Latest / Real Investor Radio Podcast / Ep 74 | Inside Dominion Financial: Scaling Success in RTL and DSCR Lending, 2025 REI Predictions
Transcript
- Craig Fuhr (00:13) Hey, welcome back to Real Investor Radio. It's Craig Fuhr with Jack BeVier. We've got some quick hits for you coming. Jack, no one loves predictions more than you and I and sort of, I, and I always love it at the beginning of the year, beginning of a new administration. You know, the world's on fire right now and lots of crazy things happening. I'm speaking from a sp- just a real estate centric standpoint here. Man, I love you. We don't try to make this show about Dominion Financial, Jack, although I think it's clear what we do in the business. And I'm a loan officer with Dominion Financial, your co-owner of Dominion Financial. We had a great, great year last year in twenty twenty four, Jack. And maybe you could just highlight what we delivered for investors in all 50 states last year. And, you know, we had some headwinds, we had some tailwinds, but but the year ended up significantly better. And I'd love for you to just talk about sort of the private lending space and where Dominion fits into all of that for investors around the country. Jack BeVier (01:20) Yeah, sure. So on the DSCR side of things, the product really has, I think, eclipsed the local banking system. Even, you know, in our real estate business, we add maybe 50 to 75 rentals a year. And so I'm always refinancing rentals ourselves. And we back in 2021 started using the DSCR product to help build our rental portfolio. but kept in touch with banks and Craig Fuhr (01:33) Mm-hmm. Jack BeVier (01:46) used them from time to time. And in 2023, as interest rates started to really increase and DSCR rates got much higher, I started reconnecting with those banks and to see if, you know, to see if there was a bid there, right? To see if there was an alternative. And what I found is that the rates are not better and the pain is more than it ever has been. You know, they, they've kind of, and now they've got commercial real estate issues on their balance sheets and DSCR really falls, you know, term loans secured by Craig Fuhr (01:52) you Mm-hmm. Jack BeVier (02:16) investment property falls into that CRE bucket, for the banks. so we really just haven't seen, their appetite come back, you know, for this kind of product. So I think that the DSCR product frankly is, is taken over term loan lending for, residential real estate investors. And, so that's been my experience on, that's, that's, and I think that's going to stay. I think that's, I think that's where that product is going to be for a long time. Craig Fuhr (02:40) Yeah, walking into your local bank anymore, Jack, that relationship that you've seen, they've had for years just doesn't seem as palatable for almost every investor that I speak with who can get better service. A 30 year term as opposed to maybe a 20 or 25 year term with a five or seven year call, probably a similar rate. know, DSCR is just it just feels like the better mousetrap for investors who are looking to purchase rent ready properties or refi. Jack BeVier (03:08) Yeah. And the, really what's in where that money's coming from now, that's made the rates as or more competitive with the banks is the insurance companies. So the, the DSCR market and the, the rails to main street investor through private lending companies like dominion, is allowing us to face insurance companies directly. Right. So they're, selling annuities, bringing in a lot of cash. They need to deploy that cash somewhere and mortgage products. secured by American real estate at 70 75 % loan to value with cash flow is a phenomenal product for insurance company money. And so it used to be the case where insurance companies, know, street real estate investors or even just homeowners, right? Like borrow money from a broker who is connecting them to a lender who is originating a loan and then selling it to a Wall Street firm who's doing a securitization issuing bonds. and then selling those bonds to an insurance company. And now what we have is private lenders who are facing Main Street and facing the insurance company. And we've taken all, we've taken three middlemen out of the situation. And that is resulted in, in investor pricing being, being very tight. And there's a tremendous amount of appetite from the insurance companies for, for this product, because they can get a little bit higher rate than they could buy, by investing in, Craig Fuhr (04:05) Right. Yeah, I take that. Jack BeVier (04:30) owner-occupant mortgages, which volumes are really down on that. So I think that's going to continue to be the case. There are more and more insurance companies coming into this space right now. And I think that ultimately is going to be good for credit spreads, good for pricing to real estate investors. So that's kind how I see 25 shaping up for that product. Craig Fuhr (04:50) Well, let's talk about sort of a year in the review for Dominion in terms of bridge loans, folks who come to us with single family, multi-family, ground up construction, acquisition and development. We do all of that here. We love it. It's all fastballed down the middle for us here. Talk about what you saw over the course of 2024 for Dominion in that space. Jack BeVier (05:13) Yeah, sure. So RTL residential transition loans, fix and flip loans, whatever you want to call them. Yeah, that's what Wall Street likes to call them. Instead of fix and flip loans, they call them RTL loans. So that space has gotten a little bit more competitive in terms of pricing as short term rates have started to come down. I think that my prediction for this year is I think we're going to see RTL rates might start to come down to the borrower's benefit. Craig Fuhr (05:17) That's the new, yes, yes, it's. Jack BeVier (05:38) depending on how quickly the Fed drops short-term rates. Because as the Fed drops rates, that means that the SOFR rate, the Secured Overnight Funding Rate, comes down lockstep with that. And that is the cost of capital for most, at least private lenders that borrow money, and the large ones all do. And so I think that we're gonna see some downward pressure in rates on the RTL side over the course of this year. So far, Craig Fuhr (05:56) Mm-hmm. Jack BeVier (06:04) that hasn't happened very much because people are just trying to hold the line to keep volumes up. But we went to, you know, we go to these conferences to where they're, you know, the structured finance association is basically a big securitization conference. We go to that because a lot of the money that we borrow is securitized money and the credit spreads for RTL securitizations are as tight as they have been. The, you know, the underlying index is higher. But the risk premium that Wall Street is requiring is as low as it's been. And we even had rated securitizations. So the rating agencies have now are putting stamps and grades on the different RTL securitizations. so that opens that market up to a whole new segment of insurance companies and pension fund money that like the yield profile. the higher yield profile and the short duration of RTL loans, of fix and flip loans. And so it's a pretty strong RTL securitization market. That's what we're going into in 2025. I think we're going to see a lot more issuance, a lot more institutionalization of that capital. And ultimately that should result in kind of a gap between what the larger fix and flip lenders can offer in terms of rate and terms. Craig Fuhr (07:03) Okay. Mm-hmm. Jack BeVier (07:24) versus your smaller local guys. So the local guys, you know, they've got some headwinds in terms of, they don't have as much access to capital. And so they are sometimes less reliable as a result of that. It's nice though, because you're calling the decision maker like directly right on his cell phone. And in this higher interest rate environment that we've been in for the past couple of years, there really wasn't much of a pricing difference between the big company RTL lenders and the local guy. I think we're going to start to see that gap re-emerge here in 2022 where, you know, where there's a two or 300 basis point difference. Right now there's maybe a hundred basis point difference. I think it's going to end up being a two, 300 basis point difference between the larger RTL lenders and the local guys. And that's going to be, you know, that, that, that ends up being, um, you know, for good deals, professional real estate investors who know that they got a good deal on the property, uh, Craig Fuhr (07:53) Really? Really? Jack BeVier (08:19) that's going to end up being enough that they're that they want to work with the bigger lender that's got the better rates and still has the very high loan to cost of financing that that the local guys have. We've also just another point on that. We've also seen more acceptance of higher LTC terms in the larger lenders. It used to be the case that you could get a better rate from the big guys, but they'd only lend you 80 percent of the money. Right. Uh, you were like, well, I'll run out of money that way. I got more deals than I've got cash because I'm a great, you know, acquisitions guy. And so I'll pay the extra money for the, you know, the 90 % of financing, the 95, the a hundred percent financing from my local guy. Now you're starting to see the bigger lenders also offer 95 and a hundred percent financing, Dominion included. So, um, Craig Fuhr (09:04) Yeah, six months ago. Talk about that Jack, what we did six Jack BeVier (09:07) Yeah. So we changed the, we changed our RTL underwriting program to, kind of do a little bit more risk-based pricing. So in, in states that are judicial foreclosure states, we're actually a little bit more conservative, but in states where, the, you know, you can get to the courthouse quickly if, if hope, you know, hopefully you never have to, but if you had to foreclose, so we can be a little bit more aggressive in loan to after repair value in those states. We also started segmenting. our steak segmenting our borrowers business based off of their experience more. And by experience, I don't mean just that you've done a couple flips, but that you've done flips at this level of difficulty. So that's allowed us to be more aggressive on deals that we think are lower risk profile. So now we've been doing a fair amount of 100 % LTC. By that, I mean 100 % of the acquisition price and 100 % of the rehab financing. Craig Fuhr (09:46) Sure. Jack BeVier (10:00) for experienced borrowers who are doing deals that they've done just like the ones that they've been doing for the past couple of years. Craig Fuhr (10:07) Yeah, so for instance, a couple days ago we had a borrower come to us with a couple of properties in North Carolina. He's buying these properties, REO, and he's actually getting a good enough deal that we can fund 100 % of the purchase price and 100 % of the rehab and it stays under our sort 70 % loan to after repair value. I mean, the guy couldn't, he's not getting that anywhere else. He's ecstatic about it. It just allows him to do a lot more deals with a lot less upfront equity. You know, the good thing there is that he has, when we say experienced borrowers, Jack, we're not looking for, you know, we just interviewed Alex Sifakis who does hundreds of deals a year. We're talking about guys who've got five in the last five years of a similar nature. So, you you're not going to come to us and have done. five flips at 20 or 30 bucks a square foot and then tell us all of sudden you want the same financing on a new construction, your first new construction deal, obviously there's just more risk associated with that. what are you excited about, Jack, in terms of where Dominion Financial will be starting the year and sort of ending the year? I know you're always planning, you're always very strategic. What excites you right now, man? We had a call, I'll... Let me just tee up the softball a little bit more for you. We had a great call the other day with you, by the way, where you went over a year in review for the entire company. And one of the things that I heard you say was, you you've built the Maserati and now it's time to take it around the track. And I think honestly, all the loan officers, we all got off the phone and we were just talking. Everybody was really excited about what's coming in 2025. What excites you, Jack BeVier (11:45) Yeah, yeah. So we really spent the past year and a half as the capital markets were a bit more in flux with higher interest rates. And we didn't really know when that rate tightening cycle was going to, or when that rate loosening cycle was going to stop. And so we spent that time really investing in infrastructure, building our technology platform, just putting all the rails in place so that we could scale when the time came. And about six months ago, we got comfortable enough that the coast was clear enough on the capital market side that we wanted to start to grow again. So at the beginning of the year, we Dominion started with a head count of 104 people at the end of the year, we have 196. So we, we added more people this year than we ever have as a company before. And it was because we got enough of the technology infrastructure improvement projects. to where we could really see the finish line and now they're really completed. And the capital markets kind of environment was clear enough that we felt confident like, it's time to grow again. So that's what I was talking about on the call saying, we've been building this race car and I'm excited to take it out on the track because we've got a lot of new people. are now four to six months on the team. So they're up to speed now. And we're going into a 2025 where I think we're at least stable from a capital markets perspective and may even see some improved pricing on the RTL side throughout the course of the year. And I think that this team of 196 people is going to significantly increase volume as we become much more competitive in the space and as we're just to have more horsepower, frankly. we're going to be pushing volumes. We're going to be aggressive to win deals. And we're excited to participate in all of these RTL and DSCR projects for our investors as they build their net worth and their personal balance sheet. So I'm excited for that. Craig Fuhr (13:43) Well, man, I couldn't be more excited. You know, we speak with borrowers every single day here. Sometimes the phone rings off the hook and you really it's it's almost hard to keep up at times. But what I find, Jack, is just there doesn't appear to be any level of hesitancy when we speak to a lot of borrowers. Man, people are just still foot on the pedal. I'm speaking on that. Look, I love dealing with onesie twosies, you know, the mom and pops because Lord knows I was there myself back in the early 2000s. But what I really find most interesting, Jack, is when we talk to guys who are doing, you know, 20, 30, 40 loans a year and there just doesn't appear to be any letting off of the gas with these guys right now. Everyone appears to be a little bit exuberant about the recent election and and hopeful. And so my take on 2025 in terms of Dominion really is full steam ahead. I'm looking forward to speaking with more and more better borrowers out there. Jack BeVier (14:47) Yeah, absolutely. And I think there's a lot of reason to be optimistic. I think in American real estate is still a tremendous, tremendous investment. And I don't, know, with as much disruption as I think we're going to see in the overall economy as it relates to this next wave of technology, American real estate feels like a super safe place to continue to invest. So on the real estate side of things, we're doing the same thing. I'm still we're still adding rental properties. Rents, rents have still been strong. Occupancy is very, very high. And so we, still, still, I still see it as the best way to grow net worth. And so I'm, not surprised that, that real estate investors around the country are, are, you know, gearing up for a fun, Craig Fuhr (15:27) Well, you mentioned technology. That's a great tease for the next episode. And so we're going to end this quickie here. That's our little Dominion financial year in review. Excited to work with everyone out there on their loans for 2025. Reach out if you need any help with that. You can always reach me at craig at the dominion group.com or jack at the dominion group.com. Love to talk with you. We'll end this episode right here and come back with another quickie on AI and how that will affect real estate investors in the coming year.