Cash Distributions in Multifamily Syndications

Calvin is a Quality Engineer at a medical parts supply company. Last summer he married his wife, Lacey, in a small and intimate wedding. Instead of hosting a blowout wedding reception, they had decided to invest what they saved into an apartment syndication in Dallas, Texas.

A month after their honeymoon, Lacey was at the front door when Calvin returned home from work. She was giddily excited to share big news with him…

“Remember Diane, my best friend from college?” she asked. “She’s getting married, too! This November, in San Diego.”

“That’s a big trip,” said Calvin. “We just spent so much on our own wedding and honeymoon. Going to San Diego in a few months seems like a stretch.”

Lacey smiled with a twinkle in her eye. “I take it you didn’t look at our checking account today, then?” Calvin said he hadn’t. Lacey led him to the office room and opened up their account on the computer screen.

“Notice anything?” she asked. On the list of transactions, above his biweekly pay, was a deposit of $875: their first cash distribution from the apartment syndication in Dallas.

Now Calvin smiled, too. He embraced his wife. “We have passive income! With this kind of monthly payment, we can save for San Diego without a second thought.”

Saving their money from large expenses in favor of investing in a multifamily syndication was now paying off, literally. Every month, approximately $800 in passive income was deposited into their account from their real estate investment, and they were able to attend Diane’s destination wedding.

What exactly is a cash distribution from a multifamily syndication?

How much is your cash distribution?

After all expenses for the property (e.g. mortgage, bank note, repairs, maintenance, management) are deducted from the rent and service fees collected from tenants, this leftover income is distributable cash flow.

The average return on investment, in the form of cash distributions, can be anywhere from 7-10%. Some sponsors may offer you a standard preferred return as a part of your agreement.

In Calvin’s case above, his approximated $800 monthly cash distribution came from earning a 7% preferred return on his $150,000 investment. The total investment is multiplied by the return (150k multiplied by 0.07), then divided by the 12 cash payments per year.

Bonus! How much is your extra cash distribution?

On top of the monthly or quarterly cash distribution payments you receive from a multifamily syndication, passive investors can also receive an extra distribution. This happens when, after a year of ownership, the property has made more profit on top of the preferred return. Then you are entitled to a portion of the additional profits.

Let’s say a year has gone by since Calvin invested in the multifamily apartment syndication in Georgia. He has received his 7% monthly cash distribution, as promised, but his sponsors calculate the profit from the property has been above and beyond that amount. His sponsors will then distribute the additional profits to their passive investors –– and that includes an extra check for Calvin!

How do you receive your cash distribution?

Depending on the syndication, either every month or quarter, your cash distribution is sent to you by check in the mail, ACH directly to your bank account, or other agreed-upon methods with your sponsor.

Your sponsor is responsible for calculating and sending out your monthly cash distribution. It’s important to discuss with them ahead of time, when you close on a deal, how often and by what method you want your cash flow received.

What about fees to your sponsor?

Any fees to your sponsor in a multifamily syndication investment are calculated and deducted before you receive your cash distribution. This should be clearly defined in your agreement with your sponsor. The preferred return on investment has your sponsor’s fees already calculated into it. This means the passive income you receive is completely yours.

In Calvin’s case, this means the approximate $800 monthly payment he receives is after all expenses for the property and any fees to his sponsor have already been deducted.

What about taxes on your cash distribution?

I said the passive income you receive is completely yours, right? What about the IRS, you may be thinking? Another advantage to multifamily real estate syndications is that a portion of your cash distribution could be tax free.

This is possible through the additional advantage real estate has over other types of investing: depreciation. Depreciation allows you to write off on your taxes the value loss (such as wear and tear) of the property over time. This value loss reduces your taxable income.

As you receive your cash distributions, your income increases, while at the same time the calculated depreciation on the property reduces how much income you are taxed on. It’s a win-win!

For more details on tax advantages, look out for my next blog posts in this series of ten advantages of passively investing in multifamily syndications.