On Monday, April 27, the U.S. government resumed paying out billions of dollars in low-interest lending for businesses with a maximum of 500 employees. This is the second stimulus bill that has begun to provide relief for businesses under the Payment Protection Program (PPP). This stimulus package is expected to run out fast, so you have to be able to understand what you need to do and how it works if you hope to use it.
Understanding this second round of government assistance can be challenging, that is why we had Mark Kohler on our Secrets of Top Selling Agents webinar. Kohler, a notable CPA and attorney provided viewers with an understanding of how the stimulus package works and how it will provide assistance to real estate agents.
What is the Second Stimulus Package?
The second stimulus package comes as businesses struggle to ensure their employees are paid during this time. This bill, authorized on April 24, will provide an additional $310 billion in funds for the program and also provides 1 percent interest loans to businesses with less than 500 employees.
Strategies That Affect Everyone
1. Stimulus checks or wire transfers. You may have already received a stimulus deposit to your bank account. However, there are many Americans who have not yet received their stimulus check as a result of checks not being sent out until recently.
2. SBA Loan Forbearance. You or the clients that you serve may have a Small Business Administration 504 (SBA) Loan in place. According to Kohler, if you have one of these loans, the bank that issued you the SBA loan will begin to make the payments for you for six months. This is not a part of the Payment Protection Program, but is an option for those who have one of these loans. What you need to know is that the bank is making payments on the principal and interest of the loan during this time and that there are no tax repercussions after the six-month timeframe has completed. You or your clients do not need to apply for this, but Kohler suggested reaching out to your bank to ensure that the bank is making these payments, as they started on April 1.
3. Retirement Plan Provisions. This provision may enable you or your clients to take money out of a retirement account and defer the taxes for 3 years or return the money back to the account and pay no taxes or penalty. While this is not the best option, it can provide emergency financial assistance. You can take out up to $100,000. Kohler suggested taking money out of your IRA and rolling it into your 401K if needed. Then, you can borrow from that and put the money back into your 401K or IRA over the course of five years. This can be done if you are still employed. You can only borrow out of your 401K during this time whether it is a personal 401K or your company-originated 401K.
Should You File for Unemployment?
Under the Payment Protection Program (PPP), you have the option of filing for unemployment and collecting the benefits. Kohler states if you are not currently working and don’t have any business or closings, that this might be the best bet for you. You have the option to collect up to $1,000 a week or up to $4,000 a month for up to three months.
This sounds good, but remember that to qualify for unemployment, you have to be fully unemployed. If your real estate business is suffering, but your 9-5 job is still paying you, you are not unemployed, and you will not qualify for unemployment benefits.
Kohler suggested that the best thing that you can do to qualify for unemployment benefits is to take a step back from your business, keep networking, but stop all business for three months until things go back to normal so that you can collect the benefits that you might need. This does not mean that you are a failure, but it means that you are taking a step back to get your bearings, do some training and regroup when things are back to normal.
Options for Unemployment Under the PPP
You should take advantage of every opportunity you have when it comes to qualifying for unemployment under the PPP. There are two things you need to know when it comes to the options for unemployment under the PPP. What Kohler describes as “The Fork in the Road.”
1. Unemployment Under the PPP. Most REALTORS® will receive anywhere between $8,000 and $20,000 with a cap of $20,800. You can apply for a 1 percent loan repayable over 24 months at a bank, or can collect unemployment benefits, FMLA and emergency paid sick leave. If you file under the PPP, you subtract what you have received from the Economic Injury Disaster Loan (EIDL).
2. Employee Retention Tax Credit (ERTC). If you are a broker, you can receive $5,000 per employee that you are supporting. If you opt to receive the ERTC, you cannot do the PPP and the employee has to be an official W-2 receiving employee, and not a 1099. You can also receive a payroll tax deposit deferral for up to two years.
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There are a lot of great things about being a homeowner, but having to finance home repairs isn’t one of them. Repair costs often pop up unexpectedly and at inopportune times, such as a broken furnace in the dead of winter or an extensive roof repair right after you’ve come back from vacation. And they’re rarely cheap. In 2018, 88% of American homeowners had to take care of at least one major repair, with an average annual spend of almost $5,000.
A home is a big investment, and like many other big investments, you need to take steps to maintain and improve it if you want to make a return. And depending on the age and condition of your home, as well as the elements that it faces where you live, a large part of maintaining your investment is addressing home repairs. So how do you finance home repairs without completely depleting your savings? Alternately, how do you finance home repairs if you don’t have a lot of savings? Fortunately there are options to help with both cases.
Budgeting for Home Repairs
Even before you start looking into ways to finance home repairs you should be actively accounting for the possibility of repairs in your budget. There are a few ways that you may choose to do this, but many homeowners abide by either the 1% rule or the square footage rule. Here’s how they work.
The 1% rule dictates that you should set aside 1% of the purchase price of your home each year for potential repair costs. So if you bought your home for $250,000, that’s $2,500 allotted in your budget year after year for maintenance and repairs. The logic behind the 1% rule isn’t so much that your repairs are going to cost you that much every year, but that it’s a good way to set a guideline and encourage yourself to save.
Variations on this rule include saving 2-3% instead of 1%, or putting aside 10% of what you spend on your property taxes, mortgage payment, and insurance payment each month for repairs. With the latter rule, if you’re spending $2,000 a month on those combined expenses you’ll want to put an additional $200 a month into savings for repairs.
The square footage rule is a recommendation that you budget $1 per square foot of your home for repairs. A 2,200 square foot home means $2,200 in savings for repairs a year, for example, and a 3,000 square foot home means $3,000 a year. Again, this doesn’t mean that there’s a direct correlation between the square footage of your home and what you’ll spend in repair costs each year—it’s just a good way to ensure you’re saving a decent chunk of change toward these types of expenses.
How to Finance Home Repairs
Even with a well-executed savings plan it’s not uncommon to need extra funds when it comes to financing home repairs. If you save $2,000 a year for example, you’ll see it go quickly if you need a roof repair (averages $351 to $1,352, depending on whether the repair is minor or major) followed by a new water heater (averages $767 to $1,447 with the new unit and labor). And there’s always the possibility of needing a notoriously expensive repair, like a foundation repair (average cost of $4,511 but can range as high as $15,000) or needing to restore and repair after incurring water damage (average cost of $2,701).
As you might expect, many homeowners will at some point find themselves in need of having to finance home repairs. And fortunately, there are a few good options for how to do it. Here are five of them.
Home Equity Line of Credit
A home equity line of credit—often shortened to HELOC—is a loan that you take out using the equity that you own in your home. Think of it almost like a credit card, with the set limit that you can borrow being the amount of equity that you have when you first take out the HELOC. Most of the time, you’ll have a 10 year draw period during which you can pull out money from this fund, followed by a 20 year payback period.
There are a few advantages of using a home equity line of credit to finance home repairs. To start, HELOCs generally have low interest rates—or at least lower than you’ll find with other loan options. That’s because lenders consider these loans to be less risky endeavors on their part, since you’ve already shown your ability to earn and pay that amount with your mortgage.
Another advantage is that you can take out money as you need it, instead of taking all of your equity out as a lump sum. If you have $50,000 in equity to borrow from then, you can take out money multiple times during the draw period—perhaps $5,000 for a major roof repair one year, $2,500 for a new gas furnace another year, and so on. And you’ll only pay interest on the amount that you actually pull from the available limit.
A cash-out refinancing takes your existing mortgage and turns it into a bigger mortgage, meaning you end up with a new loan that puts more money in your pocket for things like home maintenance and repairs. You can get up to 80% of the market value of your home refinanced, and then take the difference in cash.
Opting for a cash-out refinance to finance home repairs is a popular choice, since depending on market conditions and how much you’ve already paid toward your original mortgage you could end up with a large amount of cash that you can then put toward expensive repair needs.
Unlike a home equity line of credit, cash-out refinancing doesn’t borrow off of your existing mortgage. Instead, it creates an entirely new mortgage for your property, complete with its own rates, lending terms, and repayment schedule. This means that you may be able to get extra benefits out of a cash-out refinancing if mortgage rates have gotten more favorable since you first bought your home.
FHA Title-1 Loan
A home equity line of credit or cash-out refinancing are great if you have lots of equity in your home, but what if you incur an expensive repair cost in your first year of home ownership or at some other point where you haven’t built up a substantial amount of equity? In that situation, you may want to consider an FHA title-1 loan, which allows you to borrow money specifically for many types of home repairs and improvements.
There are some guidelines to be aware of with an FHA title-1 loan. To start, the maximum loan amount is $25,000 for a standard, single family home, and loans above $7,500 require you to put down your home as collateral (FHA title-1 loans below $7,500 do not need to be secured by your home). The loan repayment period for a single family home is 20 years.
FHA title-1 loans are fixed rate, so you won’t have to worry about variable interest rates over the course of your repayment period. To qualify, you’ll need to have a debt-to-income ratio of 45% or below, and you must be applying the loan to an approved repair or improvement costs. You can find more info on what those are by visiting the Department of Housing’s FHA title-1 loan information page.
Using a credit card to finance home repairs can be an easy way to go, especially if you have a high enough limit on your existing credit card to simply borrow money on there. If you don’t though, you’ll likely have no problem applying for and receiving a new credit card just for home repairs.
It’s important to note though that credit cards aren’t always the best way to go. What you gain in convenience you may end up paying in high interest rates and high monthly payments with a shorter repayment period than you’d get with other types of repair financing loans. Look into the other options above before opting for a credit card if you’re facing a major repair cost and do a comparison on interest rates and other loan terms. If you just need to cover a basic and not too expensive repair though a credit card may be a good way to go.
Finally, you could consider getting a personal loan just for home repairs. These tend to have higher interest rates than options like a home equity line of credit as well as shorter repayment periods, but you’ll have a lot of freedom to use the loan as you need to, and can usually borrow as much as $40,000.
Check with your existing bank first to see what kinds of terms they offer for personal loans, and then expand your search to other lenders. If you can find a personal loan with favorable rates and terms, then it is certainly worth considering as a way to finance home repairs.
Home repairs pretty much always need to get done, even if you don’t have funds on hand. Look through the available options above and find a lending option that makes the most sense for your long term financial goals and your existing financial situation, and be sure to account for repair costs in your annual budget as well.