Investing in the American Dream
Residential Capital Partners (ResCap) Champions the Individual Investor
By Carole VanSickle Ellis
The founders of Residential Capital Partners (ResCap) knew a lot about real estate before they started working together and founded ResCap in 2009 in the midst of the U.S. housing crash and subsequent global financial meltdown.
Each of the four founders, Paul Jackson, president and CEO of the company, Richard Morgan, chief investment officer at ResCap, and Greg England and Rob Feito, both directors at the private lending firm, have years of personal experience in real estate investing and a deep appreciation for the creativity and drive of the individual real estate investor. However, they initially planned to put their cumulative knowledge to use in a very different fashion by buying bulk packages of distressed mortgages rather than by specializing in making loans on single-family residential properties to individual investors. The tipping point occurred when the four principals realized many investors would not make it through the crash without a credit solution that was very hard to come by at that time.
“In 2009, every investor out there was trying to figure out if they were going to have to reinvent themselves and their business or if they would be able to ride out the storm,” Jackson recalled. “The four of us had originally intended to function as a distressed-mortgage purchaser, but we pivoted in response to what we learned through our due diligence. The single-family rental investor was having a hard time finding credit in the market due to the global financial meltdown. With so many banks and other lenders sitting on the sidelines, we decided to tailor a credit solution for single-family residential investors.”
The result of that about-face was Residential Capital Partners, usually shortened to ResCap, named to make the company’s mission crystal clear.
“We saw a void of credit in the single-family rental investment space and decided to try to fill it,” Jackson explained. “Then, we all survived together. That resilience is one of the things we are most proud of: entering during the global financial crisis, being active during turbulent times, staying in business and staying open during the COVID-19 crisis, and building such important relationships over the last 12 years.”
Morgan agreed. “We had all been actively involved in real estate before coming together as a firm, so we knew that single-family assets through four-unit assets would be a good fit for us with this enterprise. We have certainly been successful and enjoyed it — and our borrowers have been successful, too.”
Everyone at ResCap enjoys the firm’s success stories most of all, naturally, but they do not define “success” by their own bottom line. Instead, they like to define it as helping investors stay in business when times get tough.
Jackson told the story of a client in Chicago who had been funded primarily by a family office prior to the housing crash in the mid-2000s. Then, Jackson said, “his lender basically evaporated on him” due to the global financial crisis. By the time that investor found ResCap, he was in full panic mode. “He thought he was going to lose the business he had worked decades to build,” Jackson said. “We were able to work with him on the scale at which he was already operating. Instead of losing everything, he is still going strong.”
Working in Partnership with Investors for Long-Term Success
When a potential client comes to ResCap, they are immediately more than simply numbers on a page; they are the sum of a complicated, insightful blend of factors that ResCap uses to determine the viability of a loan and how much the firm will lend. In some cases, borrowers may be offered up to 100% financing for short-term rehab projects or for rental bridge loans, and ResCap also may fund up to 75% of the after-repair value (ARV).
In addition to short-term bridge loans and fix-and-flip lending, the company also has adopted long-term financing catering to single-family rental investors. ResCap can adjust and adapt to its clients’ needs in large part because it is a balance-sheet lender and does not rely on a third party to purchase loans once they are made.
“We assume the full risk of every loan we write and carry it on our books until it is paid off,” said Morgan. “Our success depends entirely on the success of our borrowers, so we make it a point to make solid decisions based on years and years of experience in real estate as well as more ‘traditional’ considerations.”
“We are more than 100 years deep in experience on our bench of partners,” Jackson added. “We want our borrowers to have that kind of successful, long-term experience as well.”
Once the borrower contacts ResCap about a loan, the team swings into action, learning more about the deal itself and, in addition, the strength of the borrower. Deals that are too “thin,” meaning the time and money invested will not likely create positive returns when the property sells, generally do not pass the ResCap test because, as Jackson puts it, “We want to do business with you, but some deals are just not rich enough for you to spend your time and energy trying to make money on them.”
Morgan added, “It is really about making just one loan at a time. We have built a fantastic portfolio of loans one loan at a time, and we are committed to coming in every day, mastering the basics, and being really good at what we do so our borrowers can be really good at what they do.”
The team also keeps a watch out for investors who are spread too thin. “From our perspective, the customer is part of the team,” Jackson explained. “Our number-one goal is to take care of them so that they can achieve their goals and the success they want in this space.”
In today’s market, ResCap places an especially high priority on monitoring borrowers’ liquidity. That, Jackson said, is part of a lender’s responsibility to the borrower.
“Liquidity for the borrower is vital during these types of periods [in the market],” he explained. “We always want to make sure they have cash in the hopper so they are not stretched too thin during their investment period.”
That concept of teamwork is also the prevailing purpose behind ResCap’s 100% financing, which permits no-money-down loans to qualified customers and financing up to 70% of ARV.
“We are very strict about how and when we do that,” emphasized Morgan. He continued, “Frankly, we think a qualified borrower with a little extra capital in their pocket is a safer loan for us than us getting a few extra thousand dollars on a down payment. We are notorious for these loans, and I would put our loan performance up against anyone because we always know, given quality of the asset, that our loan is secured very well.”
Advocating for Individuals in an Increasingly Institutional Market
When the partners first founded ResCap in 2009, they knew they wanted to work with individual real estate investors to create a teamwork model that would span the gap between investors and the capital they needed to access at that time. However, they had no idea how quicky the space would become institutionalized and, as a result, how vital their services would remain in the industry long after the process of obtaining niche investment loans was, in effect, no longer a particularly niche proposition.
“Our asset class has become increasingly institutional since we founded the company,” observed Morgan.
Interestingly enough, he does not consider this a bad thing for ResCap’s individual investors.
“The nature of the asset class [real estate] lends itself to a lot of people being involved, up and down, in all different aspects. Metadata has empowered institutions to have a better feel for single-family real estate, but you will never have a world in which individual investors and the types of deals they do go away.”
Morgan, himself a strong advocate for homeownership, believes individual investors play a crucial role in society not just because investors help build value in neighborhoods and restore stagnant assets, but because they are more likely to create homeownership scenarios than high-volume rental ones.
“The single-family rental as an institutional investment class is here to stay,” he concluded, “but ResCap will always be here, camped out, for the individual investor.”
Jackson agreed, observing that ResCap has seen experienced real estate investors ramp up their activities since the advent of the COVID-19 pandemic.
“It is the same as during the global financial crisis,” he said. “During turbulent times, the stronger borrowers are more active and the less experienced borrowers may decide to hit the pause button.”
He recommended less experienced investors pay close attention to what experienced ones do during a downturn: “They are not leaning back right now; they are leaning forward. They are going straight into uncertainty in order to come out on the other side with profitability.”
Another thing ResCap borrowers have in common is that they are still finding a lot of good deals, Jackson said. This is likely the result of individual investors’ ability, far greater than that of institutional real estate firms, to adjust quickly and on a case-by-case basis to challenges.
“They are not necessarily able to achieve wholesale exits right now, but they are definitely finishing the properties and selling for positive returns,” he said. “They still see a positive exit. It just is not the same exit as before.”
Thriving in the “Year of the Buffalo”
Looking back at the turbulence of the last few years, Jackson said one of the things that made him proudest of his team at ResCap was that they stayed in business and kept their doors “open” during the pandemic so that real estate investors could thrive in the dynamic market.
“Our motto is ‘Investing in the American Dream every day,’” he explained. “Even during a crisis, we need real estate investors transforming neighborhoods so that affordable housing is available to the families looking to own or occupy a house.”
Jackson dubbed 2020 “The Year of the Buffalo” after reading that buffalo, when spotting a storm on the horizon, will run into it rather than away from it. “They run into it because they know running into it will get them out of the storm faster than if they run away,” he said.
That led ResCap to the determined stance on staying open and fully operative during the pandemic. “We said to the team, ‘We are going to keep loaning money to our borrowers, keep providing them with the ability to realize their dreams, and keep true to the motto that we walk in every day: investing in the American Dream and transforming the neighborhoods of America,” he recalled.
“We stuck to the fundamentals of investing in real estate that got us through the global financial crisis and we got through this crisis successfully as well.”
Sidebar
ResCap by the Numbers
100% ResCap loans qualified borrowers 100% of the cost of acquisition and 100% of repairs up to 70% of ARV, requiring the borrower to cover only origination fees, appraisal costs, and document preparation.
1,000 — ResCap partners have flipped more than 1,000 properties and are still active investors today.
2 — Approval of a loan at ResCap takes about two business days.
14 — On average, a loan submitted with valid appraisal, clear title, and evidence of insurance can fund in 14 days.
0 — Amount of interest ResCap charges on repair funds prior to the investor drawing them.
$75,000 — The minimum amount ResCap loans in most cases.
$1.5 Million — The maximum amount ResCap loans in most cases.
2 — Number of rehab projects investors typically must have completed in order to qualify for ResCap 100% financing and 65% funding of ARV.
5 — Number of ResCap loans investors typically must have closed in order to qualify for 100% financing and 70% funding of ARV
48 — Number of states/markets where ResCap is actively lending money
Sidebar
Fully Prepared & “As Excited as We’ve Ever Been” for Real Estate in 2020s
The partners at ResCap are active real estate investors in addition to running a private lending firm, so today’s housing market represents exciting opportunities for them as well as their lenders. For Richard Morgan, a founding partner and CIO at the firm, the past few years have simply set the stage for the single-family asset class and the investors operating in it to thrive. The important thing, he believes, is having a clear understanding of what is coming.
“The single-family sector was a beneficiary of the huge creation of money by the United States government in the last three or four years, so when things tighten up, we are going to be on the front end of a little bit of pain,” Morgan said.
However, he continued, certain things are coming down the pipeline that government policies and global events simply will not change. Investors who are ready for these events with actionable, profitable strategies will be in a prime position for success in this market cycle.
“There are a huge volume of houses currently belonging to Baby Boomers that are going to come down the line in the next 10 years as those homeowners reach retirement age and sell,” Morgan said. “It does not really matter for that scenario what interest rates are or how crazy the world is because when those individuals leave the house, most people are going to sell it. Most simply will not keep it, and those fundamental demographics are irrefutable. The inventory is coming because there are a lot of 65-years-plus people living in their homes right now who are not going to be able to continue to do so in another 10 years.”
Morgan said three factors will drive the “strike price” for buyers and sellers when this sell-off occurs: rental rates, interest rates, and renovation costs.
“Those factors are moving targets, but the fundamentals are not going to change,” he noted. “The successful borrowers and lenders will be the ones who continue to do high volumes of good business when the ground underneath them is moving quickly.” When it comes to being prepared, Morgan recommends individual investors take a page from their institutional competition and review all the metadata they can get their hands on.
“There are databases that show prices, assets, homeowner ages, etc. right down to the ZIP codes,” he said. “Prepare by knowing what is coming, what it is worth, and when it is going to happen.”
Learn more about ResCap lending programs and access their borrower resources at ResidentialCapitalPartners.com.
