Welcome to Passive Real Estate Investing. I’m your host Marco Santarelli. Well, we have a special guest today because he has taken a book concept and rewrote it specifically for real estate investors, which I’m really excited about. In fact, I didn’t even know this book existed until two days ago. And so with that, I wanted to bring on David Richter. I hope I pronounce that correctly. Yep. David is an experienced real estate investor that took part in over 800 deals, which is amazing. And he’s everything from whole tailing to wholesaling, to retailing. He rented properties. He’s done lease options. He’s done over financing. He basically did every exit strategy under the sun when it comes to real estate. And so he’s a very seasoned real estate investor. But what he did is he took a concept from a book that I read years ago called Profit First. And many of you being entrepreneurs and business owners, professionals who listen to this podcast have probably heard of the book, or maybe even read the book, but he took it one step further. He took that whole system, that whole concept and created it for real estate investors. And so the book is called Profit First for Real Estate Investing.
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And with that, David, welcome to the show.
Marco, thank you so much for having me it is an honor to be here.
Well, I’m glad you’re on. This was interesting because I’ve never heard of this book and usually I’m right on top of all the new books that are coming out. Not that I can read all of them. I don’t have that kind of time, but I found the book Profit First. Very interesting. And the fact that you took it one step further and adapted it for real estate investors, I thought this is really cool. And so I have to be honest, I only went through a summary of the book. I haven’t read the book cause it just came out. Is that correct?
Yeah, it just came out this month.
Okay. Well congratulations. Thank you very much. Let’s start with you. Tell our audience a little bit about yourself and your journey to get to this point. And then let’s start talking about things like mindset and the, how the formula works. Cause I just love how profit first flips the profit formula backwards up on its head, which is kind of difficult for, I think a lot of people to understand, but I don’t wanna get ahead of myself. Let’s talk about you for a bit.
Sure, sure. So I got into real estate investing back in 2012 because someone, when I was in college gave me a good friend, gave me the book, Rich Dad Poor Dad, Poor Dad. So it all started with a book for me and that’s where my mindset was changed. Just like a lot of people probably listening to this has probably read that book or have heard of it. Robert Kiyosaki wrote that and it was just an incredible book and that’s where I started reading a whole lot more on real estate investing and just business in general. And that’s where I also, during that time bought my first house on 12-12-12. I’ll never forget that day. And it was, you know, it was a fixer upper, fixed it up, rented it out for a while, actually lived in it after, uh, we had rented it for a little bit.
So we cash flowed it then lived in it then actually at least optioned it at the end. And then the person who was in there exercised their option within like six months. So it was like a great deal that I did on that first, uh, that first house. So I was, I was hooked. I’m like, I need more rentals. I like this passive income. Like I really like this. So I actually started working with an investing company in the area where I was living and we start, we grew that company from about five deals a month to about 25 or 30 deals a month. And you know, doing 300 deals a year between all those different exit strategies that you were talking about. We were doing everything under the sun and it was a lot of fun. I sat in a lot of different seats there from acquisitions to selling the properties to property management and managing over a hundred of our units, you know, and like the lease, we had a bunch of lease options as well, too, and a bunch of rentals.
So I got to sit in a lot of those seats and one of those seats near the end of my tenure, there was like five years that I worked there of warning hands on experience, doing a bunch of deals, like building my own portfolio too, cause I’d buy some from the company and like building my own little empire there, which was a lot of fun. So during my last one of the last seats I sat in was the finance seat and that’s kind of what first opened to my eyes of like knowing those numbers really helped me be able to understand from all the way from acquiring that property to selling it or renting it and like through out that, how those tell a story. And if I know that story, I can influence that story and I can make the numbers better or worse, you know, like depending on what we do, you know, like with the actual data that we use.
So that was just very eye-opening for me to see those numbers. And also to be honest too, we were running at like 25 30 deals a month and that was like some six, seven figure months for us. And we were also having expenses of like six, seven figures a month too. Like we had built ourself into our own rat race, even having rentals and doing active flipping and wholesaling and other things as well too. We had built ourself into a rat race. So that to me, once I saw the numbers was like, why are we doing this? Like why do we have 25 employees? Like why are we just spinning our wheels if we’re not actually moving forward? So that’s what got me more interested into the financial side as well too, or like started opening my eyes. But it’s been an awesome career in real estate. I’ve loved every minute of it from there. I was actually able to sell some rentals and move across the country. I could tell that story. That story is more of like how I got into profit first, but that was Robert Kiyosaki’s book. That’s what got me started in down the road. And what got me excited about real estate investing.
Well, congratulations on all that. In fact, Robert Kiyosaki’s book is, seems to be a cornerstone book for a lot of people that gets them, you know, into real estate investing or at least gives them a mind shift, a mindset that allows them to transition from what they’re doing, which is typically nine to five to be becoming entrepreneurial or in an investor. But you know, your story’s great, but I’m curious about the bridge. I mean, I don’t know when you read profit first or what, you know, what made you pick up the book and make this transition. For me it was years ago and I thought the book was very interesting because it’s a different model. It’s a twist on the existing business model. What was it that you liked about the book and what caused you to write Profit First for Real Estate Investing?
So let’s go from, at the end of that five years, I was working with that company. I had built a little portfolio, started selling some of the properties and could live anywhere. And you know, I, you moved out of state from where I was living and moved across the country, be closer to family. So experiencing that financial freedom finally, you know, of like being young and doing that stuff. So I also started working with another investor cause I like partnering up. It just, you know, a new market wanted to get in there, start doing deals. And so I started working with this investor and the first thing I said to him was like me see your books cause I knew the numbers don’t lie. Like data is gonna tell me if this is he, like you could tell me anything, but I, I let me let the numbers tell the story.
So I dove in and everything was a mess. There really was no books to look at to see where your numbers. So that was the first thing we did like cleaning those up. Took a, a couple months, once those numbers were in place, told an amazing story. He was very cash healthy. He was very, you know, very strong, but he also had sunk a lot of his money into his own properties too though. He had a portfolio of properties and probably about 25, 30 at the time, maybe no, maybe around 40 properties. And he was under leverage on them. Like he had a loan to value on his properties of about 30%. So he was like, well there’s where all my money is, you know? Like, because he was thinking he should have, even though he was good on the cash, he thought it was like, where is all the money though?
Like where it, I don’t understand. So once we dove in, we were able to find that he was able to refinance out like up to like, I think he only went to like 50 or 60, but it was still a significant amount of money. He put back into his pocket then to go out and buy more rentals and you know, start cash flowing even more. But I remember once he had those numbers, he told me like, this is transform my life and my business because I feel in control of my business and the cash is nice too, you know, like having that cash. So that to me was like super eye opening of like how many investors are missing out on this feeling just because they don’t have that control or like they don’t know those end numbers or they’re not getting a clear picture of that, whether they have rentals or, or whatnot.
So that to me was huge eye opening. So that made me call one of my mentors and say, Hey, I’m thinking of starting a business to help, you know, real estate investors with their finances and just taught, you know, be able to speak on their language cause I’m a real estate investor and be able to uncover stuff like this. And he was like, yeah, that sounds great. But have you read the book profit first? And I was like, no, no, I’ve never read that book. So that’s how I got introduced to it was from a mentor. So I did, I downloaded that book that night took 10 pages of notes, read the whole thing in one evening and was like, here we go. This is it. This is a framework to handle the cash that you get in. I don’t care if you have property management, that’s dispersing money to you.
I don’t care if you’re flipping or whatever you’re doing. If you receive any cash in, this is a great system to know what to do with that money, to be able to do what you want with it, whether it’s just pocket it and be profitable or whether it’s to invest it in more properties. That’s where this gave a framework for that. And I was like, this is it. This is one of the pieces to the puzzle that I want and to incorporate in real estate investing businesses. So started my fractional CFO business. That was a, my, a major part of it was the cashflow system started seeing it work in rental companies in, you know, active companies and started seeing the actual returns on, you know, the system and people actually getting outta the rat race. And that’s where about a year later I went to Mike Michalowicz as the author of Profit First and said, Hey, this thing has been working in the real estate investing industry.
I love this industry. I want to get this message out to more people. What do you think about me writing the book Profit First for Real Estate Investing? And he’s like, I’ve been to events. I think this is great. I think that would really be helpful. It it’s different from the original book because you know, like it’s asset based versus like a services or whatever business. So he was like, yeah, why don’t you tackle that? And so we kind of, we partnered up on that and I was able to write the book this last year and get this message out. Finally took 15 months of creation to get out the door, but it’s finally out the door and that’s kind of the progression of why I want it to get the message out in a book because I can’t help everyone with our company. Not everyone fits with our company and or not everyone is ready for that, but everyone can get a book and read that and get that message.
And to me, profit first was another book in the, in the same category, almost like a Rich Dad Poor Dad, poor dad, right? Where Rich Dad Poor Dad, poor dad was here’s change your whole mindset of out. You don’t have to go nine to five and like just have that. You could have passive income as well, too, where this said you don’t have to be a broke business owner, you know, struggling deal to deal. Or like if you’re upside down or you’re not getting any disbursements from your property management or whatnot, like this is how to help fix that and how you can get a handle on it. So that to me was just another eye-opening book as well, too.
Yeah. Beautiful. Okay. So I’m getting a small explosion of questions in my head here. <laugh> the first one, very simple. Is this the profit? You mentioned you call it framework. So is this framework ideally suited for people who are in the real estate business and it’s transactional, meaning they’re, you know, wholesalers or flippers or is it well suited for the passive real estate investor? Like the name of the show who are essentially passive buying hold, sit back, let the management company manage it type of investor.
I would say cause in the book I do handle both. So I would, there is a portion of the book there for the active, like the flippers, the wholesalers, but then there’s also, here’s how to set it up. If you’re just a passive investor or a long term buy and hold, like here’s what you should be doing. You know, like from that perspective, because that’s, I get that we have a Facebook group profit first for real estate investing. And I do, I got two questions this week around that I have a property manager, how do I handle dispersing? You know, or the framework? How do I handle the money if I’m getting dispersed money to myself, you know? And I have people asking like that pretty frequently inside that group. So yeah, I mean it’s at the end of the day, the whole system is about making profit a habit of like actually using that profit for what you want and what you want to do with it. So if you’re getting disbursements, you’re still handling cash. It just gives a framework for giving you ideas of what to do with that cash once you have it.
Okay, so before we start to lose listeners in terms of what is this framework, cause we’re gonna dive into it here in a minute. Yeah. I just want to clear the air is not an accounting book, right? It’s not about accounting.
No, <laugh> not at all. Like my background, I’m like the accidental CFO. Like I, if you heard my whole background from what I talked about, there was nothing CPA, accounting, bookkeeping. Like I don’t have any formal degrees like that. The people on my team do and like whatnot, but like I like this book appealed to me because I had read Rich Dad, Poor Dad and I saw how profit first was almost the continuation of it, of like, here’s how you pay yourself first. And like doesn’t deal with the accounting lingo and the jargon and all the, the language, you know, that accountants speak and bookkeepers speak. So it is, it speaks more to the entrepreneur, to the real estate invest of like here’s how to manage it. And you don’t have to know anything about the behind the scenes numbers. This is just all about managing the cash, so. Okay, cool. Yeah. Speaks to that.
Great. Okay. So in the book you mentioned that the real estate rat race is real and that just stuck out. That’s almost like a trademarkable, you know, phrase, but what do you mean when you say the real estate rat race is real?
The real estate. That was where I lived it in that company where we were doing those deals of like 25, 30 deals a month. But having the expenses be the exact same or more in a month, it’s like, why are we doing so many deals? We are literally getting up, killing, eating, and then having to do it all again next month. That’s why I love rentals too, because usually once you get to a certain amount, you know, like it starts evening in itself out, but upfront, it can be pretty tough if you’re only buying one property here and there, you know, up front. But that’s where I saw the real estate rat race. I’ve seen it in people with rentals, people in fix it, flip or whatnot, just if they don’t buy right. Or if they bought a bunch of good properties and now this one’s a stinker over here and it’s like draining the cash from the other place.
It’s like, let’s get out. We got into real estate, especially if you’re in passive investing to get out of the rat race of like the W2 jobs or whatever you might be doing currently or from the rat race, like a wholesale company or a whole tailing company. Like if you’re doing like a flipping company or whatnot, that is a rat race and itself of where you have to build on what, until you build the system and build a team. You’re a part of it where the passive side obviously is a lot more conducive to getting out of that rat race. That’s why we always say, if you’re active start buying rentals, if you’re in rentals right now, make sure that you are buying correctly on each one and actually packing you know, cash flowing. So you’re not having to get back into the rat race or like take away from what you’re doing right now. So yeah, it’s definitely something we all the time in, in real estate companies is that, that real estate route race.
So related to that, I think in the book, you mentioned that there’s a difference between being a business owner and a real estate investor. How would you describe the similarity or maybe better yet the difference between those two?
Overall, just the high level, a real estate investor thinks deal to deal. The business owner thinks the out the business overall where knowing, okay, do I have the right people in the right seat? Do I have someone for my, you know, to acquire their properties? Do I have someone to help me with the finances? Do I have a property manager who’s handling the day to day phone call? So I don’t have to do that. You know, like making sure that’s the business owner who helps themselves get out of their day to day what they’re doing, you know, to make sure that they’re actually profitable. And they’ve got the time freedom that they’ve wanted, where the real estate investor is more the, I feel like the hustle, the grind, or one more deal, like one more like, let me go, do, you know, like, I’ve just gotta keep doing this and then everything else will work out, but they’re keeping themselves right in that. So they business owner has the team, or has the systems, the property manager, those types of people versus the active investor.
Okay. That’s fair. I always say that you should treat your real estate investing business as a business. I oh yeah. I actually look at real estate investing, even though it’s investing as a business as well and treat it that way. Not as a hobby, not as a time deal, but you know, have systems and frameworks in place that allow you to operate that profitably and efficiently. So we’re talking about two slightly different things, but the principle, you know, mm-hmm <affirmative> is well taken there. So on that mindset, is there such a thing as a, you know, a profit first mindset, especially for a real estate investor?
Well, this is where the book, I feel like there’s two big parts to the book. There’s the mindset portion of profit first. And then there’s the practical application, which makes the mindset reality, which is what I feel like we hear this mindset and I’ll go into that mindset, but we hear it from like Robert Kiyosaki and like pay yourself first. So the Richest Man in Babylon, like portion of all I have is mind to keep. So that’s where profit first has its own. It’s its own flavor of that too, for the mindset where we get a formula real estate investors, we love our formulas. So sales minus expenses equals profit. That’s what we’re fed usually from accountants or bookkeepers are like people that don’t run a business, you know, they’re just there to, to manage your dot dollars and cents. So sales minus expenses equals profit.
Sounds pretty, pretty safe too. Like, Hey, I make a sale or I have rental income or whatnot. And then I pay everyone else and their mother, and then whatever I have left over at the end of the day is my, you know, is my, is for money to keep. But that if we get into that habit and into that mind frame, then we won’t get to where we actually want to be because then everyone else takes priority over what we actually started our business for. That’s when it can become a cash gain monster. And like the business can just, you know, become, get stuck in the real estate rat race. So the profit first formula mindset is sales minus profit equals expenses. Meaning I make a sale or I take, or I have rental income or whatnot. And then I take that profit first.
And then what I have left over is for expenses, you know, like making sure that I have everything and they’re just building it in first. So if you’re doing a preforma for a rental property, it’s making sure that actually profitable before you buy it. You know, like making sure you have that bottom line after your P.I T.I, after your capital expenditures, like after all that, like making sure you actually have a bottom line. So that’s where, like I said, though, I feel like we get fed the payer self first or whatnot as real estate investors from a lot of different avenues. So yes, this is one big area of like profit first takes it forward with that mindset. But then it has a practical applications behind it to back that up to be like, okay, this is how you pay yourself first. This is how you make the, the formulas and the mindset of reality. So that’s why I also like, because it’s paired with that with the mindset.
Yeah, that is a key thing that you just said it. And I wanna make sure that people listening to this don’t miss it, or it just passes them. You know, cause they’re driving or they’re listening passively in traditional business. The formula is essentially sales, which is your revenue minus your expenses is left giving you your profit, right. Profit is at the end of that formula on the other side of the equal sign. But essentially you flip it over and this is the formula that changes everything because now it’s sales or revenue minus your profit equals expenses. So now the way I look at it and I, I, this is the wrong word to use, but I’m looking at it like, okay, if sales minus your profits equals expenses. Now you’re just trying to shoehorn in all your expenses into what is left after you’ve deducted your profits.
I have to admit that when I first read the title of the book profit first, the first thing that went through my mind and the only thing that went through my mind is the subject of the book is that profits should be made a priority. That’s why the book was called profit. First. I thought that was the, uh, the gist of the book is make profits, your priority, focus on whatever you need to do to make profits your main focus. But the reality is is you it’s what it’s really saying is pay yourself first. You need to make profit the priority, generate your revenue or your income or your passive income from your properties, pay yourself first, whatever that number is. And that formula changes from quarter to quarter and, and year to year. But then what’s left over is what you work with to pay all your expenses. Did I get that right?
Yeah, exactly. That that’s exactly it. And especially if you’re in the passive side, there still might be like, if you have a property manager or whatnot, they might be taking everything out, but you know, like four expenses and whatnot. But if you’re wanting to buy new properties or if you have different goals for you, it’s like making sure we have the practical side set up. So that way you, whatever those goals are that you’re meeting them or if their expenses are going nuts, like, okay, how can we get these down in, in a very easy manner? That’s very conducive to the mindset of the entrepreneur and not just an accountant or bookkeeper.
Right? Okay. So the key formula here are sales or revenue minus your profits, which you’re paying yourself first equals expenses. So that now segues into kind of the next question, if you will, and what are those crucial numbers? And I’m gonna let you explain this, cause you’ve got your needs and you’ve got your wants, so sure. How would you differentiate those two?
So what in the book, this is one of the things that I add to the real estate investing book, because I see this all the time with no matter which side of the venture you’re on active or passive, that most investors go into it thinking I’m gonna pour all my money in and then one day I’ll get my money back out. That is kind of like the sales minus expenses equals profit formula. Like just looking for that one day event where that’s, where upfront we need to know, especially if you’re wanting to get out of your rat race, you know, like from your W2 job to fully relying on the passive income from your rentals or whatnot, then we need to work backwards and say, what do I need in order to cover my monthly expenses? Just like in the, in the cash flow 101 game, you know, which is probably very popular with the listening crowd here because I have two copies, the old one and the new one.
Like I love that game where you have to have your passive income greater than your expenses to get outta the rat race. Well, it’s the same thing here. We need to establish that need number or that expense number for our personal lives to know when we can get out of our own rat race. But then I take it step up further in the book too, and say, what do you want from your business? Like what would excite you? Like what would get you up in the morning and say like, I have more than I need just for my expenses. And now I can live the life that I always dreamed about once I bought that first rental, you know, like now it’s coming to fruition of what do I really want? And so I tell you in the book, like a little formula of how to get the needs and wants and like, to actually, you know, basically getting your want number is doubling or tripling your need number.
I mean, I make it super simple of like, what would really excite you? You say this number out loud that you get above and beyond your expenses, does that excite you, you know, like of where we’re going. So establishing those numbers first to even know what you need because profit first is all about being in the habit of a being profitable. Meaning you, you might not cover what you need right outta the gate if you’re buying your first rental, but at least you’re getting in the mindset now of like I’m going after these goals. I’m going after these end goals first. And it’s not just about buying the rentals or gaining appreciation. It’s about what would serve me, of getting out of the rat race and getting me to where I really want to be with my, my properties.
And is it fair to say that is what people should expect to gain from implementing this formula and implementing the profit first system.
From implementing the profit first system? Because that’s just, it, it’s not about, okay, I’ve set that number now. What do I do? There’s actual, actual practical steps to say, here’s how you implement that to make in a habit inside of your company and your rentals.
Okay, so let’s kind of get into the tactical side of this, you know, the steps, what are the steps? How would you break down this framework? I know it conceptually and I have to be honest. I like what I read in the original book, but never actually took the steps forward to implement it by setting up the different accounts. I just found it. And maybe you can comment on this. I just found it to be, I’ll be honest, a pain in the butt and maybe I was over complicating it in my mind, but I was just thinking, why have, you know, three or four accounts, one for each major category. Instead the one that I have transactions going in and out now, I think I know what you’re gonna say, but I’m not gonna steal your thunder. So I’ll let you describe the steps in whatever else you want.
So most of us are never trained in finance. That’s why, even when you ask the question, is this for accountants bookkeepers or more of our entrepreneurs? It’s like, that’s why, because most people just shut down. Once we hear we’re talking about finances, you know, like they don’t run a bunch of webinars on, you know, accounting and bookkeeping, you know, for entrepreneurs, you know, like that’s not a, that’s not a fun title. So that’s where on this side of things, it’s most entrepreneurs don’t have the basic information of how to manage the money, how to manage the cash. Like we’re taught the marketing, the operations, or like getting a good property manager, how to vet a property manager, like those types of things and like how we should calculate the returns on our investment. But we’re not taught of what do we do with the actual cash. Once it comes through our door, like what do we do to actually manage this like a business and run it like a business and not like a hobby. And that’s where with these practical applications, one of the big things see is in as a mistake is that because we don’t get that type of training, one account where everything goes in and out of is like tossing a cash salad. You don’t know what is your profit? You don’t know if you need to say set aside for taxes, you don’t know what is, you know, like what can you pay yourself out of that amount? It’s like this, if we break it, it gives you very clear directives of this is the money and what it’s for. You know, like this gives me as a entrepreneur, a lot more clarity than me having to dive into my QuickBooks every day or every week.
And like trying to make sense of this without someone to guide me or whatnot, the actual practical setup gives the entrepreneur that power and that control cause that’s what most entre want. They just want control of their money. They want control of their business and knowing where everything’s going. So the practical steps are that it is to set up. It’s like the envelope system. So Marco, was already commenting there on it of like it is setting up physical bank accounts. Like you might have heard of the envelope system like Dave Ramsey preaches or like, you know, like you might do it with your personal finances right now out and a portion out your, you know, envelopes for personal stuff. But you do that with bank accounts for your business. And especially if you have rentals and you have that passive income, the core fundamental accounts are still as practical as, you know, a flipping business or whatnot.
And those core accounts cause everyone asks, okay, what are those accounts? So let me give ’em to you. The first ones I call the golden trio. I’m a big movie person. I love movies. So like I like Star Wars, Harry Potter, all that stuff. And like star wars, those two movies, those big epic sagas have three main heroes, Lu con Lea always pushing the story forward for good, like making sure good wins in the end. Well your business, your rental portfolio, this is your legacy. This is your epic saga. So this is why separating this out. So you make sure that you are going to win in the end and that you’re gaining ground. You’re truly gaining ground and know what you have. So what are those three that golden trio, a profit account and owner’s compensation account and an owner’s tax account. So those three, a profit account is for a quarterly distribution to yourself of like saying, Hey, hi, I’m actually profitable in this business and I can do what I want with this money because I’m growing my portfolio.
This is for the blood, sweat and tears of like finding the properties, finding the right property manager, like finding the right pieces in place of saying like, now I’m getting outta the rat and it’s starting to provide me true profit. The owner’s compensation is like, this is such a key account because this is where the need and want number come into play. What do I need in this account that I can pay myself on a regular basis, almost like a salary from the business to be able to take over what I’m currently making somewhere else. And when that, that actually reaches that certain dollar amount, I can say goodbye to my boss. You know, like goodbye. I can fully be in the passive real estate investing game now because my owner’s compensation account provides me enough every single month to cover, you know, my rat race expenses.
So that’s where that account is for you to be able to take on a regular basis, the owner’s taxes. If you’re building a passive portfolio, you might never have to even have to touch a tax. You know, like the, the IRS or whatnot. But if you do that’s to separate out. So that way at the end of the year, if you still have active income from a W2 job or from you’re in a flipping type business to setting it aside. So that way at the end of the year, you don’t get this big tax bill and then freak out. Or maybe you had to sell a rental, a stinker in the middle of the year that wasn’t cash flowing for you. But then it ended up actually selling for way more than it was worth. Cause you’re wearing this, you know, this bull market, you know, this very high market, real estate investing market.
So you made a great profit on it. So it’s setting aside that income to be able to, you know, separate out to those three accounts. So that’s where I tell people, if you get those three accounts, you’re just at least separating out what’s yours because you might want an account, especially on the passive side for your own, for your own like reinvesting. Maybe you wanna have an account specifically to go out there and purchase another rental. Okay. And I know I’m looking in this area and it’s gonna take this much down. I wanna purchase it cash. However you want to do it. But having an account specifically for purchasing a rental or for purchasing that next property, you can see here where I’m going with this, this it’s just to give you clarity of, you can have any account for any type, but those are the three fundamental accounts to make sure you are gaining ground in your business.
And then also you could add other ones for the passive side, like, like a reinvestment account. I like also an OPM account. If you’re taking other people’s money and you only have one big pot, what’s your money versus their money. You know, like separating out other people’s money if, especially if you’re like taking it to do a project and then, you know, then you’re refinancing and selling, you know? And then, uh, then getting the cash flow, whatnot, making sure you’re not mingling that money in there because then you accidentally use that money for something else inside your business. So like setting up an OPM account inside of the book, I go even deeper of like other accounts you can set up we’re givers, you know, like I come from a background of faith. So I have like a giving account so that a certain portion of everything that comes in goes into that account and a certain percentage goes to the things that we invest in for eternity.
And we’ve got, you know, different accounts set up like that. So it’s two give at the end of the day, it’s two, one big thing is to make profit ahead of it and to give clarity and control to the person on the other side, receiving that money to that owner, making sure that you are actually receiving that money and putting it aside and keeping it and being able to do what you want with it, build your bigger portfolio or pay off your portfolio. If you wanna start paying off your properties, whatever your specific goals are, but setting the that up. So that way, you know, this is my money, this is other people’s money. This is what this is for. This is what I have to reinvest in the business, or this is what I have for my profit. So setting those up, that’s the first thing.
And if you’re like David, like if you’re like, like Marco said, if this sounds too complicated or too much like, oh man, that’s a lot of bank accounts. I always tell people get in the most important thing is the habit. So just set up one account different from your main bank account and call it profit. So that way you can start getting in the habit of just transfer 1%, 1% of the income that you receive. You know, if it’s after your property manager, whatnot still, what, even if that’s $10, whatever it might be to get in the habit of having a profit from the hard work that you’ve done of buying these properties, vetting the property managers, getting the right things in place. So that way you can at least see that, okay, this is getting addictive. Now I actually have a profit account and I want to make sure that I have more profit than I do. You know, now, now than I did last year. And then next year I have more than I do this year. So getting into of that habit as early as possible.
That was great. As you were talking about that towards the end, I got thinking about my bookkeeper and any CPA that might be looking at those books. I, I don’t know if this is the wrong question to ask, but does it change or impact in any way, how your bookkeeper managing your books and your CPA, or tax professional processes, your monthly or annual bookkeeping and taxes.
People will try and push back on this accountants or bookkeepers that haven’t heard of it cause they think, oh man, new accounts, like this means so many more entries, but literally all you’re doing is transferring from one account to the, the other. And you still might pay all from one account. Let’s just say you still have an OPEX account or like to pay regular expenses maybe outside of what property management does. So, but you would be pushing things to the property account and it’s gonna sit there until you take a distribution or the owner’s comp will sit there until you take, you know, actual owner’s comp and then OPEX will still pay the regular bills. So literally inside of the books, it’s just booked as a transfer and takes two seconds. And if you have QuickBooks online, it already matches up. Like if it went from this account to this account, it already matches it up automatically.
So it doesn’t add a ton on the back end to the bookkeepers. So which we should know we’re working with of people. And it’s like, that’s one of the questions we get all the time. I’m like, I promise this is not gonna add a ton of headache to them. If anything, what it’s going to do for the business owner or that, that real estate investor is going to make them more receptive to talk about the money with those people. Usually we avoid conversations with the bookkeeper, with our CPA because we don’t know what’s going on. We don’t know what’s going on with our money. This puts power into the owner’s hands to say, I want to have that meeting. You know? So if anything that helps the CPA know like, Hey they’re, for some reason they actually wanna meet with me now it’s like, or the bookkeeper’s like, Hey, they actually know what’s going on inside their business. And this is what they’re doing. So it, in all honesty, it helps. It usually helps the relationship and not hurts it.
So where do most people fail at implementing the profit first framework?
The biggest thing upfront is the bank accounts. They think it’s too difficult or they don’t wanna implement it, you know? So they don’t go out and set up those accounts, but it’s like, that’s a one time thing, set up your accounts, get it over with, and then now you have a system now you transfer it to those accounts from every deal or whatnot. And then it becomes pretty automatic when you have rental income come in, you know, like maybe once a week or if you’re just your property manager, distribute it once a month, you’re just doing a transfer once a month. It’s not a very much on the backend to do the actual work of answering that money. It’s just a one time thing, especially if you’re like a, a prop, if you’re just getting a one time distribution or whatnot from a property manager. So that’s where the biggest place I see people fall off is like, do I really wanna set these up? Why do I need to set these up? But then once they do, then they see, okay, building those habits, building true profit in their company. So, but yeah, that’s probably the biggest pushback is, you know, setting those accounts.
Yeah. Well, for me setting up the accounts is quick and easy. It’s a one time thing, like you said, but setting up an account is like 15, 20 minutes at your local bank. That’s the easy part. I think the harder part and I say hard in air quotes is getting into the habit of making those transfers each and every month into the different accounts. So when you have your revenue coming in, you pick a day on the calendar where you’re gonna put a percentage into your profit account, a percentage into your taxes account, a percentage into your operations or expenses account. Right. And really that’s the amount of time that you’re spending on this.
Right? It’s not that much time to actually do that. So once people see the first couple transfers, they’re like, okay, I get it. You know, then it gives them clarity of, do we have enough money coming in to cover what we need to cover? Like, are we covering what I need for as a BI new owner, like to establish that I’m outta the rat race or do we have enough? Like our expense is going nuts. Like we only got this much from our property manager this month. What happened? Like we were on track for this amount and now we got a lesser amount. So now we need to dig in with them or whatever. It just gives them warning lights that they can actually control and understand versus just, okay, here’s what it it is. Or, you know, like I have no idea what’s going on in these reports, you know, behind the scenes.
So David, I can definitely see how this can make somebody or anybody, whether a real estate investor or a business owner, more responsible. That part is really clear. There’s more accountability and responsibility, but can this, or does this, or will of this allows someone to become more profitable? Because from where I sit, that’s a slightly different question. You know, profitability comes from increasing revenue, decreasing expenses because whatever’s left over is whatever is left over. And that, that ultimately is your profit. So whether you flip the equation, you know, know with revenues minus your profit equals expenses or the traditional revenue minus expenses as your profit, you still need to have as much revenue as possible and minimize your expenses as much as possible. So does this profit first system allow you to be more profitable? It’s not that it replaces traditional business operating principles and methods, right? Right.
No, it does not.
It’s a layer on top.
Exactly. So my answer to that is we have a lot of people have two definitions of profit. Like there’s profit that the accountant tells you at the end of the year, which is like this, the revenue minus the expenses. And then there’s the true profit that should be sitting in your bank account. This helps you get into the habit of actually having a profit at the end of the day. So you feel like, yes, it’s not this fictitious number that my accountant’s telling me that we made this year from our, you know, like from our properties. So here’s the actual profit that we have. But in to that too, it helps with the gap side, you know, the general accepted accounting principles and the financial statements, because it shows you shoot. If I don’t have enough, like to disperse what I need, I need to take a look.
Do I need more rentals? Like if this is what my certain percentages are with the current portfolio I have, then I don’t have enough. I need to go out and increase the revenue. The, the rental income that’s coming in, or I need to raise the rents next year or whatever it is to get that number up. Then on the flip side, you could also look at the expenses too of saying, okay, now I don’t, I know that I need to go through this and with the properties. And is there any in here that are losing money that I should sell off? It gives the clarity of in, like I said, the warning lights of, is there something that I could do to turn the knobs either up on revenue or down on expenses. So that way I have actual bottom line profit that I feel as a business owner that I am taking out and making sure that it is true cash, profit, not just some number on some P and L, which obviously then affects the P and L better. See, because it, it puts that in our power now to look at it from a different perspective of like, I want a true cash profitability.
Got it. Cool, good stuff in closing. What advice based on our conversation, would you give investors and people listening to this?
Anyone I’ll say it again, it’s what I’ve already said. Open one account, call it profit transfer. 1%, like do something incredibly simple. Like you could open up a Charles Schwab account online in like 15 minutes, you know, or something like just do something from this podcast to get in the habit of being profitable. So open up an call it profit transfer, 1% start your journey. The sooner you do the more profit, the actual cash profit you’ll have, you know, years down the road or even, you know, months down the road.
Should people start with reading the book? Is that the best place to start?
That is a great place to start. I would say even before reading the book do at least that one step, like get in the habit even before the book get in that habit. It’s all about building that habit muscle. But yes, if you read the book, the book goes into more detail. I have lots of stories in there about passive or active investors and how they’ve used it, but also just the formulas and whatnot and the percentages for the different accounts. And you know, like if you have a property manager, if you don’t, so it’s like, if you get that book that it’ll help you at least clarify from the real estate investing point of view.
Okay. So before you share with our listeners, how they can find you or find the book or get more information, anything else you’d like to share with our audience before we wrap it up?
Take action. Like you can read, you can listen, you can do all that. Just take action. If you have the rentals, you’re on your way, like getting outta the rat races about taking the action and building that passive of income. So make it that offer that you don’t wanna make, you know, get up when you don’t wanna get up, make that phone call, whatever it might be. So take action. You’ll always be grateful in the future that you did.
Right on. David, I appreciate you coming on. Tell our listeners how they can find you and find the book.
Yeah. So one stop shop. If you go to simplecfosolutions.com, simple CFO like chief financial officers, simplecfosolutions.com. There’s a tab on there for the book takes you to Amazon, you know, right there. Or if you buy ’em bulk, you get 20% discount that I can give there and not on Amazon. Then also there’s a podcast. We have a Profit First REI podcast. If you just want some, a shot in the arm of people who have set it up, set up the bank accounts and like what it’s done for them then also on there is my, my Instagram Facebook, or if you wanna work with us, the fractional CFO services there as well too. So it just tells you what we do and how we implement stuff and, and whatnot. But that’s the one stop shop, simple cfosolutions.com for everything Profit First for Real Estate Investing.
Well, David, I appreciate you coming on today. I know I’ll be seeing you here in a couple months in one of our mastermind events coming up, I think in February. I’m not even sure. Um, yep. But we’ll be seeing you soon. So thank you for coming on. I appreciate you taking the time.
I’m oh yeah. Thank you. Thank you so much for having me on Marco.
It’s been a blast. And so for everybody listening, remember to subscribe if you haven’t done so already we come up with at least one episode per week, help us spread the word, share this with your friends, visit us on iTunes, leave us a rating and review. I do read every single one of them and I greatly appreciate it. So thank you for that. And once again, thank you for listening. We will see you all on our next episode.
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