Owners distribution...how much?

25 Replies

Hello all, as we near 100% occupancy (YAY!), we are hoping to see some regular income from the fruits of our labor!

Currently the management company is collecting rents, building an emergency expense fund, paying themselves, paying the loan payment, water/trash, etc., and whatever is left just sitting there! I finally had to say, hey...i've got bills to pay too, can I have some money!

Seriously, what type of arrangement is most common for owners distributions? Is there a preferred way for tax savings? They've proposed a flat monthly amount of what's available and a lump some of what's remaining at years end.

I've only self managed so I'm in unfamiliar territory here.

This seems extremely odd. What we do as a management company is as follows. We pay all bills, taxes insurance and anything else the owner would like us to pay out of the rent we collect at the beginning of the month. Throughout the month expenses may come up, which we will also pay out of the rent. On the last business day of the month, we collect a management fee for the agreed upon % of the collected income. Then, we pay out what is left for the month. Allowing your manager to hold all of your money is dangerous and slightly odd. This way, you can reconcile your books each month and track overall performance. 

@Tab Teehee

You take an Owner’s Draw, the timing and amount of which should have ideally been determined up front when you were doing your projections for returns.

And if you have partners, you pay each partner in proportion to their ownership interest.

I would talk to the PM and get a regular schedule and amount setup for draws/distributions. Like monthly, or at least quarterly.

Originally posted by @Chris Coleman :

@Tab Teehee

You take an Owner’s Draw, the timing and amount of which should have ideally been determined up front when you were doing your projections for returns.

And if you have partners, you pay each partner in proportion to their ownership interest.

I would talk to the PM and get a regular schedule and amount setup for draws/distributions. Like monthly, or at least quarterly.

Thanks Chris! Since there aren't any partners and this was my first experience hiring a management company, I just trusted the management company a great deal! I'm sure it was irresponsible on my part but I of course knew what the NOI was projected to be and I was sure after expenses there would be a good return.

I guess the question is....is there any reason for the management company to sit on funds that aren't being held for a specific reason or should all excess be paid out to me either monthly or quarterly?

 

Originally posted by @Calvin Ozanick :

This seems extremely odd. What we do as a management company is as follows. We pay all bills, taxes insurance and anything else the owner would like us to pay out of the rent we collect at the beginning of the month. Throughout the month expenses may come up, which we will also pay out of the rent. On the last business day of the month, we collect a management fee for the agreed upon % of the collected income. Then, we pay out what is left for the month. Allowing your manager to hold all of your money is dangerous and slightly odd. This way, you can reconcile your books each month and track overall performance. 

Yes I felt it was a bit odd myself, but didn't know if it was an industry standard, hence the question posted here.

 

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@Tab Teehee all excess funds need to be paid to the owner at the end of every month. Anything different is an extremely bad deal for you.

Why is the PM paying your mortgage? You should be paying that. This is a great way to get ripped off. I would correct this immediately.

Originally posted by @Caleb Heimsoth :

@Tab Teehee all excess funds need to be paid to the owner at the end of every month. Anything different is an extremely bad deal for you.

Why is the PM paying your mortgage? You should be paying that. This is a great way to get ripped off. I would correct this immediately.

 

Originally posted by @Tab Teehee :
Originally posted by @Caleb Heimsoth:

@Tab Teehee all excess funds need to be paid to the owner at the end of every month. Anything different is an extremely bad deal for you.

Why is the PM paying your mortgage? You should be paying that. This is a great way to get ripped off. I would correct this immediately.


So all it says is they’ll pay you the excess cash “periodically”? I wouldn’t have agreed to that.  Again, great way to get ripped off..

 

@Caleb Heimsoth

They are a pretty large company in the area that has been around a very long time...definitely not too worried about being ripped off, but I'm sure it happens. They send me an extremely detailed monthly accounting statement so I always know what funds are going where. So the bottom line here is, after there reserves are met and bills are paid, they should be sending me everything that's left.

Originally posted by @Tab Teehee :

@Caleb Heimsoth

They are a pretty large company in the area that has been around a very long time...definitely not too worried about being ripped off, but I'm sure it happens. They send me an extremely detailed monthly accounting statement so I always know what funds are going where. So the bottom line here is, after there reserves are met and bills are paid, they should be sending me everything that's left.

If you’re willing to share numbers...how much excess cash are we talking about here (on an average month)? 

Yes they should be sending it to you.  

@Caleb Heimsoth

We are just getting to 100% occupancy this month, but the monthly excess will be around $4,500 after debt service, management fees, etc.

@Tab Teehee I do not know of any reason why the PM would be keeping that excess income just sitting in the trust account. As long as they are keeping a healthy reserve for maintenance, etc., then you should be receiving the net income.  You will have to claim the net profits and pay taxes on them (hopefully not much or any after depreciation).

Again, I would get with the PM and work out a schedule for Owner Draws, like monthly, bi-monthly, or quarterly.  And if its a large company like you mentioned, they can probably direct deposit the money into your account.

@Tab Teehee do you have investors working with you on these projects because if you do you'll want to make sure they get distributions before you unless you have a different setup

@Tab Teehee

First off congrats on the success! $4,500 after all expenses is a great cash flowing asset!

I don’t want to be redundant on others post.

My recommendations would be to receive ALL excess cash each month on a certain day with a balance sheet for reconciliation.

There are reserves already set, so you can continue to have them hold the reserves and even have them add an addition sum per unit each month so you continue to build the reserves for future expenses.

I would come to an agreement with the management organization and write up an addendum to the contract that speaks to this and replace any other “vague” language with specifics.

It’s better to do it now, instead of when lawyers have to get involved.

Again, congrats on the awesome property!

@Chris Coleman

They have the ability to direct deposit into my llc account, so that part is easy!

They are now proposing sending me 80% of the NOI each month which still doesn't make any sense since we have already achieved our reserve account desired balance.

Most PM companies will want reserve funds, maybe as much as a month's worth of total rent, though likely a bit lower.  If they have already got that amount, they should be paying you the remainder above the reserve level after expenses and PM fees have been paid.

@Dj Hume

Thanks DJ, it is a pretty awesome property, I feel blessed to have had the opportunity to purchase it, rehab it and make it profitable!

Just learning as I go, thanks to help and advice from people like yourself.

@Tab Teehee sounds like you need to take more control of your PMs. You tell them how things are supposed to be done. Not the other way around. After all operating expenses are paid, the excess distributive cash flow should be put into the operating account every month. Then you distribute the cash flow according to how you have the deal structured with your investors whether theres a pref that needs to be paid or straight equity splits

@Tj Hines

Totally agreed! This is a first time evolution for me so still a lot to learn! I have no investors in this deal, if I did then I'm sure things would have been more cut and dried.

@Tab Teehee

My management company withholds $250 per property per month for reserve funds. They send me a draw 5th of every month of ALL excess funds and then I pay the mortgage and set aside the tax money. You should be in control of your money, debt and taxes. Leave the rest to them. If an unexpected expense comes up and it exceeds your balance with the PM trust account then you can inject the necessary capital if needed.

Originally posted by @Nik S. :

@Tab Teehee

My management company withholds $250 per property per month for reserve funds. They send me a draw 5th of every month of ALL excess funds and then I pay the mortgage and set aside the tax money. You should be in control of your money, debt and taxes. Leave the rest to them. If an unexpected expense comes up and it exceeds your balance with the PM trust account then you can inject the necessary capital if needed.

So the $250 per property per month is collected for how long? Assuming you don't have regular large unexpected expenses, it seems that a fairly large balance would accumulate.

 

@Tab Teehee

It just rolls into the nexts month balance sheet and gets eaten up in expenses. It’s just a policy on the contract I had to sign for properties that don’t cash flow enough.... Luckily I don’t have that problem but since this thread I am going to tell them it’s not needed and to give me all $ monthly. Thanks :-)

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