Discover the benefits real estate investors can get from the CARES Act, which is a United States federal government $2 Trillion stimulus bill passed in late March 2020 and then updated on April 24, 2020. From forgivable loans to retirement funds access, this legislation is unprecedented and every eligible real estate professional should take full advantage of all the programs available to them. Here's a run down of what you need to know about the CARES Act if you are currently investing in real estate:
PART 1: Retirement Access
This is my favorite part of the CARES Act. Very few people are talking about it, but the impacts of unprecedented access to your retirement funds could be huge for certain people. This new legislation is a great opportunity, giving you access to your own capital so you can do more deals.
Access up to $100,000
This legislation gives you the ability to access up to $100,000 as a distribution. Unlike a normal distribution before the age of fifty-nine and a half:
- This distribution is not subject to the early withdrawal penalty of 10%.
- It is also not subject to the withholding of potential tax liability. Typically, with a retirement account you are putting money in before you pay taxes. When you pull out that money, there is a tax liability. What is special about this is you get to spread the tax liability out over three years.
- If a husband and wife are both in a plan together, they are eligible for $200,000.
Since you don't have to pay the 10% early penalty, and you also don't have to withhold taxes, you get all that money right away. Think about that, you can take that money and use it to invest in deals right now. If you want to put that money back in, you have up to three years.
There are two forms you need to fill out, a distribution certification, and a form W4P. The link below will direct you to more information and a link to the forms.
A solo 401K allows you to be the administrator of your own 401K account. This is helpful because it gives you more access and flexibility with your retirement and allows you to borrow up to $50,000. A Solo 401K is only available to small business owners, like real estate investors. I'd love for you to take advantage of the many benefits it has.
With this new legislation, they're increasing the amount you can borrow to $100,000. Suddenly, you have access to a tremendous amount of potential capital. You do have to pay it back with interest however you're paying yourself back.
Setting Up a 401K
If you don't have a 401K or a solo 401K, now would be a great time to set it up. To take advantage of this new legislation you could put in the maximum amount right away, then just pull it right back out as a distribution.
For those of you who are younger thinking that you don’t want your money locked up till you are fifty-nine and a half, this is an example of a time when it is available to you. You can touch it now, and you'll see that this happens a lot when there are economic downturns and major needs. Governments give you more access to your retirement money. I have a video on exactly how to go about the process of setting up a 401K and recommend who you work with to set one up. The link below will give you more details.
PART 2: Forgivable Loans
There are two forgivable loans in the CARES act. I'm going to talk about both of them, how it can apply to you as a real estate investor, especially if you don't have a retirement built up, and you've got to get access to some money right now.
I want you to think of this as a $10,000 advance: in theory. The original intent of this was for people to apply with the SBA and then they would wire you a $10,000 check within three days. That’s not exactly what happened. In the first rendition of this they payed $1,000 to businesses, per employee, up to 15 employees. Now, with the new updated version of the CARES Act, it looks like they may fall back to the original plan; whether you were a W-2'd employed company, or simply an LLC. So, if you can, this is nice however I don't know how well funded it's going to be.
How to apply:
Below is the SBA link with a simple form to fill out:
The second and the bigger loan is called the Paycheck Protection Program. This loan is for companies with less than 500 employees. It is also supposed to apply not just to companies that have W-2'd employees, but to those that have independent contractors as well.
They can apply for what amounts to two and a half months of last year's income. That income would have to be shown on some sort of government tax document, whether it's paying employees on the 940, getting a 1099, or on schedule C. It is forgivable if you use it to pay for utilities, your income, or your employees. Our hope is that it will be easy to follow the guidelines to get this. So, if you had a good year last year, which most people did, then this could be an option for you.
How to apply:
With this loan you choose a bank to apply with. Community Banks just got pumped another 60 billion, so some local banks are a lot easier. However, if you choose the bank you already have a business bank account with it will be faster because they have all your information. So, in most cases the best choice is the bank of your business bank account. If you have an American Express card, they're issuing PPP loans right now as well. So that provides another option for you.
Can You Apply for Both Loan Programs?
Some people are wondering if they can apply for both loans. If you do the EIDL, then you must put that on your PPP. My suggestion would be, if you have decent income from your LLC last year, from what you produced as a small business owner, then I would apply for the PPP only. However, if you have an LLC but it doesn't show much income, or two and a half months is much smaller than the $10,000 allocated, then apply for the EIDL.
The problem is these have run out of money already. They just replenished it, and they might have to do a third round of replenishing. Either way, this is supposed to be forgivable loans. A lot of investors have not seen this money yet, but we're hopeful that with this second round of money, they will begin to see it.
PART 3: Other Stimulus in the CARES Act
Loan Payment Forbearance:
- Specifically, for government backed programs such as FHA, VA, USDA Rural, and then any Fannie Mae or Freddie Mac backed loans. This applies to the conventional side for your investor loans, pushing off payments for several months.
- Other banks and local lenders are also following suit. In many cases they are tacking those on to the end of the loan, just adding to the principal balance. Something to consider for your rental properties, especially if you have quite a few vacation rentals that have been vacant.
- Although not part of the CARES Act, credit card companies are also allowing for forbearance.
In all these instances, you do have to correspond with these creditors to ask them. Lord willing, it won’t show negatively on your credit report. It's not supposed to, but then again this is really rapidly changing legislation.
Emergency Business Loans:
At the state level you might have some emergency business loans available. For example, in Florida, they had a 50-million-dollar emergency assistance business loan program meant for hurricane season. This was not a forgivable loan. They went through that 50 million extremely quickly, giving it to a thousand businesses that applied, and 37,000 applicants didn't get it. So, your state level emergency funds might already be depleted.
You may be able to apply for unemployment if you're an independent contractor. As a licensed real estate agent, I receive a lot of correspondence from the national, state, and local level realtor boards. They've been talking a lot about how this influx of money will help those that are independent contractors. I'm not totally sold that it actually will because unemployment is funded by businesses that have W-2 employees.
Now is a great time to be doing deals. My team and I are doing a ton of flips right now and I'm funding and closing a lot of deals. I don't know what the news is talking about, but in the real world there are a lot more buyers of affordable price point homes than there are sellers, even during the lockdown. It is a great time to be in this business, and since a lot of the big competitors left the market there's a lot less competition.