Private Lending Insights

Rocky Butani (00:00)
Welcome to Private Lending Insights. I'm your host, Rocky Butani. In this episode, I interviewed Jeff Tesch, the CEO of RCN Capital, which is one of the largest private lending companies in the entire country.

We covered a variety of topics. We talked about what happened in 2024 in terms of loan volume, where Jeff sees things going in 2025. We talked about interest rates, securitizations, capital markets, wholesale lending, and more.

All of our interviews are available on your favorite podcast, YouTube, and you can also find them on our website, privatelenderlink.com.

I'm sure you'll learn a lot from listening to this episode. Let's get started. Here we go.

Rocky Butani (00:39)
All right, Jeff, thanks for joining me for this episode of Private Lending Insights. How's everything with you and how's everything at RCN Capital?

Jeff Tesch (00:48)
Yeah, happy new year, Rocky. Happy to be into the new year for us.

Boy, I'll tell you the two week holiday span this year. It was a lot like it was like the world almost shut down for two weeks with the way those holidays fell in the middle of the week there and then back at it and January is a big month for us because we have annual meeting we have a big gala so it's January gets pretty crazy once we get back at it.

Rocky Butani (01:20)
Nice. And obviously you guys have a stacked conference schedule as you always do.

Jeff Tesch (01:27)
Yeah, tons of tons of events around the country this year. Being a big wholesale lender, we're always trying to get out there and meet new brokers, existing brokers, correspondent partners. It's just a never ending venture around the country. And the team really embraces, as a matter of fact, is January, February kind of quiet for travel anyways. But then once we get into March, it's off to the races.

Rocky Butani (01:57)
Nice. So let's talk about the past and then we'll come back to the present and the future. So tell us about 2024 for RCN. How was it in terms of loan volume and growth?

Jeff Tesch (02:9)
Well, growth was good. We grew almost 20%. And we're pretty pleased with that. Our loan volume per transaction was up, we closed the most loans we've ever closed in the history of the company. We also closed the most dollars we've ever closed in the history of the company. More impressive was the number of transactions. You know, we eclipsed that 8,000 mark this year, which is just crazy. Like, it's hard to believe. I think a lot of that had to do with the DSCR market and folks continuing to not only acquire new properties, but also refi five year debt that was coming due. And a lot of those transactions are between 225 and 350,000. So lots of those transactions really propelled us this year, it was, listen, was the interest rates went the wrong way.

That wasn't what was supposed to happen, right? Like the rates started going down the end of the summer and we were all set up there going into the late third quarter fourth quarter for a nice reset of interest rates and The exact opposite happened we get we had that one nice blip there for about 45 days And then the rates turned around on us. It didn't stop the growth, but it could have been better It could have been better if the rates had had stayed down where they were

Rocky Butani (03:45)
From the data I've seen, it seems like the loan volume in 2024 was higher than past years, even in 2021. And I can't explain that. Do you have any thoughts on why that is, even in a high rate environment, that 2024 was so good?

Jeff Tesch (04:03)
Yeah, you know, first off, I believe we have a difficult time getting a handle on exactly just how much loan production is produced in the private lending space. With that said, I believe there's been a tremendous amount of consolidation and

the larger lenders like RCN that are wholesale and in minded. A lot of folks have fallen under our umbrella now and we've kind of shepherd them along and volume is good. I'm not so sure how...

how overall we look at that data and we think about the volume in years past from a private lending standpoint. But overall, the larger lenders that are still here seem to have all had a good year in 24.

Rocky Butani (05:04)
And was it significantly better in the later part of the year versus Q1, Q2?

Jeff Tesch (05:11)
Yeah, I mentioned that that third quarter dip right like coming out of the summer

that really propelled us for a great fall. mean, the fall was just spectacular. And November, December weren't bad either, but like going into autumn, that dip in the rates really spurred some activity both on the purchase side, as well as some opportunistic refinancing as well. People that knew it, they had to do it and they just did it because the rates dipped down into the sixes, which was just tremendous.

We probably pulled a little volume forward there from the end of the year, but it sure felt good at the time.

Rocky Butani (05:55)
Nice. And how about the percentage of loan volume as DSCR versus Bridge? Are most of your loans that you're funding DSCR long-term rental loans?

Jeff Tesch (06:08)
Yeah, it's interesting. As the year evolved, our DSCR started picking back up again. We've always since COVID been about 75-25, about 25 % bridge, 75 % DSCR. I mean, we have put so much work and effort into making sure that we had just a tremendous DSCR program. It's awesome, right? Like it was great. But.

We really weren't happy with where our flip business was. So we started making some efforts, some leverage changes, and that started to show results in November, December. It was more like a 70-30 towards the end of the year. So we were happy about that.

Rocky Butani (06:55)
Great. And then let's talk about the future. What do you see happening in 2025 for private lending in general?

Jeff Tesch (07:01)
Well, a couple things. Everybody likes to talk about rates. The reality is we need rates to go down in order to unlock some inventory for our fix and flip friends out there, right? Like we...

We're just not gonna be able to unlock this inventory until we get some of these rates back down into the sixes. And everybody, you know, says it needs to be lower than that. But I know if the rates get into the sixes, we'll unlock some inventory just from opportunistic folks, people that are waiting to move. You know, life happens, Rocky, right? Like people have children, people will change jobs. There are divorces like...

Some people are just sticking it out for the sake of these low rates when the reality is if they can just get a Marginally better rate. They are ready to move Not because of the money but because of life so we need some lower rates to unlock inventory on the flip side Same goes for the dscr. You know, one of the challenges and we can get into this today, but One of the challenges that a lot of folks who been aggregating single-family houses for rental is

Insurance and taxes are really beginning to have a problem for folks especially the folks that refinance their debt and sort of did a max value They are realizing now that that with the increase in taxes and insurance These deals aren't penciling out the way they were before and that's causing a problem So we could use a dip in the rates

just because the expenses on the other side, aside from repairs and things like that, have gone up. The fixed cost of insurance and taxes. we're optimistic, but we're not kidding ourselves, Rocky. We need the rates to come down marginally. I'm not looking for a big move this year at all, but we do need rates to come down.

That's a whole other conversation on how they come down. I'll leave that up to you to guide that discussion.

Rocky Butani (09:15)
I'm not sure if I can help out there either. But what are the rates currently averaging for your DSCR loans right now?

Jeff Tesch (09:17 )
Hahaha

Yeah, the DSCR the nice thing is because of the way the DSCR loans are structured you have these prepays on them and For those that don't really understand how the private lending business works We are accessing buckets of capital

that is private in nature and that private capital needs a certainty of return for a certain period of time. Unlike your traditional Fannie Freddie loans, which are no prepay, can buy a house tomorrow, you can pay it off in a month, there's no ramifications to that. On the business purpose side of things, on the rental loans,

These the typical loan has a prepay and that's how we lock in these rates. Now the nice thing about that is it's allowed us to have rates that are extremely competitive because the certainty of that private capital is being locked in for a longer period of time than on the owner occupied world. And that's really making a difference. So to answer your question.

With these lock-ins that we have today, people can buy the rates down into the sixes still with points because of the prepays that are on these loans anywhere from three to five years. But you do have a certainty of payment at that point, and you also have a certainty of return from your investment. So yes, we would like to get the rates down further, but deals are still pencil and out, Rocky.

Rocky Butani (10:57)
Nice. you know, I've heard some about some transactions in the past several months where there's either a one year prepay or in some cases there's no prepay. Is that only possible when the borrower pays a bunch of points upfront to compensate for that?

Jeff Tesch (11:17)
Yeah, it's either going to be points or a higher rate. It's going to be one or the other. The reality is the higher rate will compensate and it'll have to be significantly higher. But you can also buy your way out of prepays as well. But what...

Most folks do. mean, most folks that are buying a rental home expect to own these homes for years, right? Generational wealth. Most people are comfortable buying down the rate and then locking it in for that three to five year period.

Rocky Butani (11:50)
But even if they wanted to refinance within the three to five years, they're going to pay those points eventually. So do you see investors, maybe the cycle hasn't come to that point yet, but do you get investors who say, hey, I just need out of this loan. Here's my two or three points that I'm going to to pay it off early.

Jeff Tesch (12:12)
it happens because opportunities come along, right? Like somebody who's cash strapped in the marketplace today, but maybe has a home with under 50 % equity in it, right? Maybe it's worth 400,000, they owe 200,000 and they have an amazing opportunity, but they've got to unlock some cash to be able to go do that. It happens more often than you think where people just say, well, listen, I know I've got a two point penalty on my five-point

year lockout, I'm just going to pay it so I can access that cash, sell the house and move on to the next opportunity. It happens, Rocky.

Rocky Butani (12:51)
And so we've talked about the rates as far as DSCR loans go. What are your thoughts on interest rates for short-term loans? Do you see any changes coming in that sector?

Jeff Tesch (13:01)
Yeah.

Yeah, a lot of that is going to be driven by the overall marketplace. The same way that DSCR is rates are higher on bridge lending. A couple different ways that lenders like ourselves securitize. We also use balance sheet lending, which has a warehouse component to it. Now that warehouse component is driven by the Federal Reserve and how those rates are set. Without further reduction there, the rates are going to remain high.

for longer and as well as some of the Treasury and LIBOR. There just hasn't been any relief and without that relief coming especially on the Treasury side where a lot of the longer mortgage rates are set we're just not going to see a reduction in rates on the short term or the long term for that matter.

Rocky Butani (13:55)
So last year there was a lot of rated securitizations which you know supposedly there's it's it's gonna drive rates down at some point Do you see that happening and and what are your thoughts on on the enormous securitization volume that's? taking place

Jeff Tesch (14:11)
sure, yeah, without a doubt. So the rated securitizations were a big deal for our industry, right? Like we're a small, when it comes to asset-based lending, we're a relatively small component, even though...

Well in excess of $10 billion is being originated every year in the business purpose space, just on single family homes, aside from the commercial. The reality is the rated securitizations now allow institutional investors access to those bonds. Before, it was much, much smaller pooled by them being rated a much wider perspective of accreditation.

investors today can access those bonds and theoretically the larger pool of capital should drive down rates if supply and demand works.

Rocky Butani (15:09)
And that's really because the lender's cost of capital goes down, right? Where the bonds are issued at a lower and lower amount just because there's so much demand from multiple investors in that space, right?

Jeff Tesch (15:23)
Right.

Yeah, before they were rated, it was a very small pool of investors that had access to the unrated securitizations. Now with the rated securitizations, family offices, like it's a much bigger pool of people who can access those bonds. And the single family home continues to be the all-star, Rocky. People love the certainty of the return. People love the certainty of asset.

Rocky Butani (15:51)
Do you expect the transaction volume to be larger than it was in 2024?

Jeff Tesch (15:56)
So at RCN, we're predicting a 20, I think we have 21 % increase for this calendar year. We're pretty conservative. We don't predict 50 % increases. Like we've gotten, we've gotten pretty good at figuring out where the capital is coming from and how we think that the overall marketplace is gonna be able to handle that capital. So for us, we're looking at like 21 % increase. Now, hopefully I'm low balling it. It's gonna be significantly more.

than that but we think interest rates are going to struggle the first six months of the year and with where interest rates are today and where we think they're still going to be come July 4th we don't see a massive increase in inventory coming into the marketplace at all so I think it's going to be very difficult for lenders to pick up a big chunk of volume when the inventory is just not in the marketplace. you still as we discussed earlier you're still going to have your

your traditional refis, you're gonna have your opportunistic buys in the marketplace. Those are always gonna be there, but without the rates coming down the first half of the year, we don't think there's gonna be a big chunk. Now, that's the demand side for our products. The supply side from a money standpoint, right? Like the bread.

Is is going to be there and it's going to be there. we believe for the entire calendar year Certainly going into 26 The single family asset has proven itself Year after year and now that business purpose lending has data behind it 10 years of data now rocky showing real returns over time The capital continues to really like

our space. And when I say capital, I'm referring to the ability to sell bonds, doing securitizations, the ability to balance sheet. You know, there are sovereign wealth funds. There are hedge funds that are just straight up balance sheeting these loans. And then of course, insurance money, insurance money that found our space about five years ago, loves the single family asset as it continues to perform. it's so welcome. Rocky, if you think about the single

asset I would argue it's the greatest asset in mankind of all time. It's transferable, it appreciates, and it's something that will always be in demand. Yes, we can have pockets like 2008 and 2009, but over the long haul, the asset performs. Now that doesn't mean you can't be reckless, and you always need to be thoughtful on how you're originating and your loan to values, but the space has attracted capital

that has given us certainty of execution and we think 25 is not going to be any different.

Rocky Butani (18:57)
And with that, far as the capital markets and where your loans go after you funded them, is there a mix of that or are most of your loans now going into those rated securitizations?

Jeff Tesch (19:11)
Yeah, so our securitization partners take our loans and put them into securitizations, bonds, insurance, and we have a pretty good sized balance sheet. We have a very diversified exit strategy for all of our loans.

Rocky Butani (19:25)
Going back to the insurance topic, you mentioned that that's causing some issues for for rental properties, but but just in general, what other issues are coming up with insurance? And is this something that's happening all across the country, or is it only in the regions like Southern California or Florida that typically see natural disasters?

Jeff Tesch (19:47)
Yeah, it's interesting right like when people to your point people always think of those those areas right hurricanes fires floods earthquakes And the the tragedy of the fires in Southern California, was just horrific Our hearts go out to everyone and everything that

our neighbors have gone through and what continues to be an ongoing rebuilding effort for years to come. Insurance, when it comes to business purpose lending, really became an issue in early 2024, Rocky. What we started to see was parts of Florida, only were rates doubling in certain areas,

but there were certain areas where our investors were unable to even obtain insurance. That was in Florida. Now it's well documented what happened in some parts of Southern California with insurance companies not renewing certain policies as well. But these were, this really came out of nowhere in Florida. And then about mid-year, we really started seeing a problem in Texas.

So Texas had a rough year for hail. Texas has always had, you know, hail storms, but for whatever reason, the past year or year or two, the hail storms have gotten worse. And in the insurance companies have passed along those costs on a wide scope of Texas. And the workforce housing is really taking it on the chin, So.

You're an investor in Texas and you bought a house in 2000 whatever, 20, 21, 22, and you had your insurance and you had your taxes and...

It's sort of been a dual threat where the insurance costs have gone up significantly because of the ale. But then you've had tremendous appreciation in Texas and the taxes have gone up as well. It's really been a problem. Our friends in Texas are struggling right now. We don't see it getting better any time. Really the only way out of it is continued appreciation, which has stalled at this point.

Rocky Butani (22:18)
How about other parts of the country? you seeing similar situations in, let's say, the Carolinas that got hit with a hurricane recently?

Jeff Tesch (22:25)
Yeah, we haven't seen Texas, Florida and California have been the largest cohort, but other areas have seen more moderate. Now, when I say moderate, they've been anywhere between 10 and 30 percent increases year over year, which is significant. I mean, it didn't used to be this way. from everything that I'm hearing from our insurance partners is the large national carriers are spreading the cost of some of these

Events whether it be hurricanes floods hail fire across larger portions of the US and everybody's rates are going up rocky and Investors I urge you when you start looking at properties first thing you got to do is call your agent and find out What is going to cost you to ensure these properties? Rocky I can't tell you how many customers

Most of them unseasoned get to the last minute. that's right. I need insurance. Well, yeah, right. We've got to front load that we've got a front load these insurance expenses to find out whether or not there's going to be a good return on equity.

Rocky Butani (23:40)
Do you think the insurance dilemma is going to affect home sales, not only lending, because obviously the numbers have to pencil, but do you think that's really going to affect the number of transactions that happen?

Jeff Tesch (23:55)
sure, without a doubt. So and it's not just on the business purpose side, on the owner occ side As people begin to think about different areas that they want to move to, if the insurance is two X, three X, four X of what it would be in whatever state they were going from, it it goes into that decision making process And not only that, can they even get the insurance?

Like that is, it's real right now. And it's scary for folks that made that move 10 or 15 years ago with an expectation of what their fixed cost was gonna be. And it's very different today.

Rocky Butani (24:37)
How about multi-family, what's happening in that sector? We're talking five plus units. Are there any changes in that space? Anything getting better?

Jeff Tesch (24:46)
Yeah, It just

continues to be a struggle. 2024 was a real difficult year for multifamily. For any number of reasons, concern about the economy, concerns about...

some of the prices that were paid for some of these. The trades really weren't penciling out from the acquisitions that had happened previous to 24. The rise in interest rates, the debt was too expensive for the return that you were getting on the average unit. And it really made for a real wet blanket be put over the entire multifamily industry. Now, a lot of that

is starting to turn around, especially in the A minus B plus category of multifamilies. We're not seeing it here at RCN yet, but from everything that I'm hearing from my cohorts out there, things are starting to loosen up a little bit. Some of that's just capitals dipping their toes back into it. Other is the certainty that the economy is going to perform better for longer.

than most people had expected.

Rocky Butani (25:57)
And do you think it's just a matter of prices having to come down to where the return ends up being greater than your cost of debt?

Jeff Tesch (26:07)
without a doubt, know, when that when the cost of debt spiked for multifamily, the multifamily operators didn't have the ability to raise their rents the way the single family operators did. And that was really the disconnect. Right. As more as single family houses, their rents went up. Most operators were able to continue to either refinance debt or acquire more properties because the rents were going up. So even though the money cost more, it was still working on the multifamily side that wasn't happening. The rents weren't going up. As a matter of fact, they were staying static and even in some markets, some of the Western challenged markets, whether it be Boise, Austin, et cetera, rents were actually declining.

Rocky Butani (26:51)
There's a huge difference in the financing structures between five plus units and your two to four units. Are you seeing any challenges in that two to four unit space?

Jeff Tesch (27:02)
Well, it's interesting. The two to four for us remains pretty strong. It's not as good as the single family, but it's not bad.

There is, especially in some of the northeastern pockets of whether it be Philly, Boston, New York, there is a ton of inventory of that one to four family house, right? And most of that gets lumped in with the single family securitizations. The access to capital is much easier than the commercial.

Rocky Butani (27:34)
Great. So let's switch gears a bit. Tell us what's happening at RCN. Anything new that's happened in the last three months and what are you seeing in the next three months to come?

Jeff Tesch (27:44)
Yeah, sure. So,

Exciting stuff on the wholesale front. As we have continued to really start to provide more and more tools for our wholesale partners to grow their businesses. The adoption of some of these tools is just tremendous. You know, last year we really doubled down on our Amplify training platform, which is basically a self-directed platform for our partners to be able to educate their employees on how to originate a business purpose loan.

That self-directed software has taken off. First off, it's free to our registered partners, but it has taken off and the adoption of it is just amazing. The idea behind it, Rocky, was, well, if we're gonna have business purpose lending and we're gonna be a wholesale lender, isn't it really incumbent upon us?

as the lender to be able to teach our partners, team members on how to originate that loan. Most of the most of our partners are small shops, 10 and under they don't have the resources to do that. So we really took it upon ourselves to become that education platform and

I can't tell you how awesome it is and the amazing amount of gratitude that we're getting from our partners for elevating their own team members and bringing them into hopefully what's going to be a much better place in 2025.

Rocky Butani (29:16)
And what's the format of the training? it just video recordings that they have access to watch?

Jeff Tesch (29:21)
It's modules.

Yeah, it's modules. So when I say self-directed, truly is. It's a 24-7 platform where the employees all get specific login codes. They go in, they do modules, and then there'll be a test at the end of each module, and then they move on to the next module, depending on how much time they have. It's really great because you can do it on nights and weekends, right? Like everybody's crazy during the day, getting things done, especially alone professionals.

It's never ending, phones ringing. But this sort of tool allows them to learn, test, move on to the next. And it's really been great. For us, we're really proud of that. And you know, mean, we're doing, we have a marketing toolbox now that we're doing for our partners to elevate their ability to be able to promote their products in the marketplace. All this stuff we're doing because,

We think the wholesale model for RCN is the future. And if we're really gonna be serious about being a wholesale lender, we have gotta be the very best partner that we can to help them build their businesses. Yes, we have amazing capital. Yes, we have great leverage and rates, but that's only a component of getting our partners to a place where they can really throw gasoline on the fire. I mean, without a doubt.

Rocky Butani (30:44)
And what about your retail business? What percentage of your total origination volume is retail versus wholesale?

Jeff Tesch (30:52)
Yeah, last year it was down to 15 % of our origination and we expect that to reduce even further in calendar year 2025 with us really not putting any resources behind it at

Rocky Butani (31:06)
And besides the support and the training, what else do you think has contributed to your success in the wholesale space?

Jeff Tesch (31:17)
Yeah, I think what when we committed to the space, Rocky, I think that was really what made a big difference for us. Like. It's difficult to be all things to all people, and the temptation is always there to do that. But I don't know how you can.

be so worried about retail and so worried about wholesale and make them both work. I think our success in wholesale really started to come along when we said, you know what, retail.

They'll always be a small retail component in legacy customers, et cetera, that we've had for years. But that's not where we're going to put our focus. We're going to take our massive machine, right? Marketing process, put all technology, right? you saw the press release on the Bridge Loan Network acquisition, right? We've rolled Bridge Loan Network into RCN to help really, and listen, was all Bridge Loan Network.

was built from the ground up to be RCN's loan platform, right? By bringing it in-house, now we kind of think to ourselves, okay, how do we really embed that into the wholesale model, right? It's just things like that that are really making a difference.

Rocky Butani (32:38)
The whole thing with the Bridge Loan Network software, I mean it had its own separate name but it was always RCN Capital's product, right? So what do mean when you say it was brought in-house? Is it just rebranded?

Jeff Tesch (32:54)
yeah, not only is it rebranded, but it's intentional from how we want to think about Bridge Loan Network is going to interact with our wholesale partners. From the time that we sign up that broker or correspondent lender to the time we close their first loan, Bridge Loan Network is a part of all of that training and becomes a major component of getting that technology solution into our partners hands so that they can scale faster.

Rocky Butani (33:25)
And do all of your wholesale partners have access to it?

Jeff Tesch (24:31)
all of our wholesale partners do. Some take advantage of it more than others, but once again, we know that if we put more effort and messaging behind it, the adoption will be greater.

Rocky Butani (33:43)
And just for people who don't know about this Bridge Loan Network software, it's really just an origination or loan management tool that brokers or originators can use to send deals to RCN and maybe even to other lenders if they wanted.

Jeff Tesch (33:59)
That's right, and manage their own pipelines, right? Like that's, they can use that to manage their pipelines and craft, you know, the files, put everything together in a manner, whether it goes to RCN or not, in a manner that's going to be industry standard.

Rocky Butani (34:15)
Tell us about your wholesale program and what it entails and what type of loan products it includes.

Jeff Tesch (34:22)
Yeah, you know, Rocky, it's interesting when people hear wholesale, they think of an intermediary somewhere in the mix. at RCN, we have always thought that the local originator, whether it be broker or correspondent lender that has local relationships in their communities around our amazing country is the best person to be originating the product. Now, listen, we're a national lender and we have embraced that.

But the tools that we provide our wholesale partners make them the experts in their local communities. And we think that that's a huge competitive advantage by empowering those local folks who live, breathe.

build their communities, giving them the tools and the products, the access to national business purpose capital to deploy in their communities. We think that that is a tremendous service and we embrace it. And for any brokers or correspondents out there that want to broaden their reach in a business purpose lending, come on over. info@rcncapital.com. We'd love to have you.

Rocky Butani (35:34)
And that's a wrap for this episode. I'll put a link to RCN Capital's profile in the description. Reach out to them and tell them you found them on LenderLink's podcast, Private Lending Insights.

This episode is sponsored by RCN Capital. They pay us a monthly fee to be listed on our platform. If you visit privatelenderlink.com and do a search, you'll find RCN Capital in most of the residential categories.

I hope you enjoyed this interview. We have a lot more lined up, so stay tuned. Thank you for listening to Private Lending Insights.