You hear us talk a lot about how multi-family investing is a great source of passive income. This is one of the largest benefits of investing in multi-family properties compared to single family homes.
We go more in depth to all of the pros and cons of multi-family investing in this blog post, but one thing that people always wonder after learning about the amazing benefits is HOW the distributions actually work.
And that’s such a great question!
As an investor in a multi-family real estate syndication, you can expect to receive periodic payments based on the income that the property generates.
So that you can have a better understanding of what this looks like, keep reading to learn how cash flow distribution works!
Investing in a multi-family property is a BIG deal and you can expect to reap massive benefits along the way. But too often, it’s unclear what that process looks like.
At XSITE Capital, we aim to help you understand every step of the investment process, so you can confidently take action and trust that your investment is in good hands.
For a closer look into the 5 phases of a multi-family investment deal, click here, but for now we’re going to focus on what happens after you invest!
Once all capital is raised for a specific deal, the syndicator then transitions into the property management and value-add creation phase.
During this stage, the syndicator oversees the day-to-day operations of the property, including tenant management, maintenance, rent collection and expense optimization.
In addition to the day-to-day operations of the property, syndicators also typically implement a value-add strategy, such as property renovations, amenity enhancements or operational improvements to increase the property’s value and rental income.
The syndicator’s goal during this phase is to enhance the property’s performance and generate attractive returns for all investors involved.
This work directly impacts YOU as an investor, because the greater the property is, the greater results you can typically expect to receive.
Throughout the entire syndication, you will receive ongoing communication and regular updates, so that you are fully aware of what’s happening with the property and how it’s performing.
When you partner with an investment group like XSITE Capital, you can expect consistent communication that includes details about property performance, financial statements, occupancy rates and any significant developments or challenges.
In addition to regular updates about the property performance, you can also expect to start receiving regular cash flow distributions, which typically happen on a quarterly basis.
And remember: all of those distributions are a direct source of passive income for you, meaning you don’t have to be included in any of the nitty gritty, day-to-day work of the property.
That’s the beauty of multi-family real estate!
While all of this sounds great, you might be wondering… “where exactly does the money come from?”
And that’s another great question, so let’s break it down.
The primary source of income in a multi-family investment comes from the rental payments made by tenants who occupy the units within the property. Typically, multi-family properties are apartment buildings or similar entities where there are multiple tenants on-site.
This rental income, along with any other sources of payment, such as laundry facilities, parking fees, etc., forms the basis for the cash flow of the property.
Before calculating cash flow, the operating expenses related to the property must be deducted from the total income. These expenses include property management fees, maintenance and repairs, property taxes, insurance, utilities, marketing costs and any other overhead expenses associated with property upkeep and management.
The remaining amount after deducting operating expenses from the total income is referred to as the Net Operating Income (NOI), which is a key financial metric that reflects the property’s profitability before considering mortgage payments and other financing costs.
If the property was financed with a mortgage or other loans, a portion of the NOI is allocated to pay off these financing obligations and includes both principal repayments and interest payments.
Once operating expenses and debts are accounted for, the remaining amount is the potential cash flow available for distribution to all investors involved in the property.
This cash flow is divided among the investors according to the terms outlined in the investment agreement.
The distribution of cash flow looks different for every investment deal and is dependent on the structure of the deal.
Investors’ ownership percentages and the terms dictate how the cash flow is distributed. As mentioned earlier, you can typically expect to see distributions quarterly.
Some investment deals may have a preferred return, which is a predetermined rate of return that certain investors receive before the remaining cash flow is distributed to other investors.
Once any preferred returns are given, the remaining cash flow is typically distributed among the investors based on their ownership percentages in the property.
For example, if an investor owns 30% of the property, they would receive 30% of the available cash flow.
It’s important to note that the actual cash flow received by investors can vary due to changes in rental occupancy rates, fluctuations in expenses, unexpected repairs and other factors.
This is why it’s important to work with an investment group that values transparency and always communicates with you so you know what to expect at all times!
Hopefully now you have a better understanding of how cash flow distributions work once you have committed to investing in a multi-family real estate deal.
At XSITE Capital, we believe that investing in multifamily real estate is one of the best ways to diversify your investment portfolio and earn passive income.
When you partner with experienced syndicators like us, you can trust that the market research is carefully considered and that your money is going toward investments that will produce positive returns.
If you’re unsure of how to get started with multifamily real estate investing, click here to view our process!
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