Episode Transcript
[00:00:00] Speaker A: You're listening to the Preferred Way, a retirement podcast brought to you by Preferred Trust Company, the preferred custodian for all alternative investments.
[00:00:09] Speaker B: Thanks for everyone for joining us today. You are on the Preferred Way, a preferred trust company podcast. And today we are excited to have Jeff, CEO of RCN Capital, who we've known for a long time, we've worked with for a long time, had a very good relationship and so we're so excited to have you on our, our podcast today. So thanks Jeff for being here.
[00:00:34] Speaker A: Chris, it's awesome to be here. Preferred Trust, always been an awesome partner of ours. Happy to get into it today. Excited, great.
[00:00:43] Speaker B: Okay, so first just tell us about rcn, how it got started, what it's, you know, what is rcn, what do they do?
[00:00:52] Speaker A: So I'm going to dive all the way back to 2010 now. For folks listening or watching, 2010 was generally not a great time for anybody in the investing world, whether it be mortgages, real estate, equities. No matter what you were in 2010 was not great. But we, myself and my co founder fought with the dislocation in the mortgage space, all of the foreclosures and the short sales and all the troubles the banks were going through. Many of these assets were being placed back into the marketplace in a state of disrepair and some investors were buying them. Many of them were debt starved, meaning they just didn't have the money to be able to acquire the assets. We thought what a great time to start an asset, asset based lending business focused on investors who are buying distressed assets. So those people that were buying these beat up properties, they were rehabilitating them, making them livable and putting them back into the marketplace for families to live in. We decided that this is the time 2010 to start a company lending to those folks in a more institutional manner. So there it is. That's what we did and that's what we've been working on for the last 15 years, lending to investors from coast to coast.
[00:02:18] Speaker B: So how, how has RCN evolved since then?
[00:02:22] Speaker A: Yeah, good question. And of course, you know, so much has changed in the, in the real estate world since then, right? Like so many properties went into the MLS without even receiving any offers back in the day. And today it couldn't be any further from the truth than sort of how we've evolved with the marketplaces. We've kind of grown up with it in those early years, certainly we were providing debt to those investors, making those houses livable again, putting them back into the marketplace. And they are all short Term loans, Chris. Right. So somebody comes along, they buy the house, they need money to, to not only acquire the asset, but also to fix it. We would provide both of those funding mechanisms and then they would pay us off, typically in 12 months or less. Well, that worked for quite a while, you know, those first three, four years. But then the real estate market started picking up and we began to grow with it.
The first product we rolled out going into 2015 was a rental loan. So as some of these investors were discovering that not only could they earn a nice living on buying a property, fixing it, selling it, but they also realized that if they bought it, fixed it, and rented it to families that weren't interested in buying a home, that there was another vertical for them to be able to earn on. That product for us has grown up into a multibillion dollar product for us as an originator across the United States.
Really proud of how we've grown with the marketplace.
As those assets have sort of reclaimed their previous values and in many marketplaces gone on to much, much higher values, investors have come along with it. And I would argue that investors have been a big part of being able to resupply the housing stock across the U.S.
especially in today's marketplace where there's such an incredible shortage of housing, investors are playing a key role in keeping that machine moving along.
[00:04:36] Speaker B: So what sections of real estate or sectors of real estate are you seeing the most growth right now?
[00:04:42] Speaker A: Yeah, sure. So I'll take you back to 2020.
Covid. Right.
At that point, our origination was somewhere in the neighborhood of about 65 or 70% of all the loans we were doing were to people buying, fixing and selling. Well, along came Covid.
And those, of course, first six months were difficult till everybody sort of got their feet under and figured out what was happening, what wasn't. Investors realized that, yes, the real estate market was stable and actually growing by the time we got to the fall of 20 and our, our customer requests began to change.
More folks were interested in renting, less folks were interested in flipping. Some of that was because of the dislocation of folks not moving anymore. They weren't going from point A to point B. There wasn't as many transactions in the space with people, you know, sort of taking new opportunities because of COVID So the rental, you know, folks were staying where they put, but they didn't want to commit to that long term mortgage. So rental was the next great option. And of course, investors are always with their ear to the ground, ready to supply what's needed in the marketplace and they sure did. So many investors were buying, fixing it and renting out. Once again, Chris, it's so important that everyone understands investors are really good at finding assets that aren't performing in the marketplace. They're abandoned, they're unlivable, they make them livable again and then put them back into the marketplace. And post Covid. A great deal of that has been buying, fixing and renting out to folks now over the past, let's say three years post 2021, going into 22, right about when the vaccine started coming out, the rental business never slowed down. So yes, people began to move around again, taking new opportunities, new jobs. But there seemed to be, and this is really important, there seemed to be some sort of a shift in the mentality of the, of the single family tenant or owner that you know what, I might not want that commitment that I have today, that commitment I'm going to hold off and I want a single family home. I don't necessarily want to live in an apartment, I want to live in a home. But a rent sounds really good to me. And as of today, we're up to over 70% of all of our originations are to investors buying rental properties which is, it's almost flipped on its head since the start of COVID It's Chris, it's really been a big, big change and we're happy to be a big part of supplying that capital to the marketplace.
[00:07:50] Speaker B: Yeah, that's pretty darn incredible. So for investors, what is the attraction to the private money versus your traditional lending?
[00:07:59] Speaker A: Sure. And you know, that's a question certainly goes back to pre Covid. It really goes back to the, to the days when we started the company, which is why was this, why was there a void in the marketplace that your company was filling that the banks weren't doing well Initially the banks didn't want to have anything to do with investor real estate. Right. As we discussed foreclosures, short sales, they wanted any sort of investor loans nowhere near their balance sheets. So in those early days there, there was a real lack of capital and that's what gave us our start. But as time evolved, 20, 15, 16, 17, when those real estate trends really started showing appreciation in the single family housing market, what ended up happening is the banks began to dip their toe back into the marketplace. But there wasn't nearly the appetite for investor loans the way it was pre great recession. And independent mortgage originators like myself in the private non bank world have really filled that void. You know, our capital, especially on the institutional side, the capital that we use to fund these long term rental loans, we have been able to secure capital that allows these investors to be able to hold these properties like a traditional mortgage for 30 years. The only difference is they are they have a tenant in their home and it's not themselves and it's providing that service.
The banks that appetite has not returned.
While some smaller regional banks are definitely in the marketplace, the larger regional and institutional banks have not returned to the marketplace to provide that capital that's so desperately needed by investors.
[00:09:57] Speaker B: And so how does RCN contribute to investors reaching their goals? Like how do you feel? You work with them for that?
[00:10:04] Speaker A: Sure, without a doubt. We believe that investors are the solution to the housing crisis. We believe that investors play a pivotal role to, to really beginning to take that, that housing stock that number one may become just straight up unusable if it doesn't get repaired and bringing it back into the marketplace. We believe that RCN and other non bank private lenders like ourselves provide that role to take capital that has been earmarked for mortgages and deploy it into the space that is so underserved.
I mean, I just can't stress enough, Chris, without the role that, that lenders like myself play today, the investors would not have the ability to be able to buy those homes and put them back into the marketplace.
The, the capital that's needed for that is something that is much more institutional than it used to be. You know, some of our, our capital sources today are private equity insurance money. This is long term money that we've been able to deploy into the marketplace that is committed to the single family home space in the US and that's really important for everyone to understand. That is committed capital to helping solve the single family housing shortage in the US for the long term.
[00:11:35] Speaker B: So what makes RCN more attractive to investors than other private money lenders? What sets you guys apart?
[00:11:42] Speaker A: Sure. You know, it's interesting, I love telling the story of how we got started because for the first three years of our existence we literally lent our own money. Like that's it was our money being deployed to capital recipients, flippers, rental folks acquiring single family homes to build out portfolios. Like it was literally our money. And I think as we've grown up over the almost last 15 years, that DNA of us putting like literally our money into the marketplace has set us up in such a way where success for us is defined number one by the health of our employees. Right. Like we have built a company of nearly.
Wow. We're Coming up on close to 250 employees today. Wow.
And they are without the doubt the most important thing. Because as we have grown, we have really put their careers first. And deploying that capital from day one that was ours, we knew that at the end of the day we're on the hook for building this enterprise and the employees behind it. Right.
So that that sort of homegrown DNA that we have always taken so seriously has never been lost on us. Now we can talk about other ways, right? Like so, because we all lent our own money, we underwrite pretty strictly, right. Today we have bank lines and insurance partners and there are securitizations of our papers and lots of big words and finance. Right. Like all that stuff is important, but most of the people that started the company are really still here, myself included. None of that homegrown, hey, if we're going to make this loan, we better make sure they pay us back. Has left us. And that's really important. Especially when you begin lending out other people's money. Like when you start lending other people's money and they're counting on you to provide a customer that's going to be a good long term partner. Especially in these rental loans, like these are 30 year loans. Like this is not a short commitment. I think because we've always looked at it as our money, we've never sort of lost that way. And I would argue that, that looking at it as our own money, we are the most valuable partner an investor can have. Mainly because if we don't think the investor has a property that is going to be profitable for them, whether it be the short term buy, fix and sell or the longer term rental, we're not going to make that loan. Now, selfishly it's because, well, we want to get paid back, right? Sure.
It's our money, we want to get paid back. And it sounds simplistic, but in the mortgage world, most people are lending other people's money, it's not their own. And that includes us today. But that isn't how our DNA was made up. Right.
As I said, the investor having the benefit of us being really critical of deals is almost like having a silent partner saying, do you really want to do this deal? Do you really want to make this loan? Excuse me? Do you really want to buy this investment having that silent partner who's your lender, sort of being your double check when you're getting into a deal? I would argue that that's more valuable than anything else.
[00:15:34] Speaker B: Yeah.
[00:15:35] Speaker A: Especially in a competitive marketplace today where there's such a shortage of homes for sale. Investors are, are out there, you know, trying to secure assets and it's easy to get caught up in the moment. It's really easy even for seasoned investors. Really proud of our ability to be that double check, that extra set of eyes on the deal. I think that's our competitive advantage. I think that that's our secret sauce.
[00:16:06] Speaker B: That's awesome. So how do you mitigate risk?
[00:16:11] Speaker A: Yeah, well, it starts with very strict underwriting. Okay.
You know, investors that buy a property, to buy, fix and sell, need to have a certain percentage of return in geographic regions across the country. A lot of that is dictated by the size of the transaction. If you're buying a property in Orange County, California, your percentage of profitability can be much smaller than it is in a Oklahoma City, Oklahoma, both single family homes, but the prices are way different. Right?
[00:16:46] Speaker B: Yeah.
[00:16:46] Speaker A: So it's really important that the investors, when they are acquiring those assets have a hard cap on what they are willing to accept for a percentage of profitability. And listen, Chris, this isn't, this isn't rocket science. They buy it for X. They come up with a really detailed scope of work that we underwrite. Right. We take a look at that scope of work making sure they're not over improving it for their, for their zip code.
And then what is that house going to be worth when they're done? Right. That percentage of profitability is super important. And you need to have those guardrails internally and then we're here as the lender to make sure that we enforce them. Right. And it's no fun working on a flip for eight or 10 months and making no money or even worse, losing money. But it's. Right, it's, it's, it's awful. And if, if the lender can enforce some guardrails and, and, and be communicative with the borrower saying this might not be the deal for you. That, that to me is such an asset and, and that profitability is really what it's all about. Listen, we're here to make money. Our customers are here to make money. If they're not making money generally, we're not going to make the loan.
[00:18:12] Speaker B: Yep. Agreed. So let's talk about, let's shift a little bit and talk about self directed IRAs. Sure. And how they are, are working, how custodians are working with RCN and how the, how the account owner can secure financing to buy a property using their ira.
[00:18:31] Speaker A: Yeah, the self directed IRA is amazing. Right. Like it is a tool that so many folks, rightfully so when they grew up, they heard about individual retirement accounts and how it works and you buy some equity, some stocks and you put them in there and the tax deferred and it's great. And that certainly is a percentage of what you can do inside of those accounts. But there is a whole nother world of real estate that can be inputted into your long term retirement plans through the IRA programs. And once investors begin to get on to that track there, there is no stopping them. And the fact that you can use leverage instead of, you know, like a lot of people think, oh, okay, yeah, I've heard about real estate.
I don't have that much money in there. I only have a couple hundred thousand dollars, I don't want to buy a house and that's the only thing I have in there. Once they realize that they don't need to use all of their capital inside their IRA to deploy into a self directed tool that they can actually use leverage from a lender like RCN Capital to layer onto that just like they would be doing it outside of the individual. The ira, right.
Boy, the eyeballs open up and the lights start going off over their head. They're like, oh, I didn't know that. And it's, it truly is an amazing tool that we're 20, 24 was a good year for us when it came to our, the adoption, but we're just scratching the surface. It's such an small percentage of what we do. We see this incredible opportunity for investors to treat that investment as a portion of what their long term retirement, retirement strategies are.
[00:20:33] Speaker B: Yeah, absolutely. We always have clients asking us why, you know, I've tried to go to a bank, you know, to get a typical, you know, standard financing to buy this house using my self directed ira. They won't do it. And then once we introduce the concept of non recourse loans, because there aren't a lot of, there aren't a lot of lenders that do the non recourse. You're not going to find it at your typical, you know, Wells Fargo bank. That's just not something you're going to find. You have to find a private lender that offers that. So talk to me a little bit about the non recourse side of things.
[00:21:06] Speaker A: Yeah, I mean for us it's pretty simple. First off, we're at big picture, right? We're an asset based lender. So if we're an asset based lender, yes, typically we require a personal guarantee. But once you go into the IRA world, we just treat the asset as the guarantor and we remove the personal guarantee. And now you've sufficiently solved the restrictions that so many people don't understand. Right. Like removing that personal guarantee allows you to be able to leverage inside your sdira. And all we do is we lower the leverage inside of the loan. Instead of being max leverage, we take it down 10% to mitigate for the personal guarantee, which most investors welcome because now they're using capital that was never taxed. Right. It's, it's such a win.
[00:22:08] Speaker B: It is. We encourage clients when, you know, when they're saying, well, I don't have enough money, you know, we'll look for other options because you can leverage those funds that you do have and then you can invest in multiple things.
So tell me what portion of your, your business is the IRA world?
[00:22:23] Speaker A: Oh, right now it's under 10%.
[00:22:26] Speaker B: Okay.
[00:22:27] Speaker A: Without a doubt. And this is why I was so excited to hear that you folks are, are, are partnering in a real way with our company. Because I just don't feel like there's enough education about the opportunities of SDIRA investing when it comes to single family investments.
It would seem to, and you know, we've done our fair share, but it seems to me it is a tremendous opportunity for folks who are thinking about diversifying their strategy. And obviously you want to consult your financial advisor for all of this, but it's something to think about.
[00:23:05] Speaker B: Absolutely. Yeah. We always say, you know, with the self directed ira, you want to have your financial advisor, your cpa, even an attorney sometimes, you know, with you along for the journey that you're going to be taking.
But there are so many options out there. And just like you were talking about before, we've seen a lot of people go through and buy properties not only for the fix and flip, but we have a lot of them that, that buy properties, leverage it, and then rent it out. And so they see that rental income coming into their account every month. So, yeah, there's lots of ways to utilize your self directed IRA in the real estate world.
So what's next for RCN Capital? Tell me about any upcoming projects or initiatives that you guys are particularly excited about.
[00:23:51] Speaker A: Well, we've been talking a lot about the housing shortage in the US and investors have really begun to embrace single family home construction for investment purposes, meaning single family homes on individual lots scattered all across our United States. Investors are finding these lots and often they're, they're what's known as infill lots. So if you drive on Any street in anywhere United States. And you drive down that road long enough, typically subdivisions, all of a sudden you'll see like this wooded area in between two houses. And that that wooded area more often than not is an empty lot that somebody owns and never built on. And investors are finding these lots all across the US and building on them. And what they're typically doing is they're either going to buy the lot, build and then sell for a family to live in, or they're going to buy, build and then rent. You know, some of the things we've been talking about today, investors that are beginning to take this model seriously are really doing very well. Chris.
The lack of housing has caused investors to pivot and this pivot of ground up construction, which at the end of the day, especially now that housing materials have really settled down, you can really get some firm pricing today on what the, the actual vertical is going to cost you. Now that these, these sort of spikes and over the last three or four years have leveled out. Investors are having a great deal of success.
RCN as a lender has really embraced this. So we're providing financing to folks in every, every geography across the US to go vertical and provide more housing to help alleviate the housing shortage that we're dealing with today. That by far is our number one priority going into 2025, getting that capital out there, trying to supply hopefully a solution to our housing shortage.
[00:26:11] Speaker B: I love that. All right, so tell me anything else we didn't cover today that you want us to know about rcn?
[00:26:18] Speaker A: Well, listen, we're a family company that was built in the, in the toughest of times. Right. Like thinking back to those early years and what we tried to accomplish.
As I said, our DNA hasn't changed, which is taking capital from sources that need a return and deploying it into a marketplace that is desperate for financing to help solve the housing crisis. Back then it was solving a crisis of foreclosures and short sales and dilapidated houses. Today it's the exact opposite. It's solving the crisis of lack of single family housing for families across the US really proud of what we've built. Happy to be an investor lender who, you know, most of our customers are family run businesses across the U.S. they're folks in pickup trucks getting out there every day and, and doing their thing, happy to be a partner in that endeavor. It's, it's, it's something that as we've grown, our company has really embraced and we, we just couldn't be more excited for where we're going.
[00:27:37] Speaker B: That's awesome. Well, thank you, Jeff. We thank you and appreciate you for, for being here today. And we look forward to working with you in the upcoming months. And we look forward to successful 2025.
[00:27:47] Speaker A: Awesome. Thanks so much for having me. Chris.
[00:27:50] Speaker B: Thanks. Thank you everyone for watching another edition of the Preferred Way.
[00:27:55] Speaker A: Thanks for joining us for another episode where retirement savers meet alternative investments. Can't wait for the next episode. To learn more, visit our website@preferredtrustcompany.com.
