Anchor Funding CEO Kevin Lyons joins Steve to discuss the interest rate hikes and explore both investment and tax opportunities during this technical recession.
Episode Transcript
Intro:
Welcome to the Practical Tax podcast, with tax attorney Steve Moskowitz. The Practical Tax podcast is brought to you by Moskowitz, LLP, a tax law firm.
Disclaimer:
The information contained in this podcast is based upon information available as of date of recording and will not be updated for changes in law regulation. Any information is not to be considered tax advice or legal advice and does not form an attorney/client relationship. Further, this podcast may be construed as attorney advertising. You should see professional consultation for your individual tax and legal situation.
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Chip Franklin:
Welcome to another edition of Practical Tax with tax attorney Steve Moskowitz. Steve, there's been a lot in the news recently about interest rates and refis and how that's affecting the country, the industry, and everything that goes along that. I remember in the past, people say, well, interest rates are high people tend to, instead of sell, they do repairs and additions and upkeep and stuff. But I don't know where we are right now with that number. If it's a number that we're going to see smooth out soon, will Powell do that? Or will we continue down this road? Joining us right now is Kevin Lyons. Kevin is the CEO of Anchor Funding and old friend of mine. I've known Kevin for a long time, and he's nice enough to join us here with Steve Moskowitz on Practical Tax. Kevin, hello.
Steve Moskowitz:
He doesn't look very old, Chip.
Chip Franklin:
Your right.
Kevin Lyons:
Thanks Steve.
Chip Franklin:
Hi you Kevin. How are you?
Kevin Lyons:
Good guys. How are you?
Steve Moskowitz:
Great.
Chip Franklin:
Good. Let's just jump right into this. We've known each other a long time and we've spoken over the last 15 years and we've seen interest rates go up and down. Let's talk about where we are right now. And how do you feel people responding to the higher interest rates? Again, those of us who live in the '70s like Steve and I, they don't seem that high. But how are people responding to you right now when you're talking about everything from new mortgages to refis?
Kevin Lyons:
Well, we've had a really good run the last few years. So everyone's taken advantage of incredibly low interest rates. But if you look at interest rates over the course of time and you guys obviously remember, and so do I, and any viewers watching. Rates in the '80s and '90s and early 2000s were a lot higher. So when you go from rates in the-
Steve Moskowitz:
I remember in the 20% bracket.
Kevin Lyons:
Yeah, exactly. When you got 15% and 10%, that was a good rate. So the sticker shock that's come into play is rates in the twos and threes suddenly becoming fives and almost as high as 6%. So anytime you get that, you're going to get a change of scenery and the scenery's changed. However, it looks pretty good for the long term.
Chip Franklin:
Yeah. We're both all in California, all three of us. And here's something that always occurred to me. So people might put off buying because the rate went up a little bit, but the housing market doesn't seem to be slowing down at all and it's continuing to move. Does it make sense to still buy at a little bit higher rate to offset the increase in the value in cost of homes as they go forward?
Kevin Lyons:
That's a very interesting question, and we have that conversation pretty much daily. My personal opinion is yes. And the reason I say that is, and this is obviously my two cents, the Fed has done a really good job of raising rates really quickly, in fact, there's a three quarter point high coming up shortly and another half a percent in November, they've taken such extreme measures in such a short period of time that ultimately they're going to have to take the opposite path. When they take the opposite path and start dropping interest rates, home demand is high. I mean, there is still a huge amount of demand. COVID has changed the landscape. So people are working from home. So this idea of working in the same city is gone. You can work anywhere in the nation now. So home demand is shot up. So we're seeing crazy high coming down to busy. And what we're expecting in the next year or two is as soon as the Fed does decide to drop interest rate, these home prices are going to continue over the course of time to go up. Your home is your best investment. So you wait now, granted, you may get a lower interest rate in a year or two, but the chances of getting a better home value in my opinion are diminished.
Chip Franklin:
I bought a home in '79 at a huge double digit rate, and we sold it 25 years later with a 300% increase in value. It was outside of DC, but nonetheless. I mean, it's all relative to where you live and the money you earn and the taxes you pay, depending on what part of the country you're in. To me, I was an intriguing question is what's going up quicker, the interest rate which we know abates and drops eventually, but other than the bubble we had in '08 which was really not about the housing market, as much as it was about just bad banks and bad practices. It seems to me that that's a really good way to go.
But I mentioned this at the top, Kevin, but Steve, let me ask you this before that though. So if I took money out of my home for repairs, the equity that I have in my home, and I'll ask the second part of this is how do you recognize equity, real equity, Kevin? But the first question is that interest that I borrow on that is that still tax deductible? Because I remember a point it was 100% deductible.
Steve Moskowitz:
So, that's changed. It used to be 100% deductible no matter what you did with the money. Then they put a cap on it at a mill. Then the cap came down to three quarters of a mill. And what a lot of people don't realize is if you refi, you only get to deduct the interest on the money that you used to repair the house or get a bigger house or an addition. And they even took away the extra 100 grand for a credit line. So the bottom line is, yeah, they take a look at it. So when people refi say, okay, it's real important, again, keeping records because I was a CPA before I was an tax attorney. Because what happened is some people, most people don't separate it, they just take it and the government says, well you paid off some credit cards and you made some improvements, government takes the position that since you can't say which is which that used the money from the house for the credit cards no deduction for you.
So what you want to do is you say, okay, you're very specifically put it in separate accounts and say, all right, this money that I took out the house I use it for improvements, that's tax deductible. And there's another trick too. It's the Voss case. The IRS always said that the limit was per house. Mr. Voss bought a house with his girlfriend and Mr. Voss said, well, okay, I get a 750 and my girlfriend gets a 750 and the IRS said, oh no, no, Mr. Voss, it's 750 a house. The tax court said, no, no, Mr. Voss is correct. It's 750 per taxpayer. So one of the tricks here, suppose boyfriend and girlfriend buy a house [inaudible 00:06:54] common. If they got married, they could only deduct 750. If they live together without marriage, they could deduct a mill and a half.
So again, the minute you ask me something, having spent my life in this, it's, oh, well wait a minute. The way to do that is this. It's kind of like why the Fortune 500 doesn't pay any taxes because they have an army of people like me saying, oh wait, wait, wait, wait, don't do it that way, do it this way. And the last thing you want to hear from your lawyer is, oh, too bad, you did it that way [inaudible 00:07:26]-
Chip Franklin:
That's tax attorney, Steve Moskowitz. Kevin Lyons is with us here. Kevin, how do you know what's real equity and what is just a bit of a spike in the market?
Kevin Lyons:
I think equity's equity. So when you get your house valued through an appraisal and that's what an appraisal believes your house is worth and you look at what you owe versus what it's worth. That's your current equity position at the time. So in regards to a spike in the market, yeah, I mean we had borrowers coming to us over the last year who wanted to borrow up to 80%, in some instances 85% of their property values. They can go up to 90 with VA. And our advice to them has always been, just understand that once you take this cash out refi, you got to live with this mortgage. So if there's ever a downtick in rates and you want to refi down the road, you may not have as much equity as you need.
So I think we always tend to heed to the side of conservatism. We like to see people getting up to 70% loan to value, maybe 75, always giving themself a 5% buffer in case of emergency or when they want to refi. So we definitely have a lot of equity right now. Are we going to see a big diminish in it? No. As I mentioned earlier, I don't think property values are taking a dive. And you mentioned as well, there's nothing to put them in that direction. There's no bad mortgages out there that are pulling the market down. So real equity is, in my opinion, what your house appraises for and perceived equity is just be careful and don't overdo it.
Steve Moskowitz:
Also, the thing I would throw in, it depends an awful lot on what do you plan to do with the money?
Kevin Lyons:
Correct.
Steve Moskowitz:
You say you're going to take money out of the house and go on a wonderful vacation, maybe that's not such a great idea. On the other hand, if you say, look, I have a really solid business idea but it needs some cash. In that case,
