In this episode of The Same Day Podcast, Rockford Steele, the Vice President and Loan Officer at Stout Funding, joins Mat Zalk for a discussion about real estate investment loans. Rockford explains the various types of loan options, how interest rates are determined, and which loans are best for the different asset classes.
How To Evaluate Loan Options
Rockford Steele is the Vice President and Loan Officer at Stout Funding, a commercial loan brokerage helping real estate investors secure funding. As an active real estate investor with a portfolio of rentals, he has been a financial advisor, property and casualty insurance agent, and realtor.
Here’s a glimpse of what you’ll learn:
- From disabled marine to real estate investor and lender: Rockford Steele’s career journey
- The criteria for 30-year fixed-rate conventional loans — and how credit scores affect rates
- What are the differences between conventional and commercial loans?
- How Rockford determines loan rates — and what they’re based on
- Stout Funding’s most profitable deals
- Construction financing strategies for brokers
- Rockford informs about prepayment penalties in loan programs
- How to structure loans in various asset classes
In this episode…
When it comes to securing loans, real estate investors often lack the bandwidth to determine the best loan or lender. Fortunately, loan brokers are available to help borrowers decide which type of loan meets their financial needs, assessing commercial and private lenders and determining the ideal type of loan for the borrower’s situation. How does a broker help you find the appropriate loan to fit your investment goals?
As a financial advisor turned real estate investor and loan officer, Rockford Steele can help you navigate the complexities and narrow your loan choices. Conventional 30-year loans offer many options, including lower fixed or adjustable rates, but the qualifications are generally stricter. If you choose a federally backed loan — like a VA or FHA — it’s easier to meet the criteria, particularly if you have a low credit score. However, a commercial loan may be a good choice if you’re a business or LLC; although the interest rates may be higher and the loan period shorter, the application process is often simpler. Real estate investors may choose a DSCR (Debt Service Coverage Ratio) loan if their DSCR is high enough so the cash flow is better, providing them with a favorable rate. With so many factors and variables, it’s beneficial to have a broker on your side to navigate the complexities.
Resources mentioned in this episode:
- Mat Zalk on LinkedIn
- Keyrenter Property Management
- Keyrenter Property Management in Tulsa | Oklahoma City | Arkansas
- Keyrenter Property Management email address: [email protected]
- Rockford Steele on LinkedIn
- Rockford Steele’s email: [email protected]
- Stout Funding
- “Renting to Own: The Advantages of a Contract for Deed” with Brook Reutter on The Same Day Podcast
- “Closing the Deal With Real Estate Investors” with Scott Reeves on The Same Day Podcast
Sponsor for this episode…
Keyrenter Property Management:
This episode is brought to you by Keyrenter Property Management.
Keyrenter Property Management is a full-service property management company that helps clients buy, renovate, and operate real estate assets.
The team helps clients build wealth while taking the headache out of property management.
That’s why, no matter what rental you have — single-family homes, condos, townhomes, or apartments — they can give you the management solutions you need.
To learn more about their services, go to https://keyrenterpmc.com/ or send them an email at [email protected].
Episode Transcript
Intro 0:05
Welcome to The Same Day Podcast where we discuss driving incremental business growth and other topics related to real estate, property management and entrepreneurship. Now to the show at hand.
Mat Zalk 0:20
Mat Zalk here on the host of The Same Day Podcast where I connect with top business experts and real estate leaders past guests include Brook Reutter talking about contract for deed versus lease to own options Scott Reeves the Chickasaw Community Bank talking about commercial banking options, which you’ll hear more about today. Today’s episode is brought to you by Keyrenter Property Management Keyrenter Property Management we are a full service property management company helping our clients buy renovate and operate real estate assets we help our clients build wealth while taking the headache out of property management. Listen Rockford. As you know since you’re an investor, it’s hard to line up contractors and get make readies done in a reasonable amount of time after a tenant leaves the property. Contractors are busy the work seems to drag on forever and all that leads to loss rental income, your key runner we line up our dedicated vendors so that turns having super quickly and we get more money back into the pockets of our owners or investors just like you and me. And that’s why no matter what rentals you have single family homes, condos, townhomes apartments, we have the management solutions that you need, go keyrenterpmc.com or email us at [email protected]. Rockford Steele our guest today he’s in a real estate investor and has been for the better part of a decade he’s got a portfolio of rentals still and previously flipped properties as well. Rockford has been a licensed financial advisor and property and casualty insurance agent and he’s been a realtor. Currently Rockford still manages his rental portfolio and runs Stout Funding LLC which is a commercial loan brokerage stout funding specializes in getting funding for investors to fund their deals. Rockford Steele, welcome to the podcast. I’ve told you many times before but I’m gonna tell you again, you got the best name in the game. Oh,
Rockford Steele 1:55
pleasure to be here. Yeah. My, my normal running joke with with my name getting complimented as you know. Thanks a bunch. I thought about myself, right.
Mat Zalk 2:08
That’s actually funny. That’s actually funny. You came out of the right birth canal. So thanks to your parents. Let me ask you, how did you get started? Lender? How did you get started in this game?
Rockford Steele 2:22
Oh, we kind of got to take a few steps back to kind of go down the road to get there. So I’m actually medically retired from the Marines. So I’m 100% disabled. And then expecting my son, we decided dad being humbled is probably not a good example. So I went back to school taking classes I was interested in, I ended up with a bachelor’s in economics. And what I found out during my senior years, there’s not a whole lot of job openings for somebody with a bachelor’s in economics, you had to have a master’s if not PhD in net current job environment, you had had to go back for a PhD and I was done with going to college. So I went to a career fairs end up wanting to know but looking into a buddy of mine that is a manager of financial advisory firm and everyone kind of knows what a financial visor is. Right? So investments and insurance moat for the most part. And so I was like, Well, why would you guys be different? And his response was, Well, everything we do is needs based whatever’s in the best interest of their clients. We have no quotas. We’re not beholden to one company. Like, sometimes you just go out, make friends and see how you can help. Yeah, yeah, like, great. I can do that. I mean, I want to just go sell people on stuff, but I can, yeah, I can do that. So the first thing they tell you to do is call your friends and family, tell them what you’re doing. So I’m going down my list and get to know Ron Harris, which he’s known me since I was born. His dad and my dad were business partners and best friends like thing. And he’s been doing that real estate thing. Here. He’s been doing pretty well. We chat. So we met for coffee. He was telling me about Piper stuff he was doing. Okay, so let me get this straight. So you buy these houses in cash? Because yeah, you fix it up in cash. Yeah. Then you refinance. You get all your cash back as well. Yeah. And then it pays you. Yes. That’s kind of the point. You know, where are you going with this kind of question, right. With that,
Mat Zalk 4:12
it was so second nature to him. Yeah,
Rockford Steele 4:14
it was like So essentially, by free houses, and then pay you because I hadn’t thought about it like that. But yeah, I like that, hey, I’m gonna use that I buy free houses that pay me. This was before burr became a popular, popular nomenclature, right. And so I went home, and I told my wife about the type of stuff he was doing. And she goes, so why are we in real estate? And we didn’t have good answers for that anymore. So I called Ron back said, Hey, you mentioned your coaching and mentoring. How do I sign up because right now I know just enough to lose a whole bunch of money. Right? So I did coaching and mentoring with Ron and his wife, Angelina, is bigger appeal for us to work with them as because they are a husband, wife team, and we were to be a husband, wife team, building the real estate business and so that worked out well. What I I found is I had a financial advisory business in its infancy, and then the real estate investment business in its infancy, and they were really pulling in different directions. And with my disabilities, I limit number of hours that I can work really work in a day anyway. So I had to pick one, well, my wife sublicensed, if my disabilities flare up, she can’t take over that, right. But the real estate business probably actually do better. But so we went, you know, let go my financial advisory license and decide to go full time real estate. And then I had this thought, Well, I never got my real estate license, because you know, you, you can’t be a financial adviser and a realtor because the moment you sell someone a house, then you’re guilty of selling away because you’ve helped someone put money into something that’s outside your brokerage. Interesting. I got my real estate license. And at the same time, it started getting a little bit harder to find flips. So I was thinking, You know what, I’ll just use it. I’ll what year What year was this? Oh, I can’t remember. It’s been? Yeah. Yeah. I mean, when I first started in real estate, it was a lot easier to find deals than it obviously is now. Right? Even at that point, it was becoming more challenging, which is why I started to use my real estate license as a realtor. And what I found was, is I really appreciate the work Realtors do, because I don’t want to do it. I hated. And then I was thinking, Okay, well, what am I going to do now? Like, well, everyone I know wants to have a 30 year fixed rate loan on their rental property, but they want to keep it in their LLC, I want to just I’ll go find that and I’ll sell that. Right. That’s an easy thing. Everyone I know wants it. So I’m calling around to my referral partners. As a realtor, you know, these are all mortgage lenders. And I got to my my buddy, Chris Horford who owns Stout Lending. And he goes, Well, yeah, we can do that. I don’t know why you want to. It’s kind of expensive. Like, I mean, how bad is it? Because probably like six and a half percent. Like Chris, I’m paying six and a half on an arm right now. I’m gonna come work with you, we’re gonna do a whole bunch of these loans. And then he got really excited. And he goes, alright, you’re gonna hit up our commercial lending division? I go, okay, great. I mean, what all lenders do we have, because we don’t really have any, go find some. And that’s been my baby ever since it’s been six or seven years, something like that, since I took over the commercial lending arm. And it wasn’t long after that we split, split it off as its own company, because there’s compliance issues with the conforming residential mortgage broker versus the commercial. And so we just split off in their own companies. We have stopped lending that does conventional, FHA, USDA and VA, and I still have a license for that. And then, you know, the snap funding, which does the commercial lending, commercial being the borrower is the company, not the individual? It’s not specific to property type. So
Mat Zalk 7:51
in commercial funding, it’s so interesting. There are not that many people that do 30 year fixed notes, which must be federally backed. I mean, are they federally backed? Nope. So they’re not okay. Interesting. They’re new,
Rockford Steele 8:03
basically. Yeah, all these 30 year fixed loans, if they’re sold on the secondary market, it’s being sold to probably two or three different hedge funds that buy them all up. I mean, hedge funds, they, they gotta have some consistent income, those big watered ones, like I guess they’re good, you know, so they’re owned by the by the hedge funds or some large bank, like civic financial, that folded last year, and then was acquired by another lender. But they were owned by PAC western bank. And so Civic, financial was fine. But Pac was from bank wasn’t so they got shut down and sold, right. But
Mat Zalk 8:37
it all still flows into the CMBS. A collateralized mortgage backed securities market, ultimately, they just take these it’s a different risk profile, because it’s, it’s it’s signed by an LLC instead of by an individual.
Rockford Steele 8:49
But right, so it’s not a conventional, it’s not backed by Fannie Freddie. Right. So it’s not a Fannie Freddie loan. The pro with that is, I mean, Fannie, Freddie, if you’re trying to do a cash out refi you gotta wait six months, and you gotta close in your personal name.
Mat Zalk 9:03
Yeah, you know, I
Rockford Steele 9:04
we close an LLC. I mean, I’ve got I’ve got some lenders that will even let us close with no seasoning, as long as you did some rehab to the property. Got it?
Mat Zalk 9:12
And is there a substantial difference in rate between what a conventional 30 year federally backed mortgage does and a commercial 30 year note? Traditionally, conventional would be cheaper. Right now, it’s not much cheaper. Got it? It’s basically the same. And the logic there is that it’s federally backed, so the risk is lower, and it’s in your personal name. So your ability to walk away from it is lower in there. So the risk in totality is lower, so the rate would be better. What stops it from being a large difference right now in terms of the rates?
Rockford Steele 9:51
I’m not actually sure why that’s different now. I’m not actually used to the conventional loan not being substantially cheaper. I know I’d probably do maybe one and 50 loans that would then go and be conventional right now versus in the past, there’d be more that would choose conventional, especially if they’re a newer investor. Because you can use those right and get that better rate, you get the consumer protections with that. The investors that are trying to scale, they don’t tend to like conventional because the underwriting is more strict. Yeah.
Mat Zalk 10:23
And so, are your underwriting requirements? More like visiting a local community bank? Then?
Rockford Steele 10:30
So for my Yeah, my commercial rental property loans, I don’t even need tax returns. Wow. Yeah. So it’s based off of DSCR as opposed to DTI. So your crucial concern over dimensional versus demdaco? Yep. Sir, traditional conventional loan their underwriting, it’s still can you pay will you pay for both cases, but the criteria they use to determine that is different. So will you pay for both cases is turned by your credit score, you have good credit means if the money’s there, you’ll pay your bills and define good credit. It it’s a sliding scale, right? So if you’ve got to say conventional believe you have to have a 620 plus together investment property loan. Commercial, if you’ve got a 600 plus you can get a loan, the better your score, the better your terms, the better your rates, right,
Mat Zalk 11:16
are their tier, so 820 to 740 is one. Whereas
Rockford Steele 11:22
what it’s basically every 20 points, you got a break point, Oh, wow.
Mat Zalk 11:25
Coming down from like an eight, I don’t even know what the highest is 820, what’s the highest a 4860
Rockford Steele 11:29
I’ve literally never seen an 820.
Mat Zalk 11:34
So let’s start at 800. So 800 to 780, there’s a there’s a breakpoint there, you’re gonna pay a little bit more in interest, if it’s actually
Rockford Steele 11:40
about the same if you’re 740 plus some 40. Plus, it’s about the same side, conventional still scales all the way up to 800.
Mat Zalk 11:49
Interesting. Tell me a little bit of his own personal guarantee for the LLC can 30 year note,
Rockford Steele 11:57
you still are personally guaranteeing the loan. Okay. That being said, I don’t know of a single instance where they’ve enforced the personal guarantee. I mean, you’d have to you’d have to get a pretty crazy circumstance in order for the house, not to be worth enough to cover your loan. Right? Because that personal guarantee basically just says, If the house is not worth enough,
Mat Zalk 12:18
right, you got to make up the difference. So it what is the debt service coverage ratio? DSCR? What does it generally need to pencil out at on your Proform in order for the numbers for the loan to work?
Rockford Steele 12:29
So DSCR, just real quick, just in case, one of your listeners isn’t isn’t aware of DSCR is essentially how well the property cash flows. You know, it’s rent divided by your fixed expenses, your piti principal interest taxes and insurance, and insurance and association dues? Yep. So if you have a 1.0, DSCR, that’s the minimum for a lot of them. For the ones that are a little more aggressive on rate, they tend to want it to be at least 1.1, if not 1.2 on DSCR. The reason why is that calculation does not include anything for maintenance or vacancy. But if you have a 1.0 DSCR Does that mean you’re breaking even every month? Sure ish, you know, because stuffs gonna break, and people are gonna move.
Mat Zalk 13:17
So that means let’s just take a very simple example rent is $1,000. My mortgage is 800 bucks, we assume some amount for for tax insurance. So I have to have at a one time ratio, I’ve got to be making $800. In order to cover that mortgage after I pay my tax and insurance. That’d be a one time. And if I had, if I had $1,000 After paying rent, were $1,200 and it was $200 for tax and insurance and I had $1,000 left over that would be a 1.2. What’s another 2200? Over 800 is 1.25 debt service coverage ratio just as that as that roughly right. Okay, so the higher the debt service coverage ratio, the more that property’s cashflow, if it was $2,000 of rent, and my mortgage was 800 bucks, and I only had you know, $200 of expenses, you’d have a really high on on more than two times. Yep. Cool. Okay. So no enforcement of the personal guarantee for the most part, because normally the property in foreclosure would actually pay for the remaining balance of the of the loan.
Rockford Steele 14:19
Yep, that is correct. I said, I just I don’t know of a circumstance. I’m sure it’s probably happened at some point and there’s my lunch. It’s probably happened at some point, which is why that personal guarantee is required. But I don’t know I don’t know personally, I know of a circumstance where that actually happened. And so no one was considering it, but they did not actually enforcing the personal guarantee. Interesting. A lot of work for them to try to enforce that because then you have to go through court and litigate and beyonds is the juice worth the squeeze.
Mat Zalk 14:50
Yeah, so your your thing going hypothesis is that for a few $1,000, what could be the difference between the sale price of the property and what the loan does? Use, it’s not worth the multiple 1000s of dollars and headache of litigation associated with collecting that money. They just try a little bit of a haircut, write it off and be done with it.
Rockford Steele 15:07
Well, I mean, if an investor is doing wonderful family residential properties, and they’re in a spot where the lender is having to foreclose and take that over and is considering forcing that personal guarantee, they’re probably in a lot of trouble. Yeah. And the moment, you know, the lender start suing them, they’re just going to file bankruptcy. And then you just gotta get in line. Yeah. Yeah. It’s, it’s really, I mean, unless for a really special set of circumstances, it wouldn’t be worth enforcing.
Mat Zalk 15:35
Right. Why do you think it is rare for commercial lenders to be doing 30 year fixed notes? Why do you think that very few people are doing that? So
Rockford Steele 15:47
local banks don’t tend to like long term fixed rate because it exposes them to the interest rate risk. Now, for the larger hedge funds that are looking for some kind of stable returns, you know, they’re willing to take on the interest rate risk, because they’re okay with getting the return at where that is, right. So that they’re going to have a diversified portfolio, they’ve got, you know, some earning a little bit and, you know, they’ve got other stuff that they’re being pretty aggressive on that hopefully, turns out great. They get a massive return, but it may turn out pretty bad, and they get a terrible return. And then they still can show to their investors. Oh, but look over here, we’re still getting money. All right. You know, when you’re as large as like, the black rocks of the world, right? I mean, it’s hard to place that much money, right? And being able to place a chunk of money and know you’re getting a stable return is a
Mat Zalk 16:35
plus. Right? So why aren’t more lenders getting involved in this asset class?
Rockford Steele 16:42
So local banks generally don’t have they don’t have access to the same amount of liquidity that like a Blackrock does. Yeah. I mean, so they can’t expose themselves to that kind of interest rate risk. I mean, for example, look at what happened with the banks that folded recently, they thought there was nothing safe and conservative, they bought some T bills, right? You got these tenure, measuring supposed to be the safest thing ever. But then they’re exposed to that interest rate risk rate spiked, right, and suddenly those Treasuries are worth way less, right. And so borrowers are depositors then decide they want their money, well, the bank can’t then just go sell the Treasury and get their money back, because it’s now worth half as much as what they paid for, if they wait till maturity, and they get their initial initial principal back, but they got to wait till the maturity to get that back. So the treasuries are I mean, they’re great, they’re conservative, they’re safe, right. But you then have that interest rate risk exposure, right. And that’s really the trouble. And, you know, we got acquired a couple got shut down right. Now, and I know, it’s bad enough that che said, if another one needs is in trouble, we’re not buying another one.
Mat Zalk 17:57
Or our appetite for consumption is has declined. Yeah. And
Rockford Steele 18:02
then there’s a certain amount of liquidity that the bank has to have in order to acquire another bank. Right. And so they were like, we don’t have liquidity to do just keep buying all these banks that go under so we can’t just keep using us as a
Mat Zalk 18:14
backstop. Right, right. Let’s talk for a second about rate indices. The long term fixed lenders versus the commercial lenders commercial. Yeah. What’s, what’s the difference? What is that? So generally,
Rockford Steele 18:28
what you see with the, like, short term money belongs that are either adjustable, or they’re ballooning and three to five years, they’re gonna use something more like either the Sofer or The Wall Street Journal prime index. Yeah, that’s typically what you see. I mean, so banks right now, for preferred clients are using prime plus one is mostly what I see we have a few local banks on our platform as well. Prime being at eight and a
Mat Zalk 18:52
half. What’s the other one real quick is is three points above the federal funds rate? Target, right.
Rockford Steele 18:59
I can’t remember his I know it’s eight and a half right now. Okay. Is where most regional Prime Minister? Yeah. Yeah, but that prime plus one puts banks then it might add a half percent, right. And that’s why a lot of investors that when their loans are adjusting or maturing, they’re then calling someone by g because we have other options. Like, we cashflow it at five, we cash flow to six and a half, we would have cash flow in the sevens. We don’t cashflow at nine and a half right now. And so there’s no, and bankers like referring to somebody like me, because we’re non depository. And banks need deposits. Yeah.
Mat Zalk 19:38
So the idea that the the, the idea there is that they can actually come and borrow from you, but they’ll leave their deposits at the bank. So the bankers are happy that that that happens. Exactly, absolutely correct. Right. So what index are you using? How are you basing the rates for your loans right now?
Rockford Steele 19:55
Yeah, so for the 30 year fixed lenders, the ones that are long term fixed straight, late tend to use either the five or 10 year Treasury is what I’ve seen most. Now, so over the last week or so, the five and 10 year Treasury have both come down a lot. So I’ve seen some massive improvements on rates, which is fantastic.
Mat Zalk 20:13
Wow. So what rates are you seeing now? We’re talking this in middle of December 2023. What rates are you seeing right now?
Rockford Steele 20:20
I quoted one yesterday in the low sevens. Whoa.
Mat Zalk 20:25
Whoa, now pretty significant. Yeah, that
Rockford Steele 20:28
borrower was not taking cash out. So there’s that because it was a hit. If it’s a cash out loan versus a non cash out loan?
Mat Zalk 20:35
Is that basically 16 basis points? Generally, yeah.
Rockford Steele 20:38
It’s more or less 50. pips. Yeah. Okay,
Mat Zalk 20:41
interesting. But low sevens. That’s pretty significant. Okay.
Rockford Steele 20:45
So compare that to a couple weeks ago. And we’re I’d quoted investors all the way up in the nines. I mean, we’re still like nine and a quarter. So we still were less than what the bank would have done. But yeah. I kind of got used to quartering in the Force. Couple years ago, weren’t those.
Mat Zalk 21:03
But he was just quoting in the forest you recording, like, hundreds of deals a month in the forest or something like that? I mean, it was like the chaos and the craziness of COVID was,
Rockford Steele 21:12
I mean, while I was doing commercial investment property loans in the full course it was it was fantastic. And I mean, that socked
Mat Zalk 21:20
in for 30 years. Right? Yeah. It was two years. And then,
Rockford Steele 21:24
you know, of course, you’ve heard the same cobblers kids have no shoes. Right. Right. Yeah. Whose properties didn’t get done during that period? Because also busy doing everybody else’s?
Mat Zalk 21:33
Yeah, yeah. Yeah. Well, I mean, I wish I didn’t hear that period, because I think I’m locked in it. Five years, a lot of those deals five years, five, five and a quarter, five, three quarters, but those are gonna eventually adjust. And I’m not going to be happy with me. Even in three years. If rates have come down a little bit. They’re still gonna be at six and a half, seven something. Yeah,
Rockford Steele 21:51
I had I think, I don’t remember exactly. But I had several loans at just this year. And I had to figure something out.
Mat Zalk 21:59
Wow. Because yeah, I mean, one thing, one thing that I’ve heard happening is that some commercial, local banks are just saying, Okay, I’ll go to a 25 year amortization. And because over the last five years, you’ve knocked down a huge chunk of a huge amounts 2520 year and you’ve knocked down a chunk of your, of your of your principal, I can recast that new principal amount over 25 years, and it still leaves the DSCR. Where where is palatable for everybody? Yeah, I
Rockford Steele 22:26
mean, they’re trying to make it work. I mean, the bank doesn’t want you to take your business elsewhere, and they especially want to get the property. Yeah. They mean, they don’t want the they don’t want your house. Yes, but it’s not where they’ll go. Because if a bank takes that, alright, so the way the banks can lend money and the way they can lend more money than their deposits, they’re allowed to lend 10 times what their deposits are, right. But if they have to reclaim an asset, it doesn’t just eliminate that portion of the asset, it eliminates all the multiplier that they would have been able to lend off of that initial principle. So that they really do not want to have bank owned assets. Yes. Reo is really never Bank, which is why you know, some a lot of the local banks that are like small town banks, they’ll have investors on speed dial, if they have to take one they’re calling them immediately. Will you buy this? Now? I, I’ve always wondered how you get on that list? Have you ever figured that? Yeah, a lot of people would like
Mat Zalk 23:22
to be on that list. A bunch of people with a bunch of cash. Want to Be
Rockford Steele 23:27
sure it’s the owners of the banks, you know, good buddies. Yeah, you get on.
Mat Zalk 23:33
It’s speed dial. Good friend. Let’s talk about some some of the success stories of Stout Funding. People must come to you all the time. They, like many lenders, you don’t get every deal. You don’t land every deal. But what are some interesting deals that you’ve seen recently and where you found success?
Rockford Steele 23:54
So we being a broker, we have a large amount of options as far as things that we can do. So I mean, the smallest loan I’ve done was a $30,000 rental loan, and I had to do a private money loan for that, because most of the institutional lenders won’t go that small. Right? Yeah. And the biggest deal we bid on we did not get to close it. You mentioned we don’t get to close everything. But that deal was 1.2 billion. Wow. That was going to be a hotel Marina Casino. Right? Wow. Yeah. He’s, he’s maker and told him no. And then so me and the lender, we put our heads together figured out a way to make it work. Because they didn’t have 20% of 1.2 billion to put down, right. And so we put together a plan, we’re gonna do this in tranches, right, do a section at a time. And then he took that plan to the bank. The bank said, yeah, we’ll do that. Oh, we’ll do that. Wait, so
Mat Zalk 24:40
what was the idea like a construction financing with with stage gates essentially? Yep.
Rockford Steele 24:45
So we just do a portion at a time because he would have 20% at a time and he as he did each piece, it would then have additional equity that we could leverage to account for that extra 20% But
Mat Zalk 24:57
then why would he go through to the if you guys were offering this a Lucien, why would he go back to his commercial lender? Were rates better with them? Or they had some better terms? How would that work? Cheaper? Got it, in terms of in terms of the upfront costs, or in terms of the, what he called
Rockford Steele 25:14
the points that your origination fees? Fees? Yeah. Right. Interesting. So
Mat Zalk 25:19
you didn’t win that one. But you’ve you’re bidding on massive deals, and you can do everything.
Rockford Steele 25:24
That was that was fun to be a part of for a while.
Mat Zalk 25:27
Wow. Yeah. Is that we’ll get it done. By the way. I mean, that it’s been funded and out. Are they doing that? Are they doing that project?
Rockford Steele 25:32
They came back later and ask for a different portion of it. It’s I don’t think so. Got
Mat Zalk 25:39
it. Interesting. I mean, I’ve,
Rockford Steele 25:43
I’ve been on a couple steel factories, I think is basically the same projects, just two different clients wanting to do it. In it pretty much in both cases, they didn’t have 20%. Like we were going to line up 100% financing. The lender just asked you put 20% in, in this escrow account for oops, and what ifs, right, because you got a project that large, you got to make sure you got something set aside for that. Right. Yeah. And then at the end of the construction period, everything’s done. Everything’s good, they would release that 20% Back to you. So it’s not actually injected into the project. It’s just held in escrow. Right, right. Right. But the borrower has 20 million, not 20%. Yeah. So
Mat Zalk 26:23
I mean, that’s ambitious. If somebody has 20 million bucks, and they want to do a billion plus project, that’s,
Rockford Steele 26:29
that’s ambitious, the bar was in the house, he did very well in hotels. And then, you know, he wanted to do that he was bringing in a partner that knew how to run steel factories, and he was the US based side and was going to kind of run the office. And it just didn’t work out. They had equity in their hotels that kind of tapped in to get there. And he didn’t want to do that. So it made that one went away. And then the second second stab at it, the borrower didn’t have the liquidity in the United States, they had plenty of money not in the United States, which became problematic because apparently, you can only move a certain chunk at a time and it would have taken a really long time to get the money here got
Mat Zalk 27:11
interesting. Other Other successful the recent stories.
Rockford Steele 27:17
Um, so I’ve got one in underwriting right now. We’re, it’s a warehouse actually up in the Tulsa area, and the borrower, you know, we started taking a look at it, and the borrower opted to go a different direction. So other, the other bank gave him a really good song and dance about how they’re gonna get this done. We’re gonna get it done in a timely manner. And, you know, they actually were trying to take an SBA because they were buying the business, that house that was housed in a warehouse as well. I mean, no fault to our borrower. The sellers. financials were a mess.
Mat Zalk 27:52
Couldn’t underwrite, they couldn’t underwrite the business, and then the loan associated with the business as a result, because
Rockford Steele 27:58
the business, the business financials were a mess, and so you can’t take a deal like that SBA. I was, we can do SBA. I wasn’t gonna take an SBA just because of timeliness. Yeah. Because I’ve seen those take six or eight months, and we didn’t have six or eight months, right. So they, they came back and said, Hey, can we get this done? So we’ve got that in underwrite right now with one of our local banking partners. Yeah, I think he’s getting a rate in the sevens as well. So I, you know, when you do volume, just like we do as a broker, sometimes you can negotiate some special deals. Yeah. So a local bank that is willing to do something other than prime plus, right. Yeah. Excellent. Yeah. So it helps, you know, volume has leverage. I mean, another big win for us recently is I go to a lot of lending conventions, because I’m a broker. I’m always shopping lenders, right? A little slogan is we shop lenders, because you got better things to do, right? Because you’re running rehabs, you don’t have time to call for different banks. Right. Right. So we had a wonder we on boarded, and they had these crazy insurance requirements that we were not aware of, until after we had submitted 10 loans. And so we had 10 loans and underwrite with them and trying to navigate these crazy insurance requirements. And about half of them didn’t close, because to meet their criteria, the insurance costs double. Well, and it can be right. At the convention, I happen to run into one of the directors with the with that lender. And he was asking for feedback, because we signed up, we sent a bunch of loans and we sent nothing. He’s like, what happened? Like I laid out? This is what happened. This is why I’m not sending anything. You’re asking for something on the insurance where the lender has no insurable interest in that in that part of the policy that you’re trying to be on. Yeah, no insurance agent. The insurance agents that have reasonable premiums won’t write that because you don’t have insurable interest. And he goes, I don’t know why we’re asking for that. I’m just checking. This will get fixed. And it’s fixed now. That’s because They were all really excellent on rate. And it just I couldn’t send them anything because it’s going to kill deals, right? Yes. So yeah, we just had a closing with them with the new insurance criteria, you know, so that that was a win, we’ll take that back.
Mat Zalk 30:17
Tell me a little bit about your construction financing. On projects, I buy a project for 40 grand, I want to put in 100 grand the after repair value is, let’s just use round numbers 200 grand, where do you kind of what will you fund when?
Rockford Steele 30:33
Alright, so if you’re buying it for 40, and putting 100 in is, I mean, that sounds ground up to
Mat Zalk 30:37
me, that’s a lot. We do that all the time by these that we buy these things. They’re burnt units, but they’re in a good neighborhood or whatever.
Rockford Steele 30:45
I resemble a main, the biggest rehab I did is we bought it for 65. And we put about a little over 90 into it, right? I understand, you know, most lenders do not like what’s called a lopsided deal, where your rehab is greater than your purchase price, kind of the sweet for that to get optimal pricing is, is your rehab is between 20 and 80% of your purchase price.
Mat Zalk 31:07
Okay, so that’s, let’s, let’s do that, let’s use an example we’re buying for 100 and putting in 50 and 100. The end.
Rockford Steele 31:15
So if you’re buying it for 100. And putting in 50, I’m being the most aggressive that we’re probably going to see without going to our private money lenders, because private money lenders, we can do up to 100% not to exceed 70 100%
Mat Zalk 31:29
of the total cost not to exceed 70% of the natural repair value. Got it.
Rockford Steele 31:36
And then with my institutional non bank by looking at financing up to 90% of purchase, not to exceed 90% of purchase 100% of rehab not to exceed 75% of the completed value.
Mat Zalk 31:46
That’s great. So in this case, 75% of the completed valued be 150 on 200.
Rockford Steele 31:54
And if we have a lot of you’re buying after 100 and putting in 40. I mean, you’re gonna get that 9100 program got it all that means if you’ve got time to wait for a pre approval from the bank, I do have a local bank that will do 100% Finance 100% of purchase 100% of rehab not to exceed 75% of ARV it is a rehab to rent loan. So one closing right you don’t have to refinance your goals right into a three year balloon rental loan. So renews every three years they charge a little bit more front for upfront for origination. For that program, they
Mat Zalk 32:28
have to inspect the construction and and a bunch of other stuff, I guess, right?
Rockford Steele 32:31
So if you do a fix and flip loan, they don’t inflate the origination, it’s because it’s rehab to rent. So they have to do the work twice. But the you don’t don’t make you close a loan twice, right? So you don’t feel entitled twice. And you know, there’s no second appraisal or anything like that. There as you might imagine, any bank next action or an actual bank doing 100% Finance, they’re swamped. So initial term for an underwriter is probably like 45 ish days. Got it. So I’ve got a few of those in queue.
Mat Zalk 33:05
But that’s awesome. I mean, they’ll do 100% not to exceed 75% of the ARV. That’s awesome. If you can find those deals. My God, it’s hard to find those deals, though. I mean, if you’re able, if you’re able to have 150 into a deal, that’s where
Rockford Steele 33:16
you’re bringing a little bit down, right. But I mean, they’ll also fund the entire rehab at closing. So even if you’re, you’re a little bit lopsided, since they fund the whole deal at closing, you’re still not bringing cash to close and you just end up doing some rehab out of pocket. So
Mat Zalk 33:30
do you need that they will cut you a check at closing or do they want to draw on the construction that that
Rockford Steele 33:36
link will cut you a check at closing it goes right in it goes to title and you leave with a check.
Mat Zalk 33:42
So if you’re actually able to, to do the concert in my example, I did 100 acquisition 50 renovation, it gets you to 75% of the ARV. If you’re actually able to do the renovation for 45 you actually could pocket $5,000 For your next deal. amortized over 20 years, but changing but but adjusting amortized over 25 amortized over 25 adjusting every three. Yep.
Rockford Steele 34:05
Wow. Yeah, so it’s a renewal every year it’s a renewal every three years you have a dock fee every three years to renew the loan. They are one of the banks that does prime plus one. So you’re going to be at nine and a half 975 is where I would expect most borrowers to be with them. But if your cash doesn’t have to touch the property, that’s a win. Yeah, right. I mean, personally with where my 30 year fixed lenders are, I’d probably use their fix and flip loan options, save a little bit on on the origination fee. Get in there, get it done, and then refinance on the 30 years fixed that way if rates do spike again, like I think they might. You don’t have to worry about it. It’s fixed. And then if rates go down, you know, after your repay is over, then you can always you can always refinance to lower your rate, which
Mat Zalk 34:52
loan which of these loan programs have a some sort of prepayment penalty? What a They call it they call that management. What do they call it? Cash? What do they call it? The there’s a term for it that that small balance loan program Freddie and Fannie use for big apartment complexes called
Rockford Steele 35:11
the yield maintenance. Yield maintenance. Exactly. Yield maintenance is probably the worst type of prepayment penalty you can see. Sucks six. Yeah. So for those that don’t know, you’ll maintenance means the interest that would have accrued that you would have paid that is a prepayment that’s that’s, that’s mad. Most do a stairstep. So if it’s a five year prepay, it’s five the first year for the second, you know, three, the third, right if it goes down, and then after five years, you’re done.
Mat Zalk 35:41
And it’s led to yield maintenance terminology seems to be the bank’s way of saying we are making sure that we can forecast our yield to our investors over time. It’s not a it’s not an investor facing terminology. I mean, similar to the way a bank does debit and credit your debit card, which is a one side of the general accounting ledger thing. Debit is actually referring to the fact that it is a it’s a debit from the bank’s perspective not a debit from your perspective. You we know that as debit card. So it’s it’s like they call it yield maintenance which is as is a banks. inward looking it’s as if this terminology that was a banks inside terminology got leaked to the public. And now we all know it is yield maintenance, but it’s a banks terminology, which is a little bit bizarre. But anyways, so what are the what are the yield maintenance? Or what are the other prepayment penalties that some of these programs enforce? So
Rockford Steele 36:38
the 30 year fixed lenders, they’re pretty much all their default as a five year prepay. So that’s the disaster step by 4321. Some of them offer yield maintenance, but there’s not a whole lot of savings and rate for doing that. So there’s really no reason to do that. You can also back down the prepay and get a shorter like a three year prepay or a one year prepay.
Mat Zalk 37:00
And if you’re just strategies to buy and hold, you might you probably don’t want to do it. There’s just
Rockford Steele 37:05
I’ve had several people that wanted to do the three year instead of a five because they figure after three years, they expect rates to be lower than they wanted to be able to refinance at that point. Yeah. I haven’t had anyone buy it down to one year yet. I saw a post online someone was looking for a no prepay 30 year fixed loan like no, I mean, you could do that, but the rates gonna be a lot higher. It’s gonna be it’s gonna make sense refi real soon. But
Mat Zalk 37:27
that means but that means that they expect in a year rates to be significantly lowered such that once they pay an origination fee and a closing fees twice. Once in a while, and once in a year, it’s going to still make sense. That seems that’s pretty ambitious in terms of where you think rates are gonna
Rockford Steele 37:41
be. Yeah, normally, if you’re thinking that we would just do another bridge, right? Because you can bridge into a bridge, right? I mean, sometimes sometimes it’s necessary. Yeah.
Mat Zalk 37:51
When would that be necessary when renovation just takes longer than expected?
Rockford Steele 37:56
Renovations that takes longer than expected, I’ve done a bridge loan because the borrower needed cash bridge loans close faster. And the property wouldn’t meet the SER criteria. Because bridge loans don’t commonly use the DSCR. It’s all about loan to value. And that’s really all their underwriting, you’re not meant to be in it for a long time. Right? You’re meant to be in 12
Mat Zalk 38:17
to 24 months of bridging loans are generally they don’t amortize they’re just interest only or they don’t advertise. It’s just interest
Rockford Steele 38:23
only. Right? So it bought the borrower an extra couple of years to be able to then get rents up, get things sorted, and then you can do a normal, normal stabilized loan on the back end of that.
Mat Zalk 38:34
What are all the assets that you lend on? You’ve mentioned Marina Hotel, you’ve mentioned steel manufacturing, you’ve obviously mentioned rental properties. Do you lend on a broad array of assets? Or was it mostly real estate back?
Rockford Steele 38:50
Yes, so I’m a broker. So the beauty of that is if my if I have a lender that will lend on it all. So like Trucking, we can lend on trucking, we can lend on real estate, obviously wonderful family, I think the only thing related to real estate we have trouble with is vacant land with no plans to develop
Mat Zalk 39:10
less than two acres, if you less than 20 acres. So if you have vacant land with an architect’s renderings of drawings, and do you need some sort of anything from a planning commission or from from the city that indicate that you’re zoned properly? Anything else?
Rockford Steele 39:25
You know, if you’re if you’ve got plans to develop and build it, we can just do it as a development loan, right? So that way you can get a loan for a portion of the land, right? You know, lenders don’t like to lend not lend a whole lot on loan to value on land, because there’s it’s not revenue producing, right. So if you’re about to do something to make it revenue producing, then then it’s a lot easier to get them on board.
Mat Zalk 39:50
So you do a bunch of new types of asset classes. Where do you land in Oklahoma?
Rockford Steele 39:55
So, for conforming conventional type loans, I’m only licensed in Ohio Alma, okay, for commercial loans thinking we’re in 43 states. Wow.
Mat Zalk 40:06
So you’re in, if I want to borrow commercially in, I don’t know what the states are 43 There’s seven, I could I could mention that aren’t. But let’s say, Kansas, you can do the loan in Kansas. No problem. I can do one in Kansas. Got it? And does the appraisal have to happen? The real licensed appraiser $450? Or can it be done via desktop,
Rockford Steele 40:31
it’s gonna need a full appraisal, I mean agreement across the board. The ones that do a hybrid histones of costing about the same, I mean, maybe it’s a little bit cheaper, but they send someone to go take pictures, they still have some, you know, somebody going in and taking pictures and giving a price opinion and then they do an internal evaluation. But for the most time, for the most part, it’s a full appraisal, appraisal costs for them. You know, when you’re ordering it through an AMC appraisal costs have gone up, I normally see in the ballpark around 750, for appraisals, which it’s better than it was during COVID, during COVID got as high as like full 1300. For standard appraisal. I had one, quota $2,400 for a six week term time, on a one to four family residential appraisal, we should go be appraisers. And that was the best offer at that time.
Mat Zalk 41:22
The weird thing about appraisals that like systemically it’s an issue because an appraiser in order to get licensed has to work has to apprentice under another appraiser. So the appraiser that is overseeing the the the apprentice is essentially training his or her own competition. So there’s, I guess that
Rockford Steele 41:40
creates a lot of work. Right? Because you can’t just like using the staff and hand them tasks to do because you’re responsible for everything they do. So you still have to review and look over every single report that they put together, right. So it’s not as though you get to just use them for labor during the apprenticeship period, you still have to redo all the work that they just did to make sure it’s right, because you got to put your name on it does. That is a problem. It’s in my experience with AMCs appraisal management companies, for those that don’t know what AMC stands for their repository for bad appraisers, right? Bad appraisers get to stay in business because of AMCs. A lot of our lenders have on the commercial side, not conventional, conventional, you have to work through AMC, and you don’t really get to say much about, you know who which which appraiser is going to use it. On the commercial side, I have several that let us pick an appraiser or at least put together a panel of our own appraisers that we like then when it’ll go to our list, you know, we want we want one of these guys, because we know these guys in good roles,
Mat Zalk 42:45
right guys and gals, right? Right? Is there a structural issue in the industry that needs to change?
Rockford Steele 42:52
There needs to be a better way to get rid of these bad ones, because I got a bad one just this week. And you know, then we did it. We did a reconsideration of values. And hey, please look at these comps. You know, these are ones we feel should have been used. And the appraiser said, no, no, we’re not. We’re not changing anything. And then I looked at his name. I was like, oh, it’s that guy. Right? I haven’t ever gotten. I’ve gotten appraisals from him a few times. And I’ve never gotten a good one. Because he’s set up with different AMCs if I blacklist them with us with one, but the order goes to a different AMC. He’s not blacklisted with us with that.
Mat Zalk 43:29
And so I get it we get anyway. How do people find you if they want to take advantage of some of these very interesting programs that you offer?
Rockford Steele 43:40
So best way to contact me right now is email. As you might imagine, I’m on the phone a lot. So if you call me I may or may not answer. If you text me, I can’t market a text message as unread or if there’s a way to do it, I don’t know. But email if I’m in the middle of something, I can mark it unread. And I can respond to you as I as I can. My email is just [email protected]. So [email protected]. Cool. And also fun. We have a website just stoutfunding.com as well. We just got an application thing set up. So that should be appearing on our website in the next week or so.
Mat Zalk 44:23
If somebody wants to start a new application, they just go right to stop funding the stop funding name just go to
Rockford Steele 44:28
stoutfunding.com It’s it’s a short format. So it’s just enough information for us to get an idea of what you’re wanting to work on. And then more likely than not, we’ll reach out to you via phone or email to get a little more detail to make sure that we can make sure we’re on the same page as it says on our website. It all starts with a conversation right now because just because you’re looking for a rental and we got to talk about well, what is this property what is this deal? What what’s your what’s your goal? What are you trying to accomplish? Because we want to make sure we’re on the line working in the direction you want to go. Last thing I want to do Was I mean this did happen recently those communication mix up and you know they were looking for a stabilized rental loan and it was a purchase we thought it was a fix and flip deal and we were underwriting in the complete wrong direction. And unfortunately it happens and but we were able to get it sorted out unfortunately, thankfully that my processor caught what I missed and it didn’t didn’t cost us too much time.
Mat Zalk 45:24
Rockford Steele is a real estate investor and has been for the better part of a decade. He has a portfolio rental still and previously flipped properties as well. Rockford has been a licensed financial advisor. He sold property and casualty insurance and he’s been a realtor. Currently Rockford still manages his rental portfolio and run Stout Funding LLC, a commercial loan brokerage with all the options and programs that we discussed today. Super exciting. Stout funding specializes in getting funding for investors to fund their deal, Rockford, thank you for being on the show. We appreciate it. Thank you for having me.
Outro 45:57
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