In late March 2020 and then updated on April 24, 2020, the United States federal government passed a $2 Trillion stimulus bill called the CARES Act. From forgivable loans to retirement funds access, every eligible real estate investor should take advantage of what is available to them in this unprecedented legislation. Here’s what you need to know about the CARES Act if you are currently investing in real estate:
PART 1: Retirement Access
This is one of my favorite aspects of the CARES Act. The impacts of unprecedented access to your retirement funds could be huge. This new legislation presents a tremendous opportunity, giving you access to your own capital so you can do more deals.
Access up to $100,000
The CARES Act enables you to access up to $100,000 as a distribution. The differences from a normal distribution before the age of fifty-nine and a half are:
- If a husband and wife are both in a plan together, they are eligible for $200,000.
- It is not subject to the early withdrawal penalty of 10%.
- It isn’t subject to the withholding of potential tax liability. Usually with a retirement account you put money in before you pay taxes and when you withdraw that money, there is a tax liability. With this legislation you get to spread the tax liability out over three years.
You get all that money right away which means you can use it to invest in deals without delay. Then, you have up to three years if you want to put that money back in.
There are two forms you need to fill out, a distribution certification, and a form W4P. The link provided will direct you to more information with a link to the forms: $100,000 Distribution Instructions
A solo 401K allows you to be the administrator of your own 401K account, giving you more access and flexibility with your retirement. It also allows you to borrow up to $50,000. However, it is only offered to small business owners, like real estate investors. As a real estate investor, you can take advantage of the many benefits it has.
With the CARES Act, the amount you can borrow has increased to $100,000. Now you have access to a tremendous amount of capital. Even though you do have to pay it back with interest, you’re paying yourself back.
Setting Up a 401K
If you don’t have a solo 401K or 401K, now is the time to set one up. In my video Solo 401(k) Explained I tell you exactly how to go about the process of setting up a 401K and recommend who you work with to set one up. Putting in the maximum amount right away and then just pulling it back out as a distribution would enable you to take advantage of this new legislation.
Governments are giving you more access to your retirement money, which often happens when there are economic downturns and major needs. For those of you who are young and don’t want your money locked up till you are fifty-nine and a half, this is a good example of when it is available to you.
PART 2: Forgivable Business Loans
EIDL (Economic Injury Disaster Loan)
This loan is a forgivable emergency advance. 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. However, in the first installment of this loan they payed businesses $1,000 per employee, up to 15 employees. With the new updated legislation, it seems they may go back to the original plan; regardless whether you were simply an LLC or W-2’d employed company. I don’t know how well funded it will be, but if you qualify this could be really helpful.
How to apply:
Below is the SBA link with a simple form to fill out:
PPP (Paycheck Protection Program)
- For companies with less than 500 employees.
- Applies to companies that have W-2’d employees and independent contractors.
- 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 a government tax document; whether it’s paying employees on the 940, getting a 1099, or schedule C.
- It is forgivable if you use it to pay for utilities, your income, or your employees.
My hope is that the guidelines to receive this will be easy to follow. If you had a good year last year, then this could be an option for you.
How to apply:
You have a few options with this loan:
- Apply with a bank of your choosing. In most cases the best choice is the bank of your business account as it will be faster because they have all your information. Community Banks just got another 60 billion, so some local banks are a lot easier.
- American Express are issuing PPP loans right now as well.
Can You Apply for Both Loan Programs?
If you do the EIDL, then you must put that on your PPP. I would recommend that you only apply for the PPP if you have decent income from your LLC last year as a small business owner. However, if you have an LLC that 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 funding for these loans has already been replenished, and they might have to do a third round. A lot of investors haven’t 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 Programs
If you’re an independent contractor, you may qualify for unemployment. As a licensed real estate agent, I receive a lot communication from realtor boards at all levels. They’ve been talking a lot about how this influx of money will help those that are independent contractors. I’m not sure it actually will because unemployment is funded by businesses that have W-2 employees.
Loan Payment Forbearance:
This applies to the conventional side for your investor loans, pushing off payments for several months. This is offered specifically through government backed programs such as FHA, VA, USDA Rural, and then any Fannie Mae or Freddie Mac backed loans.
Other banks and lenders are offering forbearance as well, tacking it on to the end of the loan and adding to the principal balance. This is something to consider for your rental properties, especially if you have quite a few that have been vacant. And, although not part of the CARES Act, credit card companies are also allowing for forbearance.
In all these examples, you do have to contact these creditors. It isn’t supposed to reflect negatively on your credit report, so hopefully it won’t.
Emergency Business Loans:
There may be emergency business loans available at the state level. However, your state level emergency funds might already be depleted. For example, in Florida, they had a 50-million-dollar unforgivable emergency assistance business loan which was originally meant for hurricane season. They went through that 50 million very quickly and 37,000 applicants didn’t get it.