#29 Profit First for Real Estate Investors with David Richter
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Itunes – www.TonyJavier.com/itunes
Guest Bio: David Richter is a real estate investor who has been involved in over 850 real estate transactions. He had the unique opportunity of working in every possible seat in the real estate business and found his calling to be a financial advising company that helps other real estate companies manage their finance. If you want to learn more on how to view and work with your finance, you need to hear this!
More about him – https://simplecfosolutions.com/
Hello. Welcome to today’s show. Welcome to our podcast. We’re doing something different today. We are going live on Facebook. For those of you that are on Facebook. Welcome. There is a zoom link on my Facebook page. You guys can sign on and join the conversation later today. We’re going to open up for conversation here at the end of this podcast interview with David Richter,super, super excited to have him, you know, a lot of people talk about money in their business and how they’re making money in real estate. But when they post checks that are $30,000, $50,000, a $100,000 that is not money in their pocket. Right? Where does that money go? How do you manage it? How do you keep more of it? David’s going to jump into that and we’re going to have some really good conversation on how to manage money better. Before we start, I do have one quick announcement. Next week we are officially launching real estate masters TV. I’ve been posting some stuff on Facebook, privately just kind of a soft launching my TV program. We’re showing real estate investors how to become a TV authority in their market. Get motivated seller leads from a channel that nobody almost nobody is using. So if you want to see if your market’s available and see how you can get on TV, we do a lot of the process for you. Go to realestatemasterstv.com and see if your market,is not taken and fill out the application and love to help you out. We’re launching on wholesaling Inc. Next week. It’s going out to hundreds of thousands of people. So I wanted to give my audience a shot at first to get into,to get a spot in their market.
So let’s jump into the main event. David Richter, Profit First for real estate investors. He’s writing the book. I think it’s getting ready to launch soon. If I remember correctly, you can tell us a little bit more about that. “Profit First” – it’s been a long time since I read the book. I met the author, Mike Michalowitz I think it was about three or four years ago in person at a mastermind. Super nice guy, funny guy. He’s created a nice niche in the business community of showing people how to, I think he says pay themselves first. I’m not sure if he’s the one that coined that term first, but he’s got a great system for helping entrepreneurs keep money in their pocket. David Richter has taken it one step further,and creating a system for real estate investors specifically.
So the great thing about David is he’s not just doing this. He is not just teaching this and helping people. He has done it for his own business. He’s done. I think he’s been involved in over 850 real estate transactions. He’s done a high volume of real estate, so he knows what it’s like to have money going in and out of your business 20 years, I’ve had the same, same thing, money going in and out. There’s big chunks. There’s deals that don’t close. There is a lot of money that goes in and out of the business. And if you don’t manage it effectively, track it and know where you are at any point in time it’s hard to make decisions and be a really good business owner. So with further, without further ado, I’ll introduce David. David, how are you doing today, buddy?
Doing Great. Thanks for having me on today.
Yeah, man I’m super excited. I don’t know if you guys can, can tell how excited I am because money is something that, again, most investors don’t talk about unless they’re making money, but they don’t talk about if they’re struggling with money. So I’ll just turn it over to you. Tell us about yourself, how you got into real estate. What brought you to where you are today? As far as showing people how to manage the money in the real estate investing.
Awesome. So I read, you’ll never believe this, but rich dad, poor dad in college. And that’s what got me turned on to the mindset, you know, the different mindset. And there was like, no looking back from there. So I bought my first house. Then I was about 19 fixed it up, rented it out and then actually lived in it when I first got married, you know, kick the renters out. It was some friends of mine at that time and then lived in it for two years and then lease optioned it after we moved to our other house and he, the tenant paid on early, he was on time, like all the time. And then six months later, he cashed me out like, okay, this is awesome. So I I was like, I need to do more of this. So I went and I started working with a real estate investing company and doing some more of the deals on my own.
And I really got a crash course there because it was about five deals we were doing a month at that time about five people employed. And then we scaled it up to about 30 people, 25 to 30 people in 30 deals a month. So that’s where we got to see, I got to see like the whole transformation and growth there. And I was able to buy deals from the company, built up a little portfolio of my own. I really liked the rentals and you know that, and was doing some of the flips too. And then, you know, then I got to sit in every seat too. So I got like the crash course from beginning to end of the whole real estate, the, you know, the building a real estate company. So that was really an awesome education than doing the deals on my own.
And then one of the seats, I sat in the many seats I sat in besides marketing and sales and acquisitions and, you know, everything was the financing. And I got to dive in there and I got to really see what it takes to run the small business finances and be like, okay, you know, I, I get what, where now how the marketing correlates to like when the deal closes. So, you know, get to see that whole process take place behind the scenes and how we actually manage that. And, you know, going from five employees to like 25 employees, I was sitting at that seat more towards the end when we had a lot of people and I was like, okay, our overhead is pretty high. And we’ve got, you know, we were making a lot of money, you know, we’ve got 30 deals coming in a month, but you know, we’ve almost got as much going out.
And that was really eye-opening to me at that time. And I don’t know if you can tell, but I’m kind of a nerd. So, you know, I like the numbers and like, that’s something that I like a lot. So, and I definitely embrace that. So I, at that time, so I had to realize that, but then at that time too, we were making a life change. We moved across the country basically to live closer to family. And so I started working with another investor. I sold off all my properties, you know, had a little cushion there and I was able to start working with another investor and started working in, getting inside of his books and like really understanding where he was financially and then really turning that around. Cause like the person who was working with wasn’t giving him the data he needed, he wasn’t getting the high level numbers he needed.
And when he turned around and said, you know, one day after the books were there and we’ve had plans in place and we had stuff implemented, he said, you know, like you’ve changed my life. And that, to me, just like for me, you know, cause like no one had really said that to me before. And I said, well, I want to do this continuously. You know, like I want to help other investors. And so I called one of the people, you know, that’s like on my board of advisors or one of my mentors and told them, Hey, I’ve got this idea for a company. I want to start it call it Simple CFO that helps investors know where they stand financially and comes in more as that CFO to help them work on the business from the financial aspect. And he’s like, that sounds great. You should read Profit First.
I had never even heard of Profit First. This was several years ago. So I said, okay. So I read the book and I was like, okay, this is like a clear cut way of what we can implement inside of, you know, real estate investing businesses to help them at that high level, get the actual benefits from their business, why you started your business. So that’s when I started the profit first implementation and Simple CFO was several years ago now, a couple of years ago. And then we’ve been implementing “profit first” since then. And then I called Mike back in July of 2020 and said, Hey, you know, this has been going really well. I think the real estate investing world don’t need its own Profit First book. They need something tailored to them because it’s different than a service-based business or whatnot.
So he was like, okay, you know, at that sounds great. So we, I contracted with him to do that and I was already a part of “profit first” and you know, his professional, the first professional group to implement profit first. And then from there it’s history and now we’re in the middle of writing the book and it’s written. Now it’s just the editing phase and then it’ll go to publishing. So it’ll be out probably later this year, but, but yeah, that’s where we are now inside of the profit first. But that was my journey from real estate investor and you know, heavily in that side of it now to like, I want to help other people get to the point where they can realize the benefits of their business.
Yeah. That’s phenomenal. Now tell me if I’m wrong. But most investors, you work with a lot of investors. I work with a lot of investors as well through my TV program and masterminds and all that kind of stuff. And most real estate investors are visionaries. Right. They have these great ideas. They’re like, I want to do this for marketing. I want to start this other business. They’re like all over the place. Right. And they’re just like visionaries of like wanting to go do all these great things. But they, when money comes in, they don’t always like to look at the books. I’m that way. There’s been at least a couple of times in my career where there was no money in the bank, but I knew I had money and I’m like, where’s the money. And then all of a sudden I dive into the books and then I’d be like, Oh, okay.
I put money in this property, this, and then I’ve got, you know, 20 properties with money that I put out and you know, and then all of a sudden it’s like, Oh, okay. I’m not broke. I just need to figure out how to manage that money better. So there’s not so much money going out and it’s there, there’s cushion in my business. So tell us about real estate investors you work with. I probably hit the nail on the head with a lot of the investors. So tell me about your process. When you go into real estate investors’ books, what are the things you see? What are the issues you see and kind of tell us some of the solutions for those problems.
So you did nail the, the nail right on the head because a lot of people are the deal chasers, you know, I’m an entrepreneur too. So like, I totally understand that. And in a real estate investor, so I get it, like I want to chase after that deal, you know, and I want to be making sure that we’ve got that the, you know, the deals consistently coming in and like the best thing and the best opportunities for our business. So when we go into a business and when we start, we have to go through and break that the mindset down of like of profit first saying, Hey, up to this point, you’ve been running and you’ve probably been growing, you know, like you’ve had great growth, but now we need to take a step back and work on the business with you.
You know, like we need to say, what’s worked on the business from the aspect of, are you getting the benefits from the business that you really, that you really started your business for? And that’s different for every person, you know, like their why of why they started the business. A lot of people was to make money. And a lot of people, like you said, think they’re making money and there’s no money in the bank. So it’s like, we have to start at some point to say, okay, let’s take a step back, assess where we are right now. See, and then get that plan in place to be able to say, okay, now let’s get it to where you’re paying yourself what you need. You’ve got the business healthy, you’ve got the profit that you need. You’re taking your profit first. And then all the rest of it falls into that.
But a lot of people, number one, a lot of real estate investors just do the shoe box or, you know, like just hand over their stuff at the end of the year to their accountant. And honestly they couldn’t give a rat’s BA you know, like about their books, because they’re just like, let me do the deals. I’m going to hand this off to them. And they’re like, why do I even need a set of books? Like I’m going to do the deals anyway. And if there’s money in the bank, I’m good. And that’s where a lot of people can get stuck into the real estate investor syndrome there. They don’t know if they’re doing their highest and best activities. They don’t know if they’re really making money. They don’t know if they’re a one deal away from going out of business. They don’t know if they’re one deal away from being financially set for the rest of their life.
Like go rental away, you know, it’s so it’s the, it’s the actual data that they get from that that really helps them decide, okay, where am I? Where do I to go? And a lot of people, like I said, they don’t have that. They don’t, they don’t think that way. And it’s not because anything against them, it’s, that’s how we’re trained. Especially if you’re an entrepreneur, you read all these books and it’s like, how do we do the next deal? Or this sounds great. Let’s go out and do this. And a lot of people don’t take that step back and they just think, I don’t even need to do any of this. I just need to go out and get the deals and everything else will take care of itself. That’s when you have a 2008 and a lot of people, you know, when the tide went out, we saw who was skinny dipping.
So it’s like, that’s where you really need to make the mental shift from real estate investor to business owner. And that’s where we kind of come in and have to break that barrier down and say, Hey, we’ve got to, we’ve got to have that commitment from you too. You gotta have the commitment of let’s dive into this together with someone on your side and say, let’s get these numbers in order. So that way you’re getting the benefit from the business. And a lot of people, that’s just, they have their head in the sand. So that’s probably what I see the most is just breaking down that barrier before we even start working on like the mechanics of what “profit first” is.
Yeah. I know for me as a real estate investor, when I’ve got money in the bank, I hate it. It’s, it’s weird to say, but I hate having money in the bank because it’s not working for me. Right. So I either want to use that money to pay cash for properties or you know, I started a gap funding business. So I gap funds some deals for real estate investors, give them down payment money as loans. So I want to keep my money working. Right. And so, you know, right now I’m trying to figure out a better way to track the money going in and out and the cashflow projections and all that kind of stuff. So from a standpoint of, obviously we could probably spend hours talking about how you help companies in different systems you set up and things like that. But what are some basic things like just from this call that investors can take, that they could implement today that would help them set up their business from a financial standpoint, better, as far as tracking and all that kind of stuff.
I would say I come from the aspect of Profit First, because everything that we do is based around that methodology because the, the, the thinking behind it is profit first, making sure that you’re healthy so you can have the company that you started. So the actual mechanics of that, and I love what you said, that you don’t like money in your account. I have a chapter specifically dedicated to that, to that in the book where I say, reserves can help you grow your business. You know, like they really can, because you want to be able to be fund-able for lenders. You want to be able to do. There’s like, I give several different things inside of that chapter. But the actual mechanics of that is Profit First is the mechanics behind it is the bank accounts. So you set up bank accounts like an envelope system. So you’ve got, I call them the golden trio. Like, I’m going to tell you I’m full nerd here. So like the Harry Potter, you got Harry, Ron and Hermoine. In star Wars you’ve got Luke, Han, and Leia, you know, you’ve got those heroes that are always moving your story forward. Well, in your business, you need accounts that are always working for you, that are always the good guys for you, which profit have a profit account, have an owner’s pay account to pay you, and then an owner’s tax to save for your taxes. So like you need those three accounts that are always, that those are just for your benefit. So those, I would set those up first, set those bank accounts,
Say those three again, I’m going to write them down and I want to jump into those. So you said
Profit account, owner’s comp and then owner’s taxes.
Okay, cool. I remember it’s been a little bit while. So, profit is obviously when you profit, you put that money into a separate account, so you’re not spending it. And, and, you know, putting it somewhere, you don’t know where it is. Owner’s comp, that’s what you pay yourself. So if you pay yourself a hundred grand a year, 150, 200, whatever that number is, and then taxes, that’s a big thing. Cause at the end of the year, real estate investors, unless they utilize commercial real estate and a lot of depreciation and rentals, they’ve got a pretty big tax liability end of the year. So putting taxes for each deal, or I guess, deals that you do at any given month into a Tax account, right?
So those are like the foundational ones. You’ve got your operational expense account, obviously that needs to pay your bills where there’s also, I would set up an income account that all the income comes into, where it’s just a holding bucket. So that way, once you all the income’s in, then you can allocate it to those other accounts by percentages, making sure you allocate to your profit, you allocate to paying yourself, you allocate to your owner’s tax. And that’s where we’ve seen kind of the life changing scenarios and real estate investors where we had a guy, you know, like I said, like you said, I’ve probably got lots of stories. Well, one quick story on the owner’s tax account is there was a guy that has a flipping company and a rental company. We implemented Profit First, last year for him and at the end of the year, he was like, Hey, my CPA just called me. You know, like she just called me and said, I have to pay taxes this year. And he said, this is the first year I’ve really had to pay them because I’ve lost money in other years. Or like my rentals, you know, like covered this minuscule gains that I got on my flips. And he said, I actually have to pay taxes this year. And it was like, and I said, okay. He said, that’s awesome. Like I get to pay some. And he said it was pretty minimal, but she told me the amount. And I went back to both of my owner’s tax accounts that I have saved from my rentals. And I have saved from my, my flipping. And it was like a couple of hundred off like that.
What he had actually saved in there. He was like, guess what? I’ve already got the money saved there too. So that’s what the power of that was for him, because he had come to us to the year before lost seventy, 80 grand was in the hole in his flipping business. His wife had started working with him and she was like, she started having seizures because it was so stressful, you know, working in there and like fast forward after this, like he’s got money saving taxes, his wife doesn’t work in the business anymore. The profit account. He took like a vacation with his family, you know, like within the last six months from that, guilt-free for taking that out of his business. So like, that’s where I might, those three accounts, like I said, it’s that golden trio. It’s like, they should always be working for you, like for your profitability, the actual return on investment for your company. If you’re working in the business that owner’s pay account and then that tax account. So just a quick story there. Like I want to just the life changing scenarios we’ve seen with real estate investor.
Now that’s great. That’s awesome. So we have a bunch of people in the background, Alan, Chris Ray, Lois, John Debra. If you guys have any questions, if you want us to cover anything, please give us a shout out here and put questions in the chat box. I’ve got a hundred questions. So I’m just going to keep going, unless you guys have questions. So I’ve been in the business 20 years. A lot of the stuff you’re saying I read in Profit First, now that I remember and a lot of these things I don’t do. Right. and I’ll tell you a quick story a few years ago. I’ve got a lot of rental properties. I had, I have a high volume flipping business. At one point we had 15 employees, a lot of rental properties, and I made the mistake of having all of that in one bucket. Right. And so I had all of my flip profits coming into one, one company. I had all of my rental profits coming in one company. And there was a point where I just realized that everything was coming in and I didn’t realize what was making money. Like I knew properties were making money. I knew, but I had employees in different, different businesses. And then I had two different businesses bringing in money and different expenses and it was all just cluttered together. And finally I made the big decision of splitting those up. So that helped with liability with having my rentals different from my flipping company. And then once I did that and I started segregating previous years, I realized that one of the companies was kind of carrying the other company. Right. And I didn’t know that for several years until I did that. So that was one big breakthrough for me was just splitting those two things up. And now it’s just an evolution of like coming up with better cashflow projections and all that. So as you know,uyou know, high, high volume investors have a lot of deals going on. So if I’ve got two closings next week that are going to bring in a hundred thousand dollars and those don’t happen, then I need to know like, you know, what I need to do, right. If I don’t have that money to cover the, you know, if I’m using that money to cover expenses and things of that nature. So when it comes to like cashflow projections and figuring out how much money to keep, you know, in certain places, how do you, how do you go through that with, with investors, making sure that they have money. Cause, cause even, even though you said you put money into those accounts, that’s not including if there’s overages on properties. Right? So if I borrow, you know, a hundred grand from an investor to buy and fix a property, that’s going to cost me a hundred grand and it goes 20 grand over budget, where does that money come from? So I know I’ve kind of threw in a lot in there, but how do you, how do you manage the cashflow projections of money coming in and out? And that type of thing.
Now we’re getting to the real estate specific stuff. So I love this part. It’s we, I always set up or have people set up like an OPM account for other people’s money. So if you get a private lenders funds, it goes into that account then, you know, right away, like if you’re going over budget or whatnot, that you might need to pull from your operational expenses, or then we set up, maybe a fund that’s specifically for that. If you go over consistently, you might need like a buffer account, like a repair buffer account that doesn’t go with your operational expenses. But that’s where I love the profit first motto that I hear all the time, like as a profit first professional, when in doubt, add an account, like we need an account that might take care of this specifically. Like if you run into this scenario over and over again, then we need to build that into it.
And we either need to number one, get more efficient with your rehabs or number two, you know, like we need to make sure you’ve got a buffer in there if you do go over and don’t get enough money. And that’s where that would come from. Also for the projections, because that was another thing too, is we’re always, we’ve got clients right now where we’re constantly meeting with them, like on a weekly or bi-weekly basis to say, okay, what are you projecting to sell? Like in the next, in the next month? Like January, how’s January going to close and how’s February looking right now. So that way we, you can see, do we have enough, even if you didn’t close these properties to cover the cashflow for those months, you know, like making sure you have the operational expense that you need, making sure you’ve got your owners pay, you know, and making sure we have that. So that’s one way that we do it too, is that like with the service we provide is we help them project that. So if you don’t close those hundred thousand dollars, you know, like in, in the property profit or whatnot, then we are saying, okay, if we’ve been running profit first, then you’d still be okay because we’ve planned like, okay, if we haven’t for this month, if we don’t have this, there are some reserves either in the vault account or whether it be just operational expenses has, you know, a two month, three month buffer in it that we’ve built up to that point. You know? So that’s where we were working with a lot of people to do that, to say, okay, we know real estate, we know that deals don’t close all the time when they’re supposed to close. So we’re going to need to build that buffer for you.
And you’re going to need that. So you can sleep at night if these hundred thousand dollars properties don’t close, right, when they say that they’re going to. So that way, if they get pushed back a week or a month, then you’re like, okay, I can still cover what I need to do and sleep at night without going crazy. And honestly too, that we’ve come into the situation where, you know, that happened before. And then it was like near the end of the year. And we got the tax estimate for someone and like their tax account had like over a hundred thousand in it. And they only had to pay 40. So like he was obviously cause he did, he wanted to save aggressively for taxes. He only was doing wholesale deal, but like he had bought a couple rentals. So it like took his tax liability down and some other things that he did.
So he had money there and he went through a period of like, okay, all of these closing got pushed back to the next month. He had about a couple months worth of operational expenses right in that account. So we were like, Hey, we can map this as the buffer, you know, like, so that way you have the money that you need. So sometimes it’s, it even happens through just the normal process of like from profit first. There’s always the money that we need to make sure is there for those purposes. And that’s why you have to be very intentional. That’s why in our business, we more work with people on their business then necessarily in it where it’s like, this is what you need to be thinking about. You need to be thinking about a month, two months, three months down the road. If these properties don’t close, you need to be thinking about where those funds are. Like you said, like if one company is dragging down the other company or if you have, or if you’re going over on rehabs consistently, like how much do you have into those properties versus your loans in total? Like, do you have enough to cover everything right now? Or have you dipped majorly into your own funds? You know, it’s like those types of things that you always have to be asking yourself. So that’s where I see, you know, some of the things that we’ve done to implement to make sure people have that stability during times when closings get pushed back. Cause they’ll always get pushed back, you know, 95% of the times, it seems with a lot of these, but then you’re also saying these are the things I need to look at to make sure I’m planning overall that I’m getting enough money. Maybe I need to go back. And I only got 60%, but I really need 75% now or, you know, whatever I’m comfortable with, you know, and whatever I can push to the max for the LTV. So those are the types of things that we looked at with people.
Yeah. Good stuff. So so let’s talk about these accounts again. So owner’s comp account. That’s one thing I had a question on. So when I pay myself, it just goes directly into my personal account. Is that okay? Or, or why if not, why would you want a separate owner’s comp account to go into an account that you’re probably going to pull from any way to go pay personal expenses?
I do that personally. And the main reason is I’ve saved up several months worth in there. So in case the business, everything tanked and everything else went down, I would still be okay for several months, you know? And that’s what we do with other people. There’s several investors right now. They, it’s the exact same scenario that you just said. They’re like, okay, I take from the business, you know, this is my weekly paycheck or this is my weekly draw or monthly draw. And what we do there is usually they want to make sure they’re taken care of. So in several of those people that we’re working with, they have several months worth. One guy has like four or five months. Cause he’s like, I want to make sure that she know that my wife knows that I’ve got several months saved up no matter what.
So that’s been one big benefit is the peace of mind. But then it’s also just to make sure if, especially if you’re in the business doing anything that you’ve got an account that you’re like, okay, this represents what I do in the business. And so maybe in the future, if I’m not working in the business, like at all anymore, I’ve got a CEO or a COO that’s just fully running it. And I’m just strictly in the owner’s box that what I’m putting into that account that’s clearly defined, could then go to another person. If I have the funds, like from my profit and from like the actual business to be able to sustain what I still need, you know, as the owner. So that’s where that account just helps clarify and helps honestly, most entrepreneurs don’t even pay themselves. So that’s where if you’re not paying yourself, you have to have that golden, one of those golden trio accounts that’s specifically for the work you do in the business. So that was kind of the answer from if you’re not doing any deals, if you’re doing a thousand deals, you know, so.
Okay so just to, just to clarify, so let’s say you pay yourself 10,000 a month, that 10,000 would go into the owner’s comp account. And then you would take, hopefully, let’s say, I don’t know, 8,007, whatever the number is, take just a, just a portion of that money, put it in your personal account, your own personal operating account, and then try and keep some of that money in that account. Is that what I’m gathering?
Right. That’s what people have done and where we want to make sure you’re building a little bit of a buffer for yourself too, but it’s honestly a representation too, of what you put into the business and what you, what you’re working on. So that’s why that accounts there. And for most people it’s an account. Like I said, that’s dedicated to making sure you get paid. So income comes in to the income bucket. Like I would start, you know, set up an income account as just a holding bucket. And then let’s say you make a hundred thousand dollars on those properties. Maybe you do 10% to owners pay. So 10 K would go into the owner’s comp you know, 10 K maybe to profit. If you’re doing 10 K or 10% for your profitability, then you know, if certain percentage to your taxes, then certain presents your operation, your operating expenses. So that’s how the flow would look. And then you’re making sure that you’re covered with your owner’s pay. And then you could have a little bit of a buffer in there. Okay.
So that, yeah, that leads to another question. So, you know, for, for owner’s comp tax, you know, all that kind of stuff, obviously profit varies from month to month, but do most people put the same amount each month in, into those? Or do you look at it each month and say, okay, this month we’re going to put this much in these buckets because obviously like, you know, in real estate, investors can have a hundred thousand dollars months and then they could lose 20 or $30,000 because they have overhead and they don’t close a deal or, you know, or something like that. So does it vary from month to month or do you recommend look taking a projection based on past data and then just doing it even keel every single month? Because for me, like I’ve read Profit First. Right. And I was, like, this is genius. This is great. I’m going to implement this. And then I implement like maybe 10% of it. And then I go start doing more deals and doing my thing. Right. And so for me, I think reason I, I haven’t done this yet is just setting up multiple accounts. I’ve got a team that can manage this, but just mentally having to shift money around and figure out each month how to put money in different buckets and things like that could be a little bit too much mental capacity for me because I’ve got so many things going on. Right. So how do you, how do you structure it with your people? Is it consistent every month or do you look at every month and change it based on what happens that month?
So for what we recommend and how we guide people is when we first start working with them, we run a quick, quick instant assessment. Where are you right now with your percentages? Not with how much do you know, like how much like dollar amount, but where are you percentage wise with your, how much you pay yourself, how much you, you know, versus how much you’re bringing in and then how much you’re, you know, going out the door. And then those, if you remember in the book, those are called caps, the current allocation percentages, like what you’re currently doing. And then there’s called taps, which are the targets. Those are those target allocation percentages. So what we do is when we first start working together, we say, here’s where you are currently in your percentages. So no matter if you make a hundred thousand this month and lose 20 grand the next month, if you’re running off a percentage, then you should be covered for what you need. If you know, like versus the time that you put, you know, like over the time period that we’re doing this, which is three months in quarter chunks. So that way we say, okay, your need this as your current allocation percentages for this time period for these three months. So let’s do that. Here’s where you are. Let’s like, raise your owner’s comp by 1%, let’s lower your operational by a couple of percentage points here, you know? So that way you’re moving towards what your target should be because the target gives you something to shoot for. So I would say it’s not a dollar amount, it’s more of a percentage that you are setting up and you’re, we’re doing an an analysis of like, where is that now? Where can we reasonably shoot for like an, a rollout plan and make sure like, okay, this next quarter, we’re going to increase it by this much, you know, like for your, for your golden trio accounts.
And then we’re going to decrease it by this much for like your operational expense and then getting closer to that target. So then we’re constantly readjusting that every single quarter of like, okay, here’s where I am, you know, for the, you know, for where I need to be. And I need to constantly move there every single quarter. So that’s where we set that up. And then we, then we run that with people and to make sure they have what they need, because that’s where I’ve also seen in a lot of real estate investing businesses, because we work with wholesalers you know, landlords. I, everything in between that, if we take it in that time period, it really helps the owner say, okay, this is where I am and where I want to be. And it’s giving me that peace of mind, like if something doesn’t close in January, but it closes in February that the percentage is still going to carry me throughout this quarter. No matter if I make a hundred grand this month, but lose 20 grand the next month. It’s like, okay, well then if you’re a real revenue then was 80 grand, because that’s what you made between those two months because of the percentage we’ve set up, you’re going to be taken care of your business will be taken care of. And we’re making sure that you’ve got exactly what you need. One of the other things too first is we’re making sure even if that percentage, if that percentage of what you’re taking for yourself, making sure that that actually covers what you need to, because you are the most important person in your business. A lot of people when they first started, unless they come to us and they’re just in the owner’s box already, but they want a better system, but like 99% of entrepreneurs are like in the trenches, the most important key employee. So we have to make sure their need numbers, at least taken care of. So like, what is that percentage? And then we have to make everything else fit in around that. So that’s where we go in and say, what percentage do they really need to be at? What are we projecting for this quarter? And let’s see how close we can get to the target for that. We said at the beginning of the time we worked together.
So to summarize, it sounds like it, you try and make it fixed every month or every quarter, but then you readjust as needed. Correct?
Exactly. Every quarter. Then we are readjusting. Okay. Here’s where we actually ended versus where we wanted to shoot for, for the target. Now we need to readjust again, because you don’t want to, like every single allocation be adjusting your percentages up and down. It’s like, well, then no, that doesn’t help you see if the business that you’re running is actually profitable. And if it’s where it needs to be.
Yeah, good. Like it Alan asks, how much do you save for taxes? 30%, 40%. What’s a number I’m guessing. It varies based on the person and their situation.
I would say there’s a big difference between the selling companies, you know, like wholesaling, hotel, and retail, and then the rental companies and what we base percentages on is real revenue. So your actual property profit. So in, you know, like a rental in a flipping company, you know, like you make a hundred thousand, but you’ve got your operational expenses too, which could be 40, 50, 60, 70% when you first started, you know, the process, it could be a pretty high percentage of what your operational expenses are. So you don’t have to save 30 or 40% in tax just because your operational expenses cut down that real revenue, like in what you’ll actually own taxes. So like 15% is where we start people. That’s what Mike in the original book starts people at. And honestly, I’ve seen that for flipping businesses and stuff to 15% of the real revenue of like your actual property profit has been good because you’ve got the operational expenses that are chipping away, you know, that help lower your liability.
Now, rental companies, we actually start at 5% because the, you know, like on that, we want to save there to make sure that if they have any tax liability it’s taken care of. But a lot of times people come to us, especially if they have multi in the commercial deals, or if they’ve got the multi-families or just rentals, they don’t need to save as much. And usually they end up if they have any money in that account, that’s like extra. They’re just putting that straight to profit after, you know, it’s almost like another profit account, but we want to save something for taxes on the rental side too. And that’s where we’ve seen. That’s what I put in the book too. Like the starting percentages for taxes.
Yeah. To be completely transparent. I put no money away for taxes and it’s, and it’s because I’ve got so many rental properties that I get a lot of depreciation. And I just, I got into commercial real estate a few years ago. I put a lot of money into a building and put it into different portions into use. So I was able to use bonus or accelerated appreciation, whatever you want to call it on those renovations and expense them in the first year that I put that portion of the building to use. So for the last, you know, couple of years, I I’ve had a huge write-off from those. And so that’s another reason to probably play pro I, that I would say, and you probably say it’s situational landlords. They have rental properties. They may not be making as much on the bottom line because they’re not flipping and making huge chunks of money, but they also have a lot of depreciation. So they probably don’t pay a lot of taxes. So to answer your question now, and it’s probably situational, but yeah, it’s something that, you know, David or whoever’s doing your taxes should be able to advise on. So from a standpoint of, you know, their CPAs there’s accountants, there’s, you know, there’s different professionals that are kind of similar to what you do, but different, right? I mean, you know, so tell us the difference between that cause like, you know, for what you do, it seems like it’s more structure than anything. It’s making sure that you’re structured correctly, where you have the money where you need to allocate it, that you’re not spending money in different places you don’t need to. So for me, and tell me if I’m wrong, it’s more of an organizational system so that, you know, if you’re profitable, you can make decisions better. That kind of thing. Is there anything that you do that actually saves real estate investors money? Cause that’s, I mean, that’s a big thing with real estate investors. They’re all about the money. How can I, if I put a dollar in something, how do I get five to $10 out? Right. So for something like what you’re offering, it may not sound super sexy to real estate investors because you know, they’re all about the return on investment. For me, I know that cause I’m pretty sure I’m getting ready to hire David for my company is, you know, just paying that money and having peace of mind to know that I’ve got money is worth it. But do you also save money for real estate investors?
Well, define save money because if they’ve never had profit account, they’ve never paid themselves before they’ll already be saving money in those accounts to make sure that they are paying themselves, that they don’t have to now pay the IRS so they have to like go to operational expenses? It’s making sure that the business owner is on the right track. That’s what our business is about profit strategy and making sure that we are that guide to say, here’s how you need to make sure that your company is structured. Like you said, structured to make sure that you’ve got that. So in the sense of that, I could say the bookkeeper on your team would be like a nurse. Your CPA would be like the specialist. You know, like the surgeon, you know, someone who has got a very special, you know, like special thing that they do, then you’ve got us who is the CFO. Who’s like the doctor making sure that the system in total is running and that you’re healthy. And that way we know like, okay, where you, that you’re healthy, your business is healthy. And that you’re on the right track for where you want to go and giving that direction where we are. The one that we come in and say, we are that CFO that says, we’re that guide. We’re the one that is working on the business with you, you know, cause the doctor, the doctor, isn’t the one that checks on, you know, like checks on you every single day and like is doing the transactional stuff like inside of the books. They’re the one that says, here’s the plan, you know, like here’s how we either get better. Or if you want to increase your health, you know, like as a naturalistic or what not, to make sure that you are on the path to even a greater health than where you are right now. So that’s how I would say the analogy is of where we fall inside of the structure of like the financial world.
And I guess the other thing that I just thought of is if you’re putting money into these different accounts, instead of it going to things that don’t, that just kind of get thrown away, it goes in those accounts. So for instance, let’s say, you know, you make $20,000 in a month and you think there’s a bunch of money in there. So you go, you’re, you’re more, I don’t want to say frivolous, but you’re more likely to spend it on XYZ, right? But if you take that money and you put it into your profit first account, you put it into your, you know, all these different accounts, you really have to look your numbers more and you, and you have to say to yourself, when you’re start spending money, is this something I need to spend money on? Because I may, you know, once you put the money into those accounts, you may not, you may realize you don’t have as much money as you think. You still have to pay taxes. You still have to pay yourself. You still have all these things. So I guess in the end, it really does save you money. Cause it really, it really makes you analyze your money more.
It makes you analyze your money more. And one of the things, that’s why we only work with real estate investors. So we’re able to analyze other things too. Like once we get the foundation of profit first, we think of profit first as the whole system. So now we’re going to say, how much are you making, like per your flips or whatnot, where did they come from? And is your marketing the most effective, you know, like, are you using the best marketing channels? Like, do you have those KPIs set up? Because like sometimes we come into their people don’t have any KPIs whatsoever. And they’re like, you know, spending money on direct mail and TV and this and that. And the other and TV might be like going gangbusters, giving them a 10 X return, but direct mail is giving them one X, but they’re still getting deals or leads from it. And they think it’s really good. But then it’s like, well, no, if you poured more into this, or if you, instead of direct mail, why don’t we try a different marketing channel here? You know, like you need a better return than one or two times or go definitely going in the hole. So it’s like, that’s another way that we come into in psych, we do the full analization of where you are, because we want to make sure that you’re, you’re able to set your up yourself up the best for profitability. So it’s all ties into your profit. So that’s another way we save money too, is by saying maybe you’re spending money in areas that you really shouldn’t even, you think it might be profitable and a marketing channel that is working, but then the numbers are telling you. Nope, not really.
You, you jumped into KPI’s as far as like the marketing channels are concerned as well?
That is one of the things that we like to do as far as on the backend, once we’re, once we’ve got the profit first system up and running, then they’re the people that we’re working with actually have a handle on where everything’s going. We set up like a CFO dashboard where it’s like, here’s the, here’s where your profit is, you know, per deal. Here’s where your marketing source came from. And like, here’s the different areas that, you know, that have actually returned an investment on you and what that return is, and you know, the different exit strategies to like, so a lot of the KPIs that we sent around are all around the profitability, you know, a lot of the deals or whatnot. So that’s where we dive into the one specifically on the finance side.
Yeah. Awesome. I’m going to see if we have any more questions. We got a bunch of in the background there some experience investors that you guys have, any questions. If you want to raise your hand and be a part of the conversation and jump in the room, raise your hand. Love to have you, but if not, that’s cool. Let’s see if there’s any other questions before we start start wrapping up. It doesn’t look like we have any questions. All right. You guys are losing now. You got David here. He charges for his time. So I guess if people want to reach out to you, let’s, let’s finish there. You know, we’re, we’re getting ready to hire David for, actually one question I do have, so we talked about, or I think I talked about one of my companies, so I’ve got at least five different companies, right? So I’ve got, and they all have to do with the real estate. So someone for myself that would, would hire you, I’m guessing you would probably want to treat each company differently and have three accounts. So when we talk about profit account, owner’s comp account, would you do that for every single entity or would you figure out how to maybe combine them together where you’d only have to have profit and owner comp or, you know, maybe just have these three accounts for all the, all the businesses
That’s very customized to the client. So we have some clients where they have like six entities and he set up five accounts for each entity. You’ve got another guy has like seven entities and we set up like just the five accounts and he’s like funneling all the profit, you know, like he’s trading his real revenue as like the net profit from each company into like a master account. So it’s very tailored to who that investor is and what their different entities really are doing. You know, like if it’s the same type of business, if it’s totally different, how we want to treat that. So it’s very, that’s a part of the analysis that we do upfront in that first 90 days, making sure, you know, like where are you right now in the entities? How do we want to structure this? You know, getting the game plan together to make sure that we have the best possible setup for you, that doesn’t create confusion. That actually helps you get a handle on where your business finances are.
Yeah, absolutely. David, where do people find you if they want to hire you, if they want to have a conversation with you? I’m sure you give free consultations just to kind of, you know, answer questions and make sure you guys are a good fit. Where can they find you?
Simplecfosolutions.com. There’s an apply button right on the homepage. And or if you go to simpleCFOsolutions.com/apply, and then the ball rolls from there, then we have that upfront call where we’re getting your, you know, what your situation is and what we can help with, seeing make sure that we’re the right fit. And then we go from there,
Phenomenal. This is a great call. I got a lot of golden nuggets. Hopefully everybody else that was on the call or listening on Facebook live got a lot of great stuff too. I’d like to have you in our mastermind group, I’d mentioned mentioned that to you. We have an operations called the four Thursday of the month. So if we can’t get you on next week, maybe the week after, I will tell the group to listen to this call. And then if you don’t mind maybe jumping on and answering some questions, cause this is some high-level stuff. If you guys are, it doesn’t matter if you’re new in the business or if you’re an experienced investor, setting things up right in your financial, on the financial side can be the difference between you being in the business for a long time. And you potentially going out of business because there’s been times I’ve been in business 20 years. Now. There’s been a few times where it got Rocky where I’m like, I don’t know where I am financially. The money’s not there. Where is it? And had I set things up better than I wouldn’t have been in that position. And I may have you know, at that time, and I may have been able to make better key decisions throughout the months and years that could have led to a much better result than you know, than it was at the time. So great stuff, David, hopefully people reach out to you. I think it’s something that’s very needed and we’ll connect soon for those of you who are on zoom here. Thanks for joining us. And we’ll talk to you all real soon.
Awesome. Thanks Tony.