This week, Dr. Forrest Bryant interviews Caeli Ridge, currently at the helm of Ridge Lending Group as President, CEO, and fellow real estate investor.
The following is a transcript of the podcast audio.
Welcome to the High Speed podcast. The official podcast of the High Speed Alliance taking you further, faster, together. We are setting our course for freedom and legacy through mastery of business, finance, family and lifestyle.
FB: Welcome to the High Speed podcast this is your host Dr. Forrest Bryant. I’m excited to have as our guest today Caeli Ridge with Ridge Lending Group. Caeli how are you doing today?
CR: I am fantastic Dr. Bryant. Thank you so much for having me. I’m excited to be able to share today with your listeners.
FB: I appreciate you being here didn’t technology great? I’m ringing you from Alabama all the way up to the great Northwest up in Oregon. I heard the weather, I heard it’s a cold day up there today, right?
CR: I’ve been expressing about 106 degrees today. It’s going to be an all time historical record. So we’re finding our way indoors I think. We’re going to get a movie later or something.
FB: Well, that’s great. Things are getting crazy. I know we chit-chatted a little about “the solar eclipse” that’s coming up. I think we’re both excited about that. But we’re both kind of tuning in to see how that goes. But that’s not what we’re here to take about today. We’re here to talk about real-estate investing and your specialty which is helping real estate investors finance many of their purchases. So I know you’ve been in business-the business that your father started. You’ve been doing it over 20 years and he was there 20 years before you. And 40 years of lending you all have seen a lot of ups and downs in the real estate market.
CR: We have! For me in particular the last cycle and I think most would agree that most investments do go through cycles. But my education I think really came from the crash the big crash of 2008/2009. I was able to get first hand those ups and downs. Low, low downs but we weathered that storm and I feel grateful for the experience now looking back. I would not have said that 10-12 years ago but now I appreciate having been given that opportunity to learn from.
FB: Well and I know you and I talked a little bit about your background and just knowing that was a very traumatic event for a lot of people. And you know we’re students of the cycle. Students of learning from the past and being cognisant of where we are right now in the market and things seem… a lot of the people that I talked to in the different groups that I’m in and I’m sure you’ve got your tentacles into just about every market in the United States with investors. I know you worked with a lot of different big investor groups and also with individual investors and so you see a lot of what’s going on in the market and I know we’re just kind of keeping eye on things and what we learned from last time is really going to be helpful to you know whatever happens in the future, right?
CR: Always, always. If I can just maybe comment on that, I think that one of the things. Well, there’s more than one there’s several factors that I think make the last cycle and this cycle a 180 of each other. Prior, that particular real estate investment play was almost all about appreciation. I can tell you of all the properties that I have held and I may have said it before to you, Forrest, but all of those investment properties not one of them cash flowed. By varying degrees obviously right? 50 bucks here a 100 bucks there maybe more maybe less. But it was all appreciation and we did very very well. Conversely this cycle is all about cash flow. A few other details… leverage was much higher back then. You were putting 5 and 10% down max. Now, you’re putting 20-25% down interest rates obviously were very different back then they were in the 6’s now they are in the 4’s. Price Points back then I think average were 250 now their 80-120. So for all those different variables this particular cycle I think is there’s no risk averse, that’s just not what you get into when you’re investing in anything. But I think that moving forward people are a lot more protected than they were from a crash of this sort than we found in lending and housing all at once.
FB: Yeah, and I think that’s a really good kind of synopsis of the differences because a lot of people think that aren’t educated and they’re looking they’re saying “oh it’s just like 2008.” But most of the really knowledgeable real estate investors you know they’re saying it’s not the same, it’s not the same as it was last time.” And there’s a lot of reasons why. A lot of those that you just mentioned. So tell us a little bit about I know you yourself are a real estate investor. I know you’ve had a lot of investments in the past and then I know tell us a little bit about your history and kind of where you are now.
CR: Yes sir. Yeah.
FB: With that kind of investing side of it.
CR: Yeah so I think you mentioned we are 2nd generation company my father started it almost 40 years ago. I’ve been doing this 20 myself. We are licensed nationwide. So we’ve got a nice broad footprint. And we focus almost exclusively on the non-owner-occupied side of lending then we can do everything. Would be the VA, the FHA on the occupied of course we’ve really carved out that special skillset in the investor or non-occupied lending space. I think most uniquely to your point. Is that- Yes I’m a fellow real estate investor. So that perspective of the last 20 years the good and bad I’ve got plenty of both of those stories to share but I think that I’ve been able to leverage a lot of that and use it in meaningful ways in which to educate our investors. And I would say probably that’s our biggest value add as a company is the education piece that we try to put out there. For every client that we work with if they think there’s use or value in it they will have an opportunity to work with me personally to talk about higher level details related to their goals. And as that applies from an underwriter’s perspective and their qualifications. And more importantly than all of that then I teach them how to optimize those qualifications so they continue to secure best and highest use terms. So overall I would say if there’s a takeaway is that education piece that we promote as a company that I’m probably most proud of.
FB: Yeah, that’s excellent. And I like to- when I have specific knowledge of working with somebody I’d like to make sure that my listeners know that. And you know I’d like to give a plug to you and to Ridge Lending because I am client and I have used you for quite a few investments that I’ve made and you’ve made that process. The process is never really fun just so everybody knows that. But you’ve make it as easy as it possibly can be. But so you know let’s just kind of dial back a little bit. In this first section this is just kind of the public session. We’re just kind of keep it at a high level and then on the backend for the members only session we go a little bit deeper. Let’s just kind of back up a little bit you know let’s talk like if somebody is new to investing and they’re a new to real estate investing and they are looking at purchasing a single-family homes and they want to finance. Maybe just give us a little high level overview of you know what’s going in the market and things somebody that’s looking into kind of dipping their toe in the water and getting few rental properties might need to be thinking about.
CR: Sure. Once you expect, setting expectation. Great. So I would say that for somebody new to take the time and go through the prequalification process with us or whoever they maybe working with is your point quite invasive, right. So there’s quite a bit that goes into qualifying for an investment property. Your DNA samples are likely to be required (joking). I used the analogy it’s like turning a battleship in a creek. So anyone that’s heard me tall. they’ve probably heard me say that and i you visualize that for a second you know a lot of people will agree that that’s what it feels like. I would tell the newbies out there to get through the pre-qual of lending first to make sure you that you have all of your ducks in row with that and it’s most probably the most intensive part I think about acquiring real estate with leverage. And then within the qualifying, understanding what product type you qualify for. It’s going to be the conventional loans which we referred to here as the “golden tickets” right this is the highest leverage at the lowest interest rates on the planet. And just to clarify by conventional that just means that fannie mae or the freddie mac loans. Is it that that they start with? Or do they need to start with specialty products? Maybe their debt to income ratio isn’t intact we may need to move over them over to a different lending tool. Maybe they want to look at commercial type blanket loans. So there’s a variety of different spots that they can start. I think generally more often than not we are going to drive them toward the conventional side of things should the qualifications be there. Because there’s a finite number of available loans for those that we want to maximize first. But yeah getting the pre-qualification done first. Understanding what the long and short terms goals are and coming up with sort of a plan or strategy that meets those goals is where I would probably set that initial expectation where to start.
FB: Yeah, that sounds great. Go on, just a tiny a little bit deeper there on that like can you address credit scores and debt to income you mentioned that a little bit I mean just give us a general guidelines there for somebody that might be looking at the conventional fannie-freddie loans?
CR: Absolutely. And this actually will play into for any individuals that are in the working with us and go through that education piece some of these will come up again. But the 3 components that any individual probably needs to focus on most right and underwriting lots of moving parts but the most heavily weighted to qualify conventionally are going to be the credit, the assets and the debt to income ratio. Now, before I get into those specifics let me first comment that, when we talk about conventional loans there are 10 loan spots available per qualified individuals. So you 10 of this golden tickets as I call them. And of the 10 there’s 2 very distinct underwriting books if you will that we must adhere to. The first set of rules and guidelines applied to loan spots 1 through 6 and then there’s a new book 2nd set of guideline that applies to investors in the 7,8,9,and 10 loan spots. So that’s important because those 3 criteria change depending on which book you’re operating in. So if you start with credit first I would tell you that in 1-6 loan spots there’s really no hard and fast rule for minimum credits score requirements they’re vague actually. I’ve been able to take someone with a 650 credit score and get them approved for a loan but they came with compensating factors. So some of them might have some slightly lower credit score as long as they have strong assets or low to reasonable debt to income ratio. That would be perfectly fine in those first 6 loan spots. When they move in 7 through 10 the requirement changes. They raise the qualification bar and it is now hard and fast. The individual must maintain a minimum middle credit score of 720 or greater to qualify in the 7 through 10 so that’s credit. The assets kind of like credit there’s just those 2 boxes that apply. We need to be able to show depending on whether they’re putting 20-25% down just as a sidebar to that. For single family residence an individual can actually leverage to 85% loan to value in the first 6 loan spots. So for those that wanted to kind of stretch the dollar a little bit further that 85% loan to value might be attractive noting that anything over an 80% loan to value carries with the PMI that’s Private Mortgage Insurance. The factor is not horrible though I would probably get that off individually and interest rates are going to be slightly higher on those loans too. But the numbers usually work out with the cash flow. So the credit, excuse me. The assets… 1-6 we need to be able to show source and season for your down payment okay. Source and season means like over 2 months of bank statements that have been supplied to us I need to be able to prove that any deposit or large deposit listed in there originated with the individual so if there’s transfers or they sold stocks or maybe they sold a car. Whatever it might be any large deposit I just need to be able to show that it originated with the individual that’s source. And then seasoned, it just needs to have been in there for 60 days. So if there’s large deposits that we can’t paper trail that’s okay they can use those but only after that 60 day period of time has passed. We don’t want to see a large deposit that I can’t source until after it’s been in there just the balances they’re showing not the deposit anymore. So that’s the downpayment requirement. There’s also a reserve requirement that comes into play. The reserves are going to be equal to 6 months worth of PITI (Principal, interest, taxes and insurance) on the subject property which is the property that is in question for purchase. And they also need to show an additional 2 months worth of the PITI for any subsequent rental property only. The primary resident doesn’t count. Rental property only that are held within those first 6 loan spots. Okay, so that’s 6 months PITI on the subject property. The one that is in question plus an additional 2 months for each subsequent rental held in the first 6 spots . When we move to 7-10 we raise the bar again it’s now 6 months PITI for ALL rental properties. Okay, so that’s assets. Debt to income ratio the threshold is 50% okay. 50% of the income that we’ve been able to extract from what they’ve supplied us divided by the monthly liabilities found on the credit report only. Well, almost only there’s a few elements that aren’t found on the credit report that must go into a debt income ratio calculation. Those are going to be things like if you are a renter, if there are HOA dues on any of the properties that you own and if you pay taxes and insurance on any particular property separate from the mortgage. Those are the only 3 exceptions to that rule of liabilities that we count. Otherwise, if it’s not in the credit report it’s not counted in the debt to income ratio. For example, things like utilities or celphone bills or property management in our case those are do not get included in debt to income ratio calculation. Again, 50% is the threshold we like to see a DTI close to 45% or less but with those compensating factors again 50% is approvable. Compensating factors in this case would be high credit score or strong assets. So that’s kind of a quick overview of the primary components that an individual needs to have in order to qualify.
FB: That’s excellent. Some people if they’re not used hearing those terms their brain maybe spinning a little bit. So just if you’re listening to this for the first time. Some easy first steps you know make sure you know what your credit score is for you and your wife. And then also start looking at that debt to income you want the income to be as high as possible. And the debt that’s reported on that credit report you want it to be as low as possible. Those are just kind of easy things to do before you even start it to look it what the asset maybe. So there’s some things to go through that pre-qual process so you know. Kind of taking it back up to a high level there. We talk a little bit about how we feel like the credit market is a little bit different this time than last time. Just the real estate market in general you know what do you see nationwide? How are you feeling about things? What do you hearing?
CR: Yeah, from a lending perspective you know it all seems to be you ko 3 steps forward 2 steps back. You know if I look back from let’s just say 2010 to when we sort of started to see things move, step forward. I’m starting to see loosening of guidelines more allowances here and there for criteria qualify. But then they take a few things away. The other thing that I’m finding most prominently is that the alternative funds for long term mortgages, right so. Let’s say for an individual that’s maxed out their conventional loans they’ve got their 10 they move on the specialty. I’m starting to notice that the specialty investors and qualification and terms are starting to become more competitive to the fannie and freddie which is super exciting for us to have other real legitimate ways to fund these things. With any luck, fannie and freddie will not be the only mortgage-backed security that is purchasing these 80% LTV at 4.5%/30 year fixed. I’m hopeful that some of the alternatives are going to start playing at that hand again. For those of you that can remember within the 2008/2009 crash all of those secondary market investors Lehman brothers, AIG all of those guys went away and what we were left with were just fannie mae and freddie mac that we’re repurchasing these mortgage-backed securities well I’m finding that it appears that we are moving in the direction where we may have some additional options to just the fannie and freddie at those really competitive rates and terms. I’d say that’s from my perspective where I’m seeing things go.
FB: And just so our listeners know and you mentioned it earlier but the change in the maximum LTV that was earlier this year correct? And that bumped up on the 85 on the investment products?
CR: You know they’ve had it for probably for a year and a half but they increased it from only 4 finance properties to 6 just recently. So like 85% it’s for single family residents only it doesn’t apply to the 2-4 units but we can go 85 all the way up to 6 financed property which is the new part of that.
FB: And so, and there’s also I mean and it just seems like they are loosening credit. We went through that really credit tightening process after the crash where everything were really locked up but it’s they are continuing to loosen things up right?
CR: I think so. I think they have been fairly responsible. I think that after the crash the knee jerk was almost as is responsible as what got us there in terms of the tightening of that credit but yeah I’m seeing the same things that you mentioned but that credit in a responsible way has been promising.
FB: So you know tell us what’s the biggest mistake that you’ve made in real estate investing? Or that you’ve seen not to put you on the spot.
CR: Yeah, no I’m happy to share my experiences, the good the bad and the ugly. I would say I would have diversified more not just in demographic because we have properties all over the country but I would have diversified more in property type and in between appreciation and cash flow. It was just prevalent when I was formally active it really was appreciation but I wish that in going back, hindsight is 20/20, I would have had less negative across the board than I did and less appreciation. You know it’s funny though when I’m talking to my clients these days I find that when I ask the question about priority of what they absolutely need to get out of the investments let’s say appreciation, cash flow and tax benefit are the top 3 that most people are concerned with. Everyone starts with cash flow rightfully, probably go to tax and appreciation is last. And I feel like even though it’s one of my mistakes to the opposite I feel like appreciation is kind of got a bad rap I still think that it’s a viable and substantial play in investing and so long as the property cash flows, right, there should be some consideration maybe 20-30% of their holdings where they’ve got properties in those higher appreciating markets as long again don’t mistake me. As long as property still cash flow I think the appreciation is often discounted and it shouldn’t be.
FB: Right. And I totally agree with you and a lot of the investors that I talk with now you know everybody is really focusing on cash flow. But it seems like if you have a mix of properties in there like you said you know some older properties they’re not going to have that appreciation upside as much as maybe a newer properties and a nicer area is probably is got a lot more upside. But balancing those in your portfolio with possibly some duplexes or multi-family those kind of things really kind of give you a nice diverse portfolio right?
CR: Agreed. Absolutely, you’ll find the higher the cash flow the lower the appreciation and vice versa right the higher appreciation the lower the cash flow. But if you’ve got 10 let’s just use our 10 conventional loans. 8 of them are the high cash flow lower appreciation keep 2 of them that flip flops that. That you’ve got maybe it’s only $200 a month cash flow or whatever. But you’ve got the Sunbelt states where the appreciation play is going to be there.
FB: You know let’s talk about networking. How you meet people and how you- I know you’re a member of some masterminds and you like to network and meet people. You know if somebody and after listening and they’re not in one of those types of groups. What would you say?
CR: Well the internet is an amazing thing for something like that. Social media, I’m not a huge fan. I just I’m old old school that way. Your facebook and a google search you probably find all the information you could ever want on real estate investing. And there’s a lot to learn a lot to know. I think aligning yourself with the appropriate support kind of like you’re cultivating, well exactly like you’re cultivating here, Forrest, is super important. You’ve done the work and you know who the real players are the one’s that are providing valuable add and service. Yeah, podcasts, listening, and just education and just keeping yourself in the front of the people that have been doing this in the last 10 or 20 or even 30 years and learning from their mistakes is what I would comment there.
FB: Yeah that’s great. So, do you have, Caeli, a favorite quote or a favorite book? Would you like to share with our listeners?
CR: Uhm..I’m reading the Boys On The Boat. You’d asked me that earlier and that’s actually the book that I’m reading… actually there’s 2. Hold on I need to comment on the 2nd one. So I have a teenage daughter and almost 12 year old son the funny comment that I make about those. That my 14 year old daughter is 14 going on 20.
FB: I’ve got one of those to. I’ve got 15 going on 20.
CR: So there’s a book actually that someone had recommended and I’m forgetting the exact title but something to the effect of Get Out Of My Life but first can you drive Sheryl and I to the mall. It’s the name of the book. So, anyway that’s the primary book and Boys On The Boat is kind of a fun read. But my quote there’s a Martin Luther King quote that resonates with me “The ultimate measure of a man it’s not where he stands in moments of comfort and convenience. But where he stands at times of challenge and controversy.” always speaks to me and I try to remember that when things get tough…you know it’s easy to have morals and a certain way of life when things are easy not so much when things get you know a little harder. So I always try to remember that.
FB: Absolutely. I agree and resonate with that as well. What’s your definition of freedom?
CR: My definition of freedom?
FB: What’s that mean to you?
CR: Total flexibility of time.
CR: I like it. I like it.
FB: Alright. Well Caeli, we could do this all day long but we’re kind of wrapping up the public session here. So, we’re going to go deeper don’t go anywhere. But if you’re listening and you want to know more about Caeli, how would they get in touch with you Caeli? if they want to know if somebody is interested, if they are an investor and they want to get in touch with you what’s the best way to do that?
CR: There’s 3 ways they can do that. Our website if they want to check us out there www.ridgelendinggroup.com. They can call us at 855-74RIDGE that’s 855-747-4343 or simply they can shoot an email to firstname.lastname@example.org. I’m actually on that distribution so I would see it come over. Our front end team will make initial contact probably. But an one of those ways would be a way to get in touch with us.
FB: Alright so that’s excellent. Will put that on the show notes. So you can get in touch with Ridge Lending group. And I appreciate everybody listening.. We just finish up our first meeting and it was fantastic if you weren’t there. Please just touch base with us and our next meeting is going to be in the end of October. October 28th and 29th here in Huntsville, Alabama. You can look for other podcasts at highspeedpodcast.com or our website at highspeedalliance.com. But Caeli, thank you so much for giving us… I think that was really good. We had some high stuff and then we kind of got down and got some real practical information too for somebody that’s kind of new, right?
CR: Absolutely. It was my distinct pleasure Dr. Bryant. Thank you.
FB: Hang around. Don’t go anywhere where, we’re about to go on our members only session. And for you guys that are listening appreciate you tuning in. Thank you and we’ll see you soon. Thanks Caeli.