In this episode, Theo shares three ways to get cash from the CARES Act. He explains the 401k distribution, Paycheck protection program loan (PPP), and the Economic Injury Disaster Loan (EIDL) in detail so you will be better prepared during this pandemic. To listen to other Syndication School series about the “How To’s” of apartment syndications and to download your FREE document, visit SyndicationSchool.com. Thank you for listening and I will talk to you tomorrow.
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“Understanding the CARES Act can help many individuals.” – Theo Hicks
TRANSCRIPTION
Joe Fairless: There needed to be a resource on apartment syndication that not only talked about each aspect of the syndication process, but how to actually do each of the things, and go into it in detail… And we thought “Hey, why not make it free, too?” That’s why we launched Syndication School.
Theo Hicks will go through a particular aspect of apartment syndication on today’s episode, and get into the details of how to do that particular thing. Enjoy this episode, and for more on apartment syndication and how to do things, go to apartmentsyndication.com, or to learn more about the Apartment Syndication School, go to syndicationschool.com, so you can listen to all the previous episodes.
Theo Hicks: Hi, Best Ever listeners. Welcome to another episode of the Syndication School series, a free resource focused on the how-to’s of apartment syndication. As always, I am your host, Theo Hicks. Each week, we air a podcast episode or two podcast episodes that focus on a specific aspect of the apartment syndication investment strategy, and for the majority of these episodes, sometimes they’re part of a larger series, we offer a free resource – PowerPoint presentation templates, Excel template calculator, PDF how-to guides, something to help you on your apartment syndication journey. All of these free documents from past Syndication School series episodes as well as the episodes themselves can be found at syndicationschool.com.
In this episode, we are going to talk about three specific aspects of the CARES Act, the Coronavirus Aid, Relief and Economic Security Act that was recently passed, three aspects of that that can help you get cash to hold you over if your properties are struggling and you need some cash to pay investors to cover expenses to your mortgage and things like that. So we’re going to go through those three in this episode today.
The first one is going to be some changes they made to retirement accounts such as a 401(k) and an IRA. So if you have a 401(k) and IRA, this applies to you. Obviously, if you don’t, then the other two, I think, will be much more advantageous. But the first change is that you are going to be able to take out a large withdrawal of up to $100,000 from your IRA or 401(k) without having to pay the early withdrawal fee or the income tax right away. So usually, if you wanted to pull money out of your 401(k) or your IRA early, you’d be required to pay the withdrawal fee, which is 10% as well as the income tax on that distribution. Whereas now, you are able to take a coronavirus related hardship distribution of up to $100,000.
People who qualify for this coronavirus related hardship are people who are diagnosed with coronavirus, have spouses or dependents who have been diagnosed with coronavirus or those experiencing financial consequences from the quarantine, which is pretty vague. So the rules are actually really loose.
So if you’re an investor and you’ve seen a reduction in rent, then you’re experiencing a financial consequence from the quarantine, and are able to pull out up to a 100k out of your 401(k) or IRA without paying the early withdrawal fee. So this provision may help, as I mentioned, you, but this is also something that might be able to help your residents, depending on what type of properties you’re investing in. If you’re investing in Class A properties, maybe your residents have 401(k)s or IRAs they can tap into to pay for their rent. It’s another way to pay rent as well. But of course, obviously this is something that can help you as an apartment syndicator, cover expenses as well, and it could also cover living expenses too.
If you are putting everything into a property to pay your investors, but you’re not making money yourself, well, pull some money out of your 401(k) if you need to, to hold you over until the property turns around. The up to $100,000 distribution – not only do you not have to pay the early withdrawal fee, but it’s also tax-free for three years, at which point you need to either replenish the money, put it back into your account or you need to pay the income tax on that. Now, if you haven’t experienced a Coronavirus-related hardship, which if you’re a real estate investor and based off of the loose requirements, you should be able to be considered having faced a Coronavirus related hardship… But let’s say, for some reason, you haven’t, your properties are perfectly fine, your business is perfectly fine – well, you can still access up to $100,000 from your 401(k), and you do this through a loan.
So in the past, if you wanted to take a loan against your 401(k), the max was 50%, or 50% of the vested amount, whichever was higher. With the CARES Act, the maximum amounts has been doubled to $100,000. So the loan process is the same, which means you need to pay back the loan with interest, or else it will be treated as a withdrawal and will be subject to the income tax and the early withdrawal fee. But instead of being able to pull out only $50,000, now you’re allowed to pull out up to $100,000. And similarly, this loan may be used to cover– this can be something that your residents can use to cover rent, you can use it to cover business expenses or living expenses. Plus, you could also use it to potentially acquire a property.
A lot of people use their 401(k)s to buy properties. So you could also take up to $100,000 out of your 401(k) to buy more real estate. So the two 401(k), IRA retirement-related things that the CARES Act allow is number one, if you’ve experienced a Coronavirus-related hardship, you can pull up to $100,000 out without paying the early withdrawal fee and then not having to pay taxes for three years. Whereas before, if you pulled out a 100k, not only would you have to pay the early withdrawal fee, but also income tax immediately. And then secondly is, if you have not experienced a hardship or if you have and you want even more money, you can take up to $100,000 from your 401(k) as a loan as opposed to the previous $50,000. So that’s 1A and 1B.
The second way to get cash from the CARES Act is going to be the Paycheck Protection Program Loan or the PPP Loan. So this is something that is new. The third thing we’ll talk about is something that’s previously existing, which is expanded upon us, the Economic Injury Disaster Loan. But first, we’ll talk about the PPP loan.
So the PPP loan, as the title points to, helps you pay your payroll costs, during the coronavirus. So who qualifies? Small businesses. So this is a small business loan; you need to have under 500 employees. It can be an S Corp, a C Corp, an LLC… It can even be a sole proprietorship or an independent contractor or someone who’s self-employed. So that applies to basically all real estate investors. And then when you are obtaining the loan, in order to qualify, you need to certify that your business has been economically affected, or there’s economic uncertainty to make the loan necessary. So there’s a portion of the application you fill out that you need to basically prove that you are being economically affected by the coronavirus.
With this PPP loan, you can get up to $10 million, but the amount is going to be based on your payroll costs. So in order to calculate how much money you can get as a PPP loan, you want to determine what your average monthly payroll cost was for the past 12 months, and then multiply that by 2.5. So if your average monthly payroll is $100,000, then $100,000 times 2.5 is 250k. So you can qualify for a $250,000 PPP loan.
Things that are included in this payroll calculation are salary, wages, commissions, payment of vacation, sick parental family, medical leave, payment of retirement contributions, group health coverage premiums, state and local taxes. It doesn’t include federal taxes and it doesn’t include payroll costs for those making more than $100,000. And these are things that apply to you and your employees. Obviously, if you’re an independent contractor, you probably don’t have employees, or if you have your property under the single purpose entity, you can still qualify for the PPP loan. It would just be whatever salary wages that you yourself got.
What can the money be used for? Payroll for you and your employees. But what’s nice is, you can also use the money for rent, mortgage obligations, utilities, and other debt obligations you may have. So you can pay the mortgage on your apartments or you can pay utilities on your apartments with the PPP loan.
The interest rate is essentially interest-free; it’s only half a percent, so 0.5%. And the repayment period is two years, and loan payments are deferred for the first six months, and there’s no prepayment penalty, so you can pay it back whenever, and there’s also a way to have the loan forgiven.
So there is a loan forgiveness provision which states that you’re eligible for loan forgiveness for the amounts you spend over the next eight weeks after receiving the loan on certain qualifying expenses. And these qualifying expenses of the business over the eight week period include payroll costs, rent, interest item, mortgage debt, and utilities. So depending on how you use the loan, you could have the majority of it or all of it forgiven, meaning you never have to pay it back if it’s one of these qualifying expenses. And if the amount that could be forgiven is determined by the bank who actually grants the loan, and once you request forgiveness, the bank will have 60 days to approve or deny the loan. What’s also nice is that you are able to have more than one small business loan. So you could get the PPP loan, you could also get the EIDL loan, which I want to talk about next.
So just to summarize, the PPP loan, the Paycheck Protection Program, is for small businesses, so you have to have under 500 employees. That applies to most entities, but you can get up to $10 million. That loan amount is based off of the average monthly payroll for the last 12 months multiplied by 2.5, and the money can be used for payroll, but it can also be for rent, mortgage obligations, utilities, and other debt obligations. Very, very low interest and needs to be paid back within two years. Payments are deferred for six months and you have the possibility of having most or all of the loan forgiven, depending on how you use the proceeds. So that’s number two – the PPP loan.
Third is going to be the Economic Injury Disaster Loan, the EIDL. So the EIDL is an existing program that was expanded upon through the CARES Act. So in order to qualify for the EIDL loan, you need to meet the definition of a small business, which is something that’s organized for profit… and this applies to the PPP loan, too. You have to be a small business, because these are things that are gonna apply to most of you – organized for profit, has a place a business in the US, operates primarily within the US, is independently owned and operated, and is not dominant in its field on a national basis. So assuming you meet those criteria, you meet that definition of standards, the size standards are 500 or fewer people, and then you need to be located in the US. So assuming you meet those three, then you could qualify for the Economic Injury Disaster Loan. I’m not sure what’s easier to say – the Economic Injury Disaster Loan or the EIDL. Well, probably EIDL.
So you can borrow up to $200,000 through this program without a personal guarantee and you can be approved just based off of your credit score. You do not need to prove that you can’t get credit or money anywhere else. So you don’t need to prove that this will be your last resort and you need this loan to survive. If you’re getting a loan over $25,000, then you’re going to need to have collateral, which can be your small business. It doesn’t need to be your property, doesn’t need to be anything that you personally own. And probably one of the things that most people are talking about this is that you can get a $10,000 loan advance very, very quickly to provide for immediate support while you wait for the proceeds from your EIDL loan.
So the EIDL loan, you can get up to $2 million to provide working capital for your payroll costs, debt, expenses like that. The interest rate is 3.75% and the loan term can be as long as three years.
There’s one year of payment deferrals, although the interest does begin to accrue right away. And then as I mentioned, you can get a $10,000 advance, which is effectively a grant. When you request that, when you fill out your EIDL application, it should arrive within a few business days. And the money is yours and does not need to be repaid whether or not you qualify for the EIDL loan. So it seems like it’s just free $10,000 that you can get by just applying, assuming you meet the criteria. I went to the website and it said that it takes about two hours and 10 minutes to complete, but I know a few people who filled it out very, very quickly. So basically for this EIDL loan, the majority of it remains the same of how it was before, the biggest change is the $10,000 advance.
So when you apply, you can get a $10,000 advance in a few days that you do not need to payback. So it’s basically a grant given to you. And then after that, you can apply for up to $2 million to pay for things, assuming you can prove that you’ve been financially impacted by the coronavirus.
So those are the three main ways to get money from the CARES Act. The first is being able to pull money out of your IRA and 401(k) without paying the early withdrawal fee and the larger loan amount that you can take against your 401(k).
Number two was the PPP loan, which will help you cover payroll costs, but also rent and mortgages and utilities and things like that. And then the Economic Injury Disaster Loan, the EIDL loan is another loan that gives you a $10,000 advance. The loan terms are a little bit higher interest rate, but a longer payback period and a longer payment deferral, and you can get up to $2 million for the EIDL loan compared to the up to $10 million for the PPP loan.
So again, those are the three main ways to get cash from the CARES Act. There’s a lot more things in the CARES Act that are going to positively impact your investing business, but I think those were just kind of the main three that most people are talking about now, that we wanted to talk about today.
So thank you for listening. In the meantime, make sure you check out some of our other Syndication School series about the how-to’s of apartment syndication, make sure you check out our coronavirus page on our website – this is joefairless.com/coronavirus, where we post all of our blog posts about the coronavirus and different developments in regards to that, and also make sure you check out some of the free documents we’ve been giving away for Syndication School. That’s available at syndicationschool.com. Thank you for listening and I will talk to you tomorrow.