Every passive investor loves to receive distributions on their project. In addition to the obvious return on their investment, distributions are one sign of a healthy investment and provide investors with peace of mind. Today, we will talk a little about how distributions work and what you need to know.
How distributions work
While most people think of real estate strictly as an investment, it's important to understand that it is also a business. An apartment complex has all the characteristics of a normal business because it is and must be operated as such. For the apartment business, income is receive each month via the rents and fees that are charged by the apartment complex. This income is then used to pay expenses on the property along with any debt service that is due to the lender. While this takes up the large majority of the properties income, a healthy property will have additional funds after covering these costs which is commonly known as cash flow. This cash flow is then provided to investors as a distribution typically on a quarterly basis. It is divided between general partners and limited partners based on the terms of the company's operating agreement and amongst the limited partners based on ownership shares. It is common for deal sponsors to begin distributions 6-12 months into the ownership of the property in order to allow them to get a grasp on the property and to start executing the business plan.
How are distributions projected
When a deal sponsor is analyzing a multifamily property to purchase, they will model the income, expenses and debt service in order to calculate a predicted cash flow across the time of the project. The goal of this analysis is to provide a projection to investors that is conservative but also gives an accurate depiction of how they believe the property will financial perform. The cash flow is further divided based upon the terms of the operating agreement and the ownership shares to show investors what a projected return would look like for their given investment. Once the deal closes however, all these numbers are in flux across the life of the hold time which is way consistent communication with investors is important in order to relay how the property is doing when compared to its projections.
What if my deal isn't providing distributions
While some deals may not include distributions as a part of their business plan during a heavy construction phase or an intensive effort to stabilize a high value add project, most deals should provide them if they are in a healthy financial state. If you are invested in a deal not providing distributions, reach out to the sponsor to understand how the business plan has been impacted that distributions are no longer being given and what the plan is to move the property back towards a healthy financial status.
There are many important considerations when evaluating a multifamily deal and we make it our mission to careful vet each of these items. If you would like to learn more about passively investing in multifamily, please check out our free ebook "Achieving Financial Freedom Through Multifamily Investing."