Mark Hanf, CEO of Pacific Private Money details the latest on transitional loans and Realtor Michelle Baylog answers the question; when did it get so expensive to live in the Bay Area and is there a bubble?

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.

Steve Moskowitz:

Welcome. This is Steve Moskowitz, and welcome to Practical Tax. I’d like to introduce you to my friend, colleague, and go host, Chip Franklin.

Chip Franklin:

Steve is recovering from COVID. It’s good to see he’s got some rose in his cheeks, which is nice to see as well, it’s one of the byproducts of this. What’s interesting Steve, I love talking with you, because of your passion for taxes. I was looking at when you were on some of these sports shows, and we’d bring up luxury taxes and stuff, and just how you get into it. At the end of the day, taxes are about people. We all have to deal with them. We all benefit from them. They can do wonderful things for our society. We all have criticisms and worries about that, too. Real quick, you came here with all your possessions in a box, to San Francisco.

Steve Moskowitz:

I moved to San Francisco many moons ago, with all my worldly possession in four cardboard boxes. I bought a one way ticket from New York city to San Francisco, and said, “Here I am. I’m going to get my fancy, advanced law degree, specialization in tax, and see what I’m going to do with it.” I liked San Francisco, decided to stay, and that was many years ago.

Chip Franklin:

You’ve turned that this business from an accountant/attorney into an outreach for people that covers everything from cannabis, as we just heard last episode, to cryptocurrency. It fascinates me. There’s other people here in San Francisco, that we’ve met, that have an interest, obviously, in people, and money, and helping them through periods like that. Joining us right now is a CEO for Pacific Private Money, and a good friend to both of ours, and we’ve been with before, and worked with before, and that would be Mark Hanf. He joins us here, on our Practical Tax podcast. Hello Mark, good to see you, my friend.

Steve Moskowitz:

Hi Mark.

Mark Hanf:

Gentlemen, how are you? Steve, sorry about your voice.

Steve Moskowitz:

I’m very much looking forward to getting it back, because why’d you say, who’s that guest host you have on? What happened to Steve?

Chip Franklin:

I think the ladies think it’s sexy. I think it’s a male version of Brenda Vaccaro happening right there.

Mark Hanf:

A little bit of Rod Stewart going there.

Steve Moskowitz:

Thanks guys.

Chip Franklin:

Explain to us about your business. You guys have two parts of your business, and we’ll talk about both of them, but tell us a little bit about what hard money is, and what you guys do.

Mark Hanf:

The term hard money is a little bit dated. Usually 20 years ago, the hard money guy was the guy that everyone knew in town, that if you were in a pinch, you can go to him for money. As long as he thought you had real estate worth enough capital, he’d lend you the money. I started Pacific Private Money 15 years ago, and even now, we prefer the term alternative real estate provider. Essentially, what we do is, we use private capital from investors, most of whom are right here in the bay area, and we make short-term bridge loans to people, to help them either buy their next home when they’re trying to compete with cash buyers, or high buyers, or to real estate investors who want to buy, fix, and flip properties, because that’s still going on.

Chip Franklin:

It’s interesting too, because you have a great story, and I researched this story. There are many people, they want to downsize, and they want to sell their home. Since 2008, even with these non-QM loans, it’s still difficult to get a loan if you don’t have a job.

Mark Hanf:

That’s true. The average homeowner, and this is mostly boomers, the average stay has gone from seven years to 13 years, in the last 15 years.

Chip Franklin:

Wow.

Mark Hanf:

They’re staying in their homes longer, and in fact, boomers are being blamed for contributing to the lack of inventory that’s available for sale, for people who want to buy a home. Quite frankly, it’s not their fault. They’re just feeling trapped in their home, because their bank told them, “You can’t buy your next home until you sell your existing home, because you don’t qualify under the new Dodd-Frank regulations to have two mortgages at the same time.” It’s a real conundrum, and we help them get through that.

Chip Franklin:

Who wants to move twice, right?

Mark Hanf:

Exactly. You have this need to buy your next home before you sell your existing home, we call it, “Buy before you sell.” That’s an industry term that’s actually been popularized in the media lately. You also have a second conundrum, which is, you’re competing with cash buyers now, and cash buyers and institutional buyers are snapping up a lot of the inventory, and making them rental properties. What’s a home buyer to do? We created this consumer bridge loan product about 10 years ago, and it’s now one of our most popular loan programs. It’s essentially a loan that’s up to 100% of the price of the home you want to buy. Whether you’re buying up or buying down, or moving to another community or another state, we can do 100% financing if you have enough collateral in your existing home. We can do the math, and have a cushion of safety there, about 75% CLTV is what we solve for.

Chip Franklin:

Steve, let me ask you a question. This is along the same lines, this happened to me about 20 years ago. I sold a property, and I didn’t reinvest the cash quick enough, and I got hit with that IRS penalty. Many of the people, they sell their, home and maybe they can’t find their home. What is the time period that you have to reinvest that money, or you have to pay a big-

Steve Moskowitz:

20 years ago, that’s back when you were a high school student.

Chip Franklin:

There you go, baby.

Steve Moskowitz:

The law that you’re talking about has long since changed.

Chip Franklin:

Good. If you were to sell your home today, and say you downsized, and you spent maybe a third of that, or half of that, what is that income on the other side? How does that look?

Steve Moskowitz:

What happens is, it’s not like what you were talking about was in the old days, postponing it into the next house. That’s long gone. Today, we have an exemption, a quarter of a million dollars single, half a million married. That’s why we were talking a little bit before, that if you have that situation, if you do have a tax coming up, you might want to consider talking to a charity, and making package deal where everybody benefits. The charity gets something, and you are in a better position economically, and the only one that misses is the taxing authority, which is okay, because that’s what the law provides. Remember, the tax law is two things: one, collection of tax, which everybody knows about. The other one is a system of incentives. The government wants us to do certain things, but in a democracy, they can’t order us to do it.

Chip Franklin:

Not yet.

Steve Moskowitz:

Not yet, depends who’s in office. How can the government get you to do something when they can’t order you? They give you a tax incentive. There’s so many times where people, what you’re talking about, they’ve had that house for years and years. They want to move a retirement community, but they don’t want to be hit with these enormous cap gains. There’s a way with charities that everybody benefits.

Chip Franklin:

Mark, you told me once, and I found this fascinating, about these transitional bridge loans. You come in, and you’re paying some points for the loan, again, it’s not like a bank, it’s different. Then, there’s a higher than average interest rate. But, since you sell your home, you get to go in and buy that next home with cash, and that puts you right to the top of the list. I know this happened to me when I was in San Diego. The people next door, their home is owned by a Chinese consortium, they own 30 homes in the Del Mar area. Obviously, you’re competing in a very difficult environment. Having cash is great. You also get to stage your home. Explain how that works, and why that benefits you.

Mark Hanf:

You’re right, our money is not inexpensive, because we’re not a bank. We’re a private lender, and private money is traditionally higher. Today, with rising interest rates, the interest rate is at 9%, but it’s an annualized rate, of course, and it’s a couple of points up front. We find that most of our clients actually make money at the end, because they don’t have to move twice. They move right into their next home, and you’re right, now their home is empty. It can be cleaned up, staged, maybe you had pets, maybe get rid of the pet smells, but your agent will help you freshen it up. Now, you sell your home for anywhere from 5% to 15% more. More often than not, using our bridge loan pays for itself, in allowing you to get a higher price. Then, you get all the added benefits of moving right into your next home, competing against and winning against cash buyers, because you can structure an offer to be as compelling as it needs to be, and it’s cash-like when you use one of our loans.

Chip Franklin:

How’d you figure this out? Where’d you get this idea?

Mark Hanf:

It wasn’t my idea. Shortly after Dodd-Frank passed, there were advisors in our hard money lending organization, here in California, that said, “Hey, there’s still an opportunity to lend to consumers.” When Dodd-Frank first passed, almost all private lenders and hard money lenders felt that it was no longer legal to make loans to consumers. That actually wasn’t true. We spent the time, and invested the money to learn the underwriting guidelines we needed to do, to legally make compliant loans to consumers. Over the years, it’s become half of our business now, these consumer bridge loans, and mostly just here in the bay area.

Chip Franklin:

Steve, how does that look on your income tax at the end of the year? Does that have any special implications?

Steve Moskowitz:

There’s a trick there. What happens is, the amount you can deduct for mortgage interest is limited. However, you have a lot of couples who live together, and are not married. If you own the house with, let’s say your girlfriend, instead of your spouse, you each-

Chip Franklin:

Do I have to tell my spouse, that my girlfriend and I own it?

Steve Moskowitz:

Tax-wise, it would be a benefit. Health-wise, there might be other problems Chip, and there’d be an attorney in another area of specialty you might want to consult.

Chip Franklin:

I’m sorry to interrupt. Go back to that point, I’m sorry.

Steve Moskowitz:

What happens is, with a married couple, you’re limited to how much you can deduct. But, instead of being a married couple, if the boyfriend and girlfriend bought it, you each get your own full tax deduction. In my example, he would cobble the amount you could deduct. Initially, the IRS said, “No, the limitation is by house.” The tax court said, “No, the limit is by taxpayer.” That also means, suppose it wasn’t your girlfriend. Suppose three guys decided to buy a house together. They’d have triple the deduction, and so on and so forth. That’s something that, there’s just so much of the tax law that people don’t know, but knowing that could make a big difference. Imagine doubling or even tripling, quadrupling your tax deduction, just because you knew that.

Chip Franklin:

Mark, where do you get your fund, your resources from?

Mark Hanf:

We’ve been advertising for many years, we’ve grown a pretty deep database. We’re up to about close to 500 individuals. Basically, we call them retail investors. These are not super wealthy, uber wealthy people, who are investing millions. We probably have close to 500 investors, whose average investment in one of our funds is $250,000, our minimum investment’s $50,000. The point being, to answer your question, it’s really just average investors who are looking to diversify their investment strategy. We know what’s happening in the stock market right now, it’s crazy. Crypto is down half, if not more, depending on what you’re investing in. Maybe you topped out in the real estate market, and decided, “Now’s the best time to sell. I don’t think it’s going to get any higher.”
What do you do if you’re sitting on cash? Where do you park it? We offer four different funds, two of which have no minimum holding period, meaning, you can put the money in one of our funds, and we use that money to make our loans. We pay anywhere, starting from 6% on our lowest paying fund, which has the most liquidity option, by the way, all the way to 10%, which is a fund we use for construction loans, which does have a one year minimum hold. We have a menu of different services, it’s almost like Price Line. Pick your return, what are you looking for? We’ve got liquidity features. The bottom line is, the safety and security features that our investors enjoy at Pacific Private Money is that, their capital, their investment, their money is backed by real estate secured loans, by mortgages, by deeds of trust. We don’t do any unsecured lending. We only lend on real estate, and we only use our investor capital for making real estate loans.

Steve Moskowitz:

The tax attorney always wants to sweeten it up with a tax deal. Your investors, by doing that, would have an opportunity to set something up that could give them multiple tax benefits. I know we don’t have time right now, we’re getting ready to wrap this, but I’ll just say, for anybody that’s doing that, there are multiple tax advantages.

Mark Hanf:

Absolutely.

Steve Moskowitz:

If you contact us, we’ll tell you how to do it. You’re doing the investment anyway, but you get multiple ways to save income taxes because of it.

Chip Franklin:

Last point here is just, for those that think that the only people that do transitional bridge loans are people that might be in some sort of payroll, our former head of the Fed, Ben Bernanke, needed one when he left the Fed. He didn’t want to move twice, so he did the same thing. It’s a great alternative for a lot of people.

Steve Moskowitz:

Chip, didn’t he not qualify because he wasn’t working at the time?

Chip Franklin:

Yeah. You can look it up, as in Google it. I read the story, it’s crazy. Mark, thank you so much. Say hi to everybody at Pacific Private Money. Will you come back? We’d love to have you back, please.

Mark Hanf:

Absolutely, you bet. Thanks gentlemen, appreciate it.

Chip Franklin:

All right.

Steve Moskowitz:

Thanks.

Chip Franklin:

Again, that is Mark Hanf, who is the CEO of Pacific Private Money. That’s a great story about the boyfriend/girlfriend, as opposed to the married couple, and they both get those alternatives. All right. Coming up, how do you know you have a good lawyer? Watch this.

Steve Moskowitz:

Because, a good lawyer is going to pride himself or herself in what he can do for you. We’ve dedicated our professional careers to our clients. This is our lives. We take personal satisfaction in representing people against the government. There’s a very different feeling than representing the Fortune 500, where I started out, to representing an individual, when you’re sitting next to him in the courtroom, and that person looks at you, and you know you are everything that stands between keeping a lifetime of hard earned assets and losing everything to the government, and maybe even going off to prison. That is a tremendous responsibility. It’s a tremendous satisfaction, and that’s one of the major reasons why we do this.

Chip Franklin:

All right, that was so interesting. Welcome back. Again, that’s Steve Moskowitz, I’m Chip Franklin, this is Practical Tax. The real estate market here, speaking of real estate in San Francisco, it’s insane. It’s so high, but it’s interesting. I have a friend who’s a GC, and he’s telling me all the time, like in lower Pacific Heights, there are some great places. There are some areas and pockets that offer opportunities for all of us in the bay area to have a place to live. I’m just wondering if this is a bubble, or where it’s all headed, so I thought maybe we’d get somebody in with us on that. We’ve got Michelle. Michelle, I don’t want to totally screw your last name up, help me out.

Michelle Baylog:

It sounds like Bay. Michelle Balog.

Chip Franklin:

Michelle Balog.

Michelle Baylog:

Yeah.

Chip Franklin:

Your website is bayregroup.com, right?

Michelle Baylog:

Right.

Chip Franklin:

How long have you been doing real estate in the bay area?

Michelle Baylog:

A little bit over 20 years. I got my license in ’01, and I’ve seen a lot.

Chip Franklin:

Wow.

Michelle Baylog:

A couple of really wild transitions in the market.

Chip Franklin:

Yeah, the first eight years of this century were not for the faint of heart.

Michelle Baylog:

That’s right.

Chip Franklin:

Steve, when we talk about real estate, we talk about, for most people, it’s the biggest investment they’ll ever make. I remember early on, when I was a kid, I was saving money since I was 15, and everybody was telling me, “Buy a house. That’s an incredible investment.” Michelle, I’ve got to ask you, and I’ll ask you too, Steve, does that still apply for young people today? I’m going to ask you first, Michelle, and then you Steve.

Michelle Baylog:

Absolutely. Real estate is primarily a place to live, but historically, in California, it’s been a fantastic investment. Especially with the salaries in the bay area, I’m not a CPA, but you don’t own rental property. You don’t have other write offs. You want to get your mortgage deduction. The bay area is expensive, but this is where the land of opportunity is. It’s been this way since 1849. We’ve been through a lot of ups and downs in the bay area.

Chip Franklin:

Steve?

Steve Moskowitz:

The tax law is especially generous in the real estate area. Chip, for years, you and I always enjoy talking about the little tidbits in tax. “Hey, you can do this and save tax, and you can do that,” but there’s a lot of areas here in the real estate area, where people can benefit, all kinds of them. I can fill this whole podcast with that. I’ll just say, there’s lots of tax benefits through real estate.

Chip Franklin:

Is there a specific period of time when you benefit more, with a family, or as a single, or as a senior? Obviously, when people get older, they get out of the market, and they move the money into bonds, or to cash, or whatever. With real estate, there’s always that saying, “You’re sitting on all this equity.” But, if you sell it, where you’re going to live? How do you do that balance, Michelle? For people that are sitting on so much, and I know there’s a lot of ways you can draw money from it. There’s home equity loans, and all. Do people ask these questions, when they’re going to buy, if this is an investment> are there ways I can take advantage of the equity that I get in it?

Michelle Baylog:

If you just think about what you pay to rent in the bay area, and you add that up. You take someone just out of college, and they have their first apartment, they’re spending $3,000 to $4,000 a month, and they live in that apartment for 10 years. Do the math. It’s a lot of money that you’re spending, with no tax deduction at all. People always want to buy when things are going up, no one ever wants to buy when things are turbulent. No one wants to eat in an empty restaurant. It’s the fear mentality of selecting when to buy real estate. Historically, you only are really in trouble, as far as real estate’s concerned, if you have to sell in a down market, depending on what you acquired the asset at.

Chip Franklin:

Right.

Michelle Baylog:

When you even look at what you would’ve paid, I have clients who millennials, that live with roommates, and they get million dollar bonuses at Google. Okay, it’s time to put on your big boy pants and buy a property. When you go to sell that in seven to 10 years, just look at the equity that you’re going to build. Yes, you can take an equity line of credit, you could purchase another property. You could take it to purchase investment properties somewhere else, or talk to your tax advisor about other things that you could do. When we talk about rents in the bay area, and how expensive they are, even though they’ve gone down quite a bit with COVID, those are big numbers to look at.

Chip Franklin:

Is there a bubble here right now, or do you think we’re still moving up?

Michelle Baylog:

It’s the tale of multiple cities. My team sells San Francisco, the East Bay, and Marin, and they’re doing very different things. We have peaked, and we are receding in certain markets. It’s happening as we speak. It happens in the middle of the night. Everyone thinks it’s going to go up forever. I’ve said eight, nine years ago, it can’t go any higher, and it just keeps going higher. We are in a point of the market right now, in San Francisco, in the East Bay and in the North Bay, where prices are lower than they were back in February, because there’s less people buying, because of the interest rates. People are very fearful about the economy, and the interest rates. That’s when people should be buying, frankly, because if they have to be in the bay area to work, the best time to buy is when other people are pulling back.
We are seeing a pullback in all three of those markets. Now, it’s not universal. I have transactions right now in the East Bay, where we’re pricing things lower, which is what we do in the East Bay, and those homes are going a million dollars over list, with multiple bidders.

Chip Franklin:

Yeah.

Michelle Baylog:

That’s happening in the past two weeks. We have clients who own high rise condominiums down in South Beach by the baseball park, by the center of tech, and because those workers have not been required to be in the office, they’re living in Boise, or New Mexico, with their mom and their dad, or living in Airbnbs around the world. Airbnb has even promoted, go ahead and live [inaudible 00:22:22], and work remotely. Elon Musk has just called all of his employees at Tesla to come back to the office.

Chip Franklin:

Yeah.

Michelle Baylog:

I was just talking to a mom who’s a friend of mine, our sons go to the same school, at drop off yesterday. She was like, “I have to start going back to work in Fremont. I’m not looking forward to it.” Once that starts to happen, especially if Elon Musk takes control of Twitter, which is an iconic tech company in the bay area, located right on Market Street, more tech companies are going to follow suit. The areas that are a little bit depressed already, since the beginning of COVID, with shared elevators and shared amenities, like the high rise communities, that market was bananas at the height of tech. Right now, those markets are really struggling. There are some really good opportunities in the market, you just have to know what they are-

Chip Franklin:

You can tell Michelle loves her job, right? I love it.

Steve Moskowitz:

I do too. There’s so many tax benefits. Let’s assume that Michelle is representing a lovely couple that bought their house 40 years ago, and now, all the kids are out, and they want to downsize, but they say, “Oh my God, I don’t want to be hit with all these capital gains taxes.” You can do something that I was quoted in the Wall Street Journal recently about, the Delaware Statutory Trust. You can convert your home into 1031 property, and exchange the home for DST, Delaware Statutory Trust, which is essentially a mutual fund for real estate, so there’s no tax. You unload your home, there’s no tax. If you sell your home, you’re probably going to keep that money the rest of your life, or spend it over your lifetime, but you have a big hit in year one, in tax. No tax. Over the years, as you need the money, you just sell those shares. All the other shares are still earning for you, and you only pay a little bit of tax over the years. There’s so much you can do in tax, if you know about it.

Michelle Baylog:

I always tell our clients, when I first meet somebody, “Talk to your financial advisor. If you don’t have one, you need to get one. Your CPA is your best friend, because it’s not what you make, it’s what you keep. Real estate is just part of your overall financial wardrobe,” is what I call it. It’s part of who you are, and what you’re going to be.

Steve Moskowitz:

Before I was a tax attorney, I was a CPA.

Michelle Baylog:

I love CPAs.

Chip Franklin:

Let me ask you a question, because I don’t know the answer to this, and it just occurred to me. If you borrow money out of your home, through some sort of a home equity, is that income?

Steve Moskowitz:

Borrowing money is not income.

Chip Franklin:

If I take money out of my home, and I’m paying interest on it to pay it back, that doesn’t count as income, because essentially, I’m losing money, in a way?

Steve Moskowitz:

When you borrow money, you can borrow an unlimited amount of money. You can borrow a zillion dollars. That is not income.

Chip Franklin:

What about reverse mortgages? Is that an income?

Steve Moskowitz:

What happens is, something only becomes income when you get an increasing of wealth. The bottom line is, you also want to take a look at, what did you do with the money? For example, if you used it to acquire, construct the home, you may have a tax deduction there. A lot of business people will use their home as security for a loan, and they use the money for their business. Then, you get a tax deduction for that. Again, they want to take a look at it. There could be a lot of tax benefits just there for the taking.

Chip Franklin:

We’re running short on time. Michelle, I want to ask you one last question, because it’s in the news, and you brought it up. Do people look for homes with the idea of that they can rent part of it out as an Airbnb?

Michelle Baylog:

Not as much Airbnb, but we see a lot of roommate situations, or a lot of parents buying property for their kids going to school. The Airbnb thing is really tough, a lot of the condominium associations have very strict rules around that. Of course, when you buy into condominium building, you have to accept all of the CCNRs, and all of the legal, governing documents that follow.

Chip Franklin:

I was thinking more of a single home, with a a mother-in-law.

Michelle Baylog:

Yeah. San Francisco has a lot of restrictions around Airbnb. You have to be really careful to check with the municipality about what they will allow. My husband and I own a duplex in Alameda, and our longtime tenants moved out, and we’re doing Airbnb, and it’s great, or short term rentals for realtors that I know whose clients are renovating their houses, and need a place to go. The best way to sell it property is to have it vacant and staged. Airbnb is great, but you have to be really careful that you’re following the rules of the municipality. As a realtor, you have to be really careful about promoting that.

Chip Franklin:

Michelle, thank you so much for your time. Will you come back on and visit us again, please?

Michelle Baylog:

I would love it. I would love it. Anytime Chip, let me know.

Chip Franklin:

You were great.

Steve Moskowitz:

Thank you so much.

Chip Franklin:

Thank you so much. That was great. Again, her email address is bayregroup.com, and you can see it right beneath her name. By the way, you can find these videos everywhere. Of course, at Moskowitzllp.com/podcast, and of course, on YouTube as well, and all social media. Steve, I hope you feel better my friend next week.

Steve Moskowitz:

Thank you.

Chip Franklin:

I’m sure you’re going to feel better. I think the women are going to start writing us about that sexy, raspy voice.

Steve Moskowitz:

Thanks Chip.

Chip Franklin:

Okay, you be well everybody. This again, another edition of Practical Tax. That is Steve Moskowitz, I’m Chip Franklin. Stay safe.

Outro:

Thanks for joining us on the Practical Tax podcast with tax attorney Steve Moskowitz. To hear more and view more podcasts, go to moskowitzllp.com/practicaltax.