The Cares Act - How to Use Your Retirement Plan for Investing In Real Estate

By Christopher Levarek

“Opportunities are like sunrises. If you wait too long, you miss them.

- William Arthur Ward

---

At present, with current economic conditions and the existing COVID-19 pandemic, the government is taking action in the form of stimulus checks and loan programs to assist those experiencing hardship. One such action was the establishment of the CARES Act.

Today we will be covering this recent change and how one could use an existing retirement plan for business needs or investing into real estate. This new change represents an extremely attractive option for investing as it allows the retirement plan holder to access capital previously unattainable and not only build their wealth/retirement funds but avoid the at present stock market volatility.

Two scenarios are available with the CARES act :

1. Withdraw funds from the Retirement Plan (401k,IRA, eQRP, etc.)

2. Take a loan on the funds in the Retirement Plan.

Option 1 : Withdrawal

With the CARES Act, You can take up to $100,000 of your account out without the 10% penalty if under age 59 ½. Although the 10% penalty has been waived, the funds are still taxed. However, there are two options when it comes to the taxes due :

1. Pay the tax due over 3 years on the withdrawn funds. So spread the taxes due over a 3 year period

2. Or pay back the entire withdrawn amount to the retirement plan over 3 years with 0 tax or penalty.

This means that a retirement plan holder could have access to $100k in tax-free money for up to 3 years if the withdrawal method was utilized.

Option 2 : Loan

With the CARES Act, you can now take a loan on the balance of the retirement plan for up to $100k or 100% of the balance. Previously this was only $50k or 50% whichever was less. The payment terms are highly favorable on this loan as well :

1. You do not have to make any payment until 2021

2. Subsequently, you have 5 years to pay back the loan starting in 2021

3. Any existing loans on a retirement plan can be skipped until 2021

Real Estate Investment Opportunities?

With these two available options at capital in a retirement plan, a number of investing scenarios become possible. We will highlight below some possible options:

1. Syndication Investments : Take the money out of Wall Street and the highly volatile conditions entirely with the Withdrawal.

   1. Invest the cash into a highly performing apartment syndication with a quality operator.

   2. Ensure a 100% bonus depreciation cost-segregation study is scheduled for the property with the operator.

   3. Defer the taxes due on the retirement plan withdrawal with the losses from the cost-segregation study.

2. BRRRR/FLIP : Take the Withdrawal or Loan and use funds to purchase property with cash. Perform renovations and then refinance with traditional financing allowing payback of a withdrawal or loan. This complements the BRRRR method or flipping nicely.

3. Learn Real Estate: Interested in learning a specific niche of real estate?

   1. Use the funds to passively invest in another deal and ensure you are given a position to learn from the deal operator. This can be a simple talk upfront with a deal operator discussing your interest in learning the deal structure.

   2. Position your exit strategy at the 3 year mark for the withdrawal(unless using a tax strategy above) or 5 year with the loan.

In Final

The above are just some possible options with access to this now available capital. If you do decide to take advantage of this opportunity ensure that the funds are used in a deal that will be profitable. This goes without saying, however, using the capital for putting in the new pool might not be a good choice.

Always evaluate the yield(return) on the performance of your current retirement plan versus the opportunity or returns available if deployed into a real estate investment. Invest Smart!