Everything You Need to Know About Sending Distributions to Passive Apartment Investors

You just closed on your first or another apartment syndication deal. Congratulations!

One of your most important duties as the asset manager of your newly acquired apartment deal is to send out the correct distributions to your investors on time. (Click here for a list of all asset management duties and responsibilities).

Let’s be honest, if you mess up the distributions, the likelihood of your investors coming back for future deals decreases drastically. Additionally, my largest source of new investors is through referrals. So, by screwing up the distributions, not only would I be losing current investors, but potential investors as well.

In order to retain your investors and attract new investors, here is everything you need to know about sending distributions to your passive investors in order to not only set you and your investors up for success for this deal, but for all future deals.

For the purposes of this blog post, we will assuming you’re sending out monthly distributions and offering an 8% preferred return with a 70/30 profit split thereafter.

 

1. How do I know if I can make a distribution?

Distributions come out of the cash flow remaining after paying all operating expenses and debt service. The cash flow can be located at the bottom of the profit-and-loss statement each month.

The amount of money distributed to the investor is based on the amount of money they invested and the preferred return. For example, if a limited partner invests $100,000 and you offer an 8% preferred return, they receive $8,000 per year in distributions. If you have 10 investors in total who invested $100,000 each, you will distribute $80,000 annually.

Of course, this assumes that the asset cash flows at least $80,000 annually. If the asset does not cash flow at least $80,000 annually (for example, if the asset cash flows $60,000 year 1), then you distribute $60,000 to investors and do not receive your split of the profits.

 

2. What happens if I cannot make a distribution?

Following the example, if the asset cash flows $60,000 in year 1 and $80,000 per year thereafter, then the $20,000 would accrue and be paid out at closing, assuming you included a catch-up provision in your operating agreement with investors.

 

3. How do I calculate the distributions?

The distribution is based on the preferred return offered to passive investors and their initial equity investment. The preferred return is an annual return, so since you are offering monthly distributions, you’ll need to divide the preferred return by 12. For example, and 8% preferred return on a $100,000 investment is $8,000 annually, or $666.67 per month.

 

4. When do I pay out extra distributions? 

Every 12 months of ownership, you should evaluate the profit-and-loss statement for the previous 12 months to determine if the property cash flowed more than the 8% preferred return. If the property cash flowed more than the 8% preferred return, a portion of the additional profits (70% or however you structured the profit split) can be distributed to your passive investors.

For example, if 10 investors invested $100,000 each at an 8% preferred return, and the property cash flowed $100,000 year one, the investors would receive an additional $1,400 each ($100,000 cash flow – $80,000 in preferred returns = $20,000. $20,000 * 70% profit split = $14,000. $14,000 / 10 investors = $1,400). This equals a 9.4% return year 1 ($8,000 preferred return + $1,400 profit split = $9,400 / $100,000 initial investment = 9.4%)

 

5. Who sends out the distributions?

Ideally, your property management company sends out the monthly distributions. Make sure you set expectations with your property management company before closing on a deal (i.e., will they send out the distributions? How frequently? Etc.)

 

6. When do I send out the first distribution?

We send the first distribution at the end of the third month of ownership. It covers the time we owned the property in month 1 and month 2. For example, if we closed on January 15th, the first distribution is sent by the end of March and covers January 15th to February 28th.

After that, each distribution is sent at the end of the following month – March’s distribution is sent by the end of April.

 

7. How do I send the distribution?

The two main ways to send distributions are via direct deposit and check in the mail.

You can either offer both options or pick one option. But make sure that your property management company is capable of setting up direct deposits/mailing checks each month.

 

8. When do I receive my distributions?

Assuming there is cash flow remaining after the preferred return, the GPs receive distributions at the same time and at the same frequency as the passive investors.

First, you will receive your asset management fee of 2% (or whatever percentage you charge).

Then, the remaining profits will be split between your investors and you 70/30 (or whatever profit split you offered). For example, if you have 10 investors who invested $100,000 at an 8% preferred return and the asset cash flowed $100,000 year 1, the GP would receive $6,000.

 

You also want to assume that your passive investors will want to know this information. You can either wait until they ask you and spend your weekends writing individual emails to investors. Or, you can proactively answer these questions. My company creates an Investor Guide for each of our deals and include it in our “we closed” email. This guide outlines everything our investors need to know about distributions, including what the distributions are, when they will receive them, how they will receive them, and how we re-evaluate the deal every 12-months to determine if we can send a larger distribution.

Once you’ve answered all of these questions yourself, make sure you are communicating the answers to your investors as well – with the most effective way being the creation of an investor guide and including a link to download the guide in your closing email to investors.

 

Are you an accredited investor who is interested in learning more about passively investing in apartment communities? Click here for the only comprehensive resource for passive apartment investors.

 

 

 

 

 

 

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