One of the things I like best about being a syndicator is when it comes time to make distributions, especially the final distribution. I like sending money to people, because I know they’re happy to get it and I just did a good job for them. But exactly how do we make distributions?
When you were putting the whole project together, you should have been telling your potential investors at that point what the regularity would be on when distributions would happen. You may decide to make them annually, you may decide to make them quarterly, or you may decide to do them monthly. While annual is rare, some investors actually prefer it, especially if they’ve got a self-directed IRA and they’re getting charged fees for every time a deposit comes in.
Now if you’re making distributions monthly, it’s a lot of work to do every single month, and you do not want to miss it. When you make a late payment, you can absolutely count on hearing from a few of your investors about where that money is. Quarterly is typically the easiest to do.
So you start with your leftover money, after your expenses have been paid on the property management side. Forecast through the next period, whether that’s the next month or the next quarter. And look ahead to the following quarter or half a year. See if there is anything that you’re forgetting that’s on the horizon that you need to budget for. You want to make sure that you have the right reserve account.
Now, I prefer to set what my regular deposits are into my reserve account. But a reserve account is there to be used for things that it needs to be used for. So your reserve account may go down just as it may just continually go up. When it comes down, you want to build it up to a certain level. So you need to be giving some amount to your reserve account all the time.
Once you make sure that money gets allocated to reserves, you can take the remaining pool of money. It’s uncomfortable for investors, if they see the amount of money go up one distribution period and then down the next. So if you can pay $5 a unit right now, but next quarter you’ll be paying closer to $4 a unit, just keep it at $4. This way you can build things up, then take money out of the reserves and pump it in. So rather than just dividing by the number of shares or units that you have, and then paying out that amount per unit, always be conservative.
Once you’ve figured out what you’re going to be paying per unit, multiply that price or that value by the number of units each investor has, and then queue it up with your bank. There’s a lot of different ways to do that, but most prefer direct deposit. You won’t have to run and sign a lot of checks and worry about postage all yourself. Your bookkeeper usually appreciates when you handle distributions via direct deposit too, rather than having to reconcile checks all the time.
Are you ready to get started with your own syndication and need a private placement memorandum? Moschetti Law Group is a real estate syndication law firm and we’d be happy to meet with you to put together your Reg D PPM from a syndication attorney and guide you through the process of launching your own offering.
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