jeffrey Tesch:
So I don’t do red eyes. But I mean that’s what I do.
Kevin Kim:
I mean, one of the things that I’ve always wondered was that, ’cause I don’t know anyone that travels as much as you do, and I’m here on the West Coast and you’re on the East Coast, and during that conference season you’re over here.
Jeffrey Tesch:
Yeah, that’s exactly right.
Kevin Kim:
And you’re bouncing back and forth from Connecticut, and there has always been a question, ah man, how does he do it?
Jeffrey Tesch:
And it’s funny because you look at a place like Texas and I think to myself, man, it would be great to live in Texas. I’m two and a half hours for everybody, right?
Kevin Kim:
Right.
Jeffrey Tesch:
Three hours max if I have to go way north. It’s tough living on the coast, it’s no different for you than when you come to a conference in Miami.
Kevin Kim:
Which is why it’s tough for us to get out to Miami because it’s a whole week. We’re losing the whole week.
Jeffrey Tesch:
Or New York for that matter, right?
Kevin Kim:
Exactly.
Jeffrey Tesch:
New York is an hour and something from my house, but for you it’s a day.
Kevin Kim:
Oh yeah. We lose the whole day so that’s why when we’re looking at East Coast we plan the whole week out just like you. We don’t want to over extend ourselves flying red eyes and stuff like that.
Jeffrey Tesch:
It’s brutal.
Kevin Kim:
Yeah, it’s very brutal. So now I’d like to talk about things like I guess looking into the future, what are you guys working on at RCN looking into this coming year 2023 and onwards? We had a brief conversation about where you see things privately, so I’d like to ask you that because you guys have a national presence. You guys have relationships that feed you a lot of great intel so I’d like to hear your perspective on where we as an industry are headed in 2023.
Jeffrey Tesch:
So the way I like to think about it is, who is the end user for our product? So most people in our industry, yes, there’s ground up construction, yes, there’s multi-family, but most folks are either originating bridge loans or originating rental loans. Everything else, while it’s significant, it’s not the key. So on the bridge side, one of the reasons, and we just talked about this that the bridge side is having a tough time, is the end user is having a difficult time affording what our customers are doing. Our customers are making houses beautiful for families to live in, which is a noble and tremendous value that they add to the especially in a… Listen, we’re almost four million houses short still today. We’re still four million houses short from where we need to be. The data doesn’t lie. That’s where we’re at.
So the value that folks investing in single family homes and making them livable is tremendous. The problem we have is the affordability because of the tremendous rise in interest rates from three to seven. So the way we look at it is when are the rates going to come down to a number that makes it much more interesting for the end user to buy that property?
Kevin Kim:
So your conventional mortgage? When are those rates going to come down?
Jeffrey Tesch:
Exactly. When are those rates going to come down?
Kevin Kim:
And we’re starting to see a little bit of creep down, which is actually positive. I was really surprised.
Jeffrey Tesch:
Absolutely. And I’ve been saying this now for a couple of months, but the date that we have circled at RCN Capital is May 1st, which if you had asked me that two months ago, you would’ve been thinking to yourself, dude, you’re out of your mind.
Kevin Kim:
Yeah. When we talked it was the summer, right?
Jeffrey Tesch:
Right.
Kevin Kim:
[inaudible 00:51:45] the summer. I’m like, “I didn’t know.” I was like, “I don’t know.”
Jeffrey Tesch:
Right. Now it’s starting to look a little more possible, right?
Kevin Kim:
Impossible, it is. It is, yeah.
Jeffrey Tesch:
Now that the rates are down in this-
Kevin Kim:
I think if we get down to a five, I think people will start being a little more okay, well, I can-
Jeffrey Tesch:
That’s exactly right. And the reason we have that date circled is the Fed did their raise in December. We believe there’s going to be one more raise coming, and then they’re going to pause hopefully for this cycle for good. But if you look at the history of the Fed and how the 30 year mortgage interacts with tightening cycles, and a recession can play into this depending on the severity of the recession, but typically approximately five or six months after the Fed does their final tighten 30 year interest rates for the government sponsored loans have come in at least a percentage to two percentage points from when the Fed stopped tightening. Now, I’m not talking about the Fed lowering rates. What I’m talking about is the capital markets anticipating what the rates are going to be down the road and the interest rates begin to come in within about six months of when the Fed stops tightening. That’s how we come up with May 1st, and we think we’re going to be in the fives. I don’t know where in the fives, but we think by May 1st we’re in the fives.
Kevin Kim:
I mean, it makes sense. We’re already in the sixes now so it’s feasible. I think it’s likely, I would love it for my clients and also-
Jeffrey Tesch:
Yeah. And that’s really going to spur demand, right?
Kevin Kim:
Yeah.
Jeffrey Tesch:
Because we went to such an extreme number, and once again, we’re three to four million houses short. There’s a demand out there for single family housing that has not gone away. Even though you’re seeing days on market increase, there’s only one reason it’s gone away. That’s because people can’t afford that interest rate.
Kevin Kim:
Yeah, 7% mortgage is too much.
Jeffrey Tesch:
The demand is still there. So that’s what we think, and we think that’s really going to spur activity on the bridge side. Now, on the other side of things, on the rental side as I mentioned, five year prepaid is saving the day. We’re locking in folks anywhere between low sixes and high sixes today on rental loans, which is fantastic, right?
Kevin Kim:
Yeah.
Jeffrey Tesch:
The key will be on the rental side of things. And you mentioned multi’s not doing that great. The reason multi’s not doing that great is because people are afraid that if we enter a recession and it’s bad, folks aren’t going to be able to afford those apartments. It would have to be a more severe recession for folks not to be because typically it’s a higher income earner that is renting out a single family home than a multi-family. Right now everything’s pointing to a mild recession. So we believe that that capital for the single family of houses are going to continue to flow because we think the recession, especially with how tight the labor market is we think it’s going to be, but it remains to be seen. The key will be the asset quality of the single family home. Right now we’re at, from some of the big data providers it’s like a 98% rental and people paying their rent every month. So it’s pretty good, and that’s what we really expect going into next year continuing. Where the rates are going to be on a single family rental, they should also start to come in by May as well.
Kevin Kim:
Are you guys working on anything that you’re excited about for 2023? Is RCN working on, is Jeff working on anything for 2023 that you’re excited about?
Jeffrey Tesch:
I mean, we’re always working behind the scenes on more capital that will allow us to add a more diverse product suite. We really want to get back into the ground up construction, and if the recession is mild and we come out on the other side of it, and we didn’t talk about this at all today, but short term rentals, the Airbnb style, the capital’s pretty much dried up for that.
Kevin Kim:
Yeah, it’s falling apart.
Jeffrey Tesch:
And rightly so, because we’re seeing reservations plummet on [inaudible 00:56:24].
Kevin Kim:
Yeah, it’s hospitality. Same thing.
Jeffrey Tesch:
Yeah. We believe that the short term rental business is a great business to be in, but we just got to get to the other side of whatever recession we’re in. That is a market that we were in and we would like to get back in significantly.
Kevin Kim:
Okay. Yeah, I think it’ll come back. I think if we can get pricing under control, it’ll definitely come back. All right. So last segment of the show. I’d like to ask some kind of rapid fire questions to our guests. I already asked you what your first job was and for our audience, if you haven’t heard that, go on our YouTube page because Jeff gave the best story about this one. ‘Cause that was awesome. That was awesome. The other questions we ask, I actually don’t know this about you, so we always ask our guests when you’re not out there killing it in the private lending world, what do you do in your own time? What do you do in your downtime? If you’re not working, you’re not out there traveling for conferences, what are you doing?
Jeffrey Tesch:
So my wife and I got married right out of college. So we had our three boys while we were all in our twenties, young twenties. Had them every two years, by the time we were just about 30, we were done. So our kids are now, they’re graduates. The last one just graduated college a few years ago so they’re all out of the house now. So my wife and I, especially with my travel schedule, we like to spend a lot of time together doing things. We live in the Northeast, which is an amazing area for discovering things, even though I’ve lived here my whole life. We like to take weekends, overnights, going places, doing things, seeing things that we’ve never done before. We’re blessed to live closer to New York, Broadway, we love Broadway shows, music, all that kind of stuff that when you’re raising kids a husband and wife don’t get to do, right?
Kevin Kim:
Nope.
Jeffrey Tesch:
Because you’re in the-
Kevin Kim:
I don’t know how long it’s been since I watched the movie, let alone a play.
Jeffrey Tesch:
Yeah. It’s like Mayhem, which I loved. I loved that. I loved coaching little league, that was an awesome part, but that’s all behind us now. So we’re very different. All these things that probably sound really attractive to you, oh man, I would love to be able to go do that. You’ll get there.
Kevin Kim:
Yeah, for sure. I love that though.
Jeffrey Tesch:
It’s a different phase of our life now, which we really embrace and we love.
Kevin Kim:
It’s like… What is it called? Empty nesters, but all the positive things that come with all that. And that’s so cool.
Jeffrey Tesch:
That’s right.
Kevin Kim:
That’s awesome. I love to hear that. Last question on the rapid fire are going to be, this is a good one. What business tool can you not live without? Is there a tool that you use for your job and for your day-to-day and from a business standpoint that really is so impactful you could not live without it?
Jeffrey Tesch:
Yeah. It’s a little self-serving, I’m sorry, but we built our own technology here at RCN and we branded it Bridge Loan Network. But if we had never built that software, I don’t know how we’d do our job. Because there was no great solution to run a private lending business, and I asked all my residential friends, Galax and Compass, none of it made any sense. Without that tool, Kevin, I would be completely ineffective as a leader.
Kevin Kim:
So that’s your company’s operating system?
Jeffrey Tesch:
It’s our proprietary software system that we run RCN on, and then we also partnered out with our correspondent lenders and they run theirs.
Kevin Kim:
That’s cool. That’s cool. Yeah, I mean it’s a little bit, but that’s cool. I mean, I love to hear that ’cause we’ve heard this from a few of our guests that they built out their own internal software, but I’ve also seen BLN at events. So you guys offer it as a service to other people?
Jeffrey Tesch:
Yeah, Bridge Loan Network is a service to correspondent lenders that they get to run their businesses on. We also have a pretty robust broker system, where brokers that are just brokering deals that can use it for pipeline management and whether or not they send it to RCN doesn’t make a difference. It’s a really robust tool that we built and I hate to be self-serving, but I don’t know how we live without it.
Kevin Kim:
No, listen, you built it and you live on it. That makes sense, right?
Jeffrey Tesch:
Yeah, absolutely.
Kevin Kim:
And I’ve gotten all kinds of responses, but I like to hear real operational answers and that’s the system you live on.
Jeffrey Tesch:
That’s it.
Kevin Kim:
It’s a very challenging thing, but what’s fascinating in this space is a very common thread is that a lot of companies have built their own proprietary systems to satisfy their unique needs. And it’s not really just an LOS, it’s an entire operating system for the business.
Jeffrey Tesch:
Yeah, I mean that was the key because I did not Kevin, I did not want to get into building a software platform.
Kevin Kim:
Of course not. No one wants to build their own software.
Jeffrey Tesch:
I’m like, “I just want to make loans and make money. I don’t want to go build a software system.” But at the time it was very apparent that that’s what we needed to do. And we still continue to build that out today, and because we’re a lender, I think it’s the best ’cause I’m not a software provider building a solution for a customer. I’m a lender building it myself for myself, and then all our partners get the benefit out of it. But that’s why it’s so good, is because we know what it needs to do and what it doesn’t need to do.
Kevin Kim:
Fair enough. All right. Well, would you like to leave us with any parting words for going in 2023? Because we’re going to see you on the road pretty soon again, but we rarely get a chance to sit down for this long so any parting words for our audience going into 2023?
Jeffrey Tesch:
Parting words are rates are coming in next year, second half of 2023 it’s going to be way better than the first half. Make no mistake, the next three months are going to be very challenging, but once the buds start to appear on the trees in late spring we’re going to be in a much better place. And then finally Kevin, I would tell all the entrepreneurs out there worry about your people first, everything else is secondary. If you take care of your people, they’ll take care of you.
Kevin Kim:
I love that. That’s very true. Well, that’s all the time we have for this episode of Lender Lounge with Kevin Kim. Jeff, thank you so much for joining us and we’ll see you on the road at the next event. And for all of our listeners, thank you very much. Wow, that was a great episode, wasn’t it? Hey guys, don’t forget to put your Apple Podcast comments and five star review. You’re going to be entered into a contest to win a pair of Apple AirPods, so please do so. Let us know how you feel about the show and we want to hear your feedback. Thank you very much. This is Kevin Kim.
Thanks for listening to Lender Lounge with Kevin Kim. I hope you’ve enjoyed this episode as much as I did. If you did enjoy, please leave us a five star review on your podcast platform and be sure to follow our show to be notified of new episodes. If you’re on YouTube, don’t forget to smash that like button and hit subscribe for more content from all of us here at Geraci. Lender Lounge with Kevin Kim is available on all podcast platforms. Referrals really help us spread the word, so please send this over to someone you think might enjoy it. See you next time. This is Kevin Kim signing off.
