Roc360’s Arvind Raghunathan Discusses Residential Business Purpose Loans

Arvind Raghunathan is the co-founder of Roc360, a real estate investment and financing platform that specializes in business purpose loans to those who invest capital into the residential real estate industry. This means Raghunathan finances contractors, builders, home flippers, and landlords who accumulate or do work on single-family homes. 

The firm has directly funded roughly $22 billion across 50,000 residential transition loans since its founding 13 years ago. But Roc360’s umbrella is wide and diverse: the firm offers more than originations and underwriting, and has business lines that specialize in special servicing, insurance services, asset management, inspections and appraisals. 

Raghunathan sat down with Commercial Observer to discuss his business, his unconventional path into real estate investment, the state of U.S. housing, and the need for private credit in today’s marketplace. 

This conversation has been edited for length and clarity.

Commercial Observer: How did you get into commercial real estate? 

Arvind Raghunathan: It’s a bit of a long story, but I’ll make it short. I actually have a Ph.D. in mathematics and computer science and was a professor at NYU, and I worked at Wall Street firms in the 1990s. In the early 2000s, I ran global arbitrage for Deutsche Bank, which is globally proprietary, investing and trading for Deutsche Bank. I left in 2009 after the GFC, along with Max Stavinky and Erik Abrovovic, who were working for me at the bank, and the three of us founded Roc360. We were arbitrage traders, so we started it as a hedge fund doing long-short equity and arbitrage trading.

That actually didn’t do so well between 2009 to 2013. Our returns were middling. So we actually did the right thing by our investors and we shut down the fund, and returned all the money back to them. We had raised over a billion dollars in 2009. So we returned the capital to them, and invested our own money into something else. 

And what was interesting is that we found a niche. We met a private lender, a small private lender, who was doing $5 million, $6 million a year in [residential] loans, and we met him, and we realized quickly that there was an opportunity first for our own money that we could give him, and he could scale up. So we would invest $30 million of our own money and earn a return for ourselves. That’s how we got started in business purpose residential real estate loans.

And, as we got started in it, we realized how extraordinarily fragmented this industry was. There was no institutional capital, there was no technological platform. There was very little of anything. So we basically built that and onboarded them, and that’s how we got started with Roc360. 

What else is underneath your umbrella of Roc360? 

At Roc360, we like to provide virtually every type of service for our client base. And so, when a loan comes in, it requires so many things. It requires property insurance, obviously. It requires an appraiser. It requires inspections. It even requires title insurance. So in order to make the process as smooth as possible, we started each of those verticals. One vertical provides property casualty insurance for all our borrowers. Others provide appraisals. 

As you can imagine, every industry has some amount of slippage, or fraud, and other things that enter into the system, so we want to control the entire process, which is as streamlined as possible for our investors. We started a title insurance company that we eventually actually closed down because we could not scale it very much, but we also have an inspections unit  — for instance, if we do a construction loan, that work has to be inspected before you can make additional payments or release further monies to borrowers. So we set up a unit to do that. These are the kinds of things that we do outside of the main funding unit. And then we have an asset management unit. It’s called Roc360 Advisors. We raise money from sovereign wealth funds and other investors, and that is the money we use to fund the loans. 

On the credit side, what is your typical product type?

The bulk of what we do is single-family residences. These are not loans for homeowners. These are single-family loans for builders, contractors, flippers and landlords. 

On that note, how are you assessing the single-family housing shortage in the U.S.?

So it clearly creates tailwinds for us, too. Rates are up a lot. Housing affordability has somewhat come down, obviously. But in spite of that, there’s a tremendous demand for this product. Our volumes have grown close to 50 percent year-over-year because of this housing shortage. And, especially right now, modern people want modern houses. They don’t want to live in the houses their grandparents lived in. 

So we do any number of projects where we take a house that’s from the mid-20th century, one that was handed down across generations, and then maybe there is a death or a divorce, or whatever it is, and then the flipper buys it, and makes it a modern, livable house. And, in a sense, by contributing, say, 20,000 properties a year like this, we do our best to alleviate this housing shortage. These are houses that young families, working families, can actually live in in a functional way. 

Where are these homes usually located?

Many of these properties are located in the suburbs of the largest cities in this country. That’s where the jobs are, that’s where these types of residences exist. Many of them are in the Northeast, because unlike parts of the Sun Belt and in the South, where houses are a little bit more modern, in the Northeast we have a tremendous stock of these old houses, but still this incredible population that wants to live in better houses. We go to suburbs in America, where houses aren’t quite up to standards, and in these suburbs it’s easy to value the house, because everything is so unlike each other.

But we also do other suburbs, such as up-and-coming suburbs, where a property is in a transitional suburb, and it’s been severely undervalued for a reason, and then now it’s emerging into a livable place where the housing stock is becoming more modern. 

Is private credit going to become a permanent player in this residential housing sector? 

I think in order to provide efficient capital to highly entrepreneurial builders and landlords, you have to have private credit. It is so much nimbler, much more entrepreneurial, and has a different yardstick and standards by which they judge credit. It is able to get the money into the hands of the builders very quickly and efficiently, and at a lower cost. I think general financial institutions are unable to execute on these things. Fannie Mae and Freddie Mac, which typically dominate residential mortgages, are completely not involved in products such as this.

Our products underwrite so differently that standard underwriting systems will not work, which is why you need to develop expertise in this type of underwriting, which we have. We’ve underwritten maybe 100,000 loans and we built a great deal of data and expertise into this, which is not that easy to do. Most Fannie, Freddie, and even commercial bank underwrites typically just check the box. And this is a much more entrepreneurial underwriting we do. 

If you’re underwriting construction firms, flippers, developers, what goes into that? 

Essentially, you look for three things. One is you look at the underwriting property and the collateral, which everybody does. What is the price today? You look at that. But you also look at what its price can be if $50,000 or $100,000 goes into upgrading it. That’s a methodology that people generally don’t use. They just look at what it looks like today. But here you look at the after-repair value. That’s one aspect of it. 

Then, of course, we have to underwrite the principle behind the company that’s doing the work. What do we know about them? What is their credit? What is the background? Do they have any issues that we should be aware of? These are standard questions. But on top of that, we look at that track record. Can we automatically work the data and figure out how many flips this person has done or how many projects they have completed? And how good are the projects? And what exit prices did they get? These are things we ask. 

There’s a third aspect of the underwriting: Is the project suitable for the neighborhood? For example, in an up-and-coming neighborhood, where the average home value is $400,000, if somebody were to try to put a mansion in it for $2 million or $3 million, that doesn’t fit, and we don’t want to do that. So similarly, we look at how much lift a project has. Is it a big project? If so, does the borrower have the track record to do a big project? If it’s a smaller project, then it’s a different story. And finally, we look at whether we can step into their shoes if something happens. Sometimes borrowers get hit by a bus, sometimes they have other things happen to them. Can we step into their shoes and finish the project? That’s another important thing. 

What type of housing market do you see for the rest of the decade? 

Interest rates are high and growing higher for structural reasons. It’s not just inflation that has become almost embedded. Federal debt causes interest rates to stay high. That affects every market. Of course, the opposite can happen and there are scenarios where we can imagine interest rates coming back down a lot. 

One of the things that we’ve seen happen is there’s been a credit bubble in a sense. There are so many credit funds all over the place making loans. If there’s any kind of hiccup in the AI, even more than a hiccup, it could be almost an earthquake. If that were to happen, which would affect data centers and credit funds, that would be something that can cause a real problem in the economy, and in which case I can imagine Treasurys yielding a lot. But just based on where things are today, obviously. Housing is more and more unaffordable, and it’s not just mortgage rates. Prices went up during COVID and they will not come back down in any way. But on top of it, all the other carry costs have gone up. Insurance rates have gone up in many markets 40 percent to 50 percent. These are very, very high costs. The cost of construction has gone up a lot, the cost of labor has gone up a lot.

So this is making housing unaffordable for people because real wages haven’t kept up. 

Brian Pascus can be reached at bpascus@commercialobserver.com.