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SHOW NOTES FOR EPISODE 613: PROFIT FIRST REAL ESTATE INVESTING
Too many real estate investors needlessly struggle with financial problems because they use old thinking that holds them back! In today’s podcast, real estate investor, entrepreneur and author David Richter shares how he transformed his real estate business from a cash-eating monster to a money-making machine.
What You Will Learn
- How to turn your real estate business from a cash-eating monster to a money-making machine!
- Why it’s important to view your real estate business from many different perspectives
- How real estate investors get trapped into financial systems that make it impossible to succeed
- Why “knowing your numbers” is critical to your real estate investing success
- How accounting can help you create financial freedom
- The critical role of mindset to your business’ success
- You don’t have to be a math wiz to master your real estate business’ financials
About Our Guest
David Richter
David Richter is an active real estate investor who has been essential in closing over 850 deals over the last 7 years. Those deals include wholesale, turnkey, BRRRR strategy, owner finance, rentals, lease options, and many other exit. While growing and building a real estate business from 5 deals a month to over 25 deals a month, he realized that as money was coming in to his business, it was going right out just as fast.
With the unique opportunity of being in every seat as a real estate investor, he found a unique calling in his company’s finance seat to help other real estate businesses to see where their money was going too. David has helped real estate companies completely turn around, from going out of business to building cash reserves – all by using the Profit First cash flow system.
He wrote the book Profit First for Real Estate Investors as a derivative of the original Profit First by Mike Michalowicz (Michael has been a guest on the Old Dawg’s Podcast – 235: Clockwork: Designing Your Business to Run Itself With Mike Michalowicz ) – David’s book is specifically tailored for Real Estate Investors
David’s goal is to completely transform the Real Estate Investing industry when it comes to how real estate investors view their finances. He wants to bring investors true financial clarity and freedom, and help every investor stop living deal to deal.
More About David
- A good friend of David’s gave him the book Rich Dad Poor Dad
- The book opened his eyes to real estate investing
- He bought a house right away off the MLS – a HUD foreclosure property – back in 2012
- He fixed it up and rented it out for a little while to generate cash flow
- He also lived in it for two years
- Then, he put a tenant in it on a lease option (rent-to-own) arrangement
- Great tenant
- Paid early each month
- 6 months later, they paid off the house for a full purchase
- He realized he liked real estate and wanted to do more
Working for a Real Estate Investing Company
- Later, he got linked up with a company outside of Chicago (where he was living) that was doing 5 deals a month
- He became part of the leadership team
- They scaled up to about 25 deals a month
- He got to sit in a lot of roles:
- Acquisitions
- Sales
- Property Management
- Project Management
- Transaction Coordination
- Finance
- When he sat in the finance seat, all the other roles made sense (like acquisitions, sales, marketing and transaction coordination)
- He could see the “money story” from the beginning to the end
- He could see the money trail from acquisition to profit – what happened to the money along the way for the owners and the leadership team
- He saw how it translated into bottom-line profits
- As they were growing the company, he got to see all sides of the real estate investment business
- They did over 750 deals while he was working there
- It was a great learning experience
- This was his crash course in real estate
- They were making six and seven figure months from the sales of their properties but they were spending the same amount too
- That part blew his mind!
- “Why are we doing 300 deals a year and not making any money?”
- This was his first “A-ha!” moment!
- It got him more interested in the finance side of things and to looking deeper in to what is happening to the money
- He went to the management team of the company and told them what they had to do to get back in the black
- He shared how they had to sell some of he rentals to get back in the black
- But they didn’t want to do what he was recommending
- The company ended up splitting apart
- People went different ways
- David ended up selling his personal portfolio and moving across the country
- It wasn’t a “victory story”
Getting a New Start
- Once he moved across the country, he found a new investor and started working with him
- He became the COO/CFO of the company
- The first thing he looked at was the investor’s numbers
- He told the investor, “I don’t care what you tell me about how great this company is, I’m going to look at the numbers to see what’s really going on.”
- He dove in and found out that the numbers were a mess – like a lot of companies!
- He told the owner, “We’ve got to clean this up!”
- The bookkeeper was not being held accountable
- They needed to get the right numbers recorded to get a true picture of the situation
- The owner was very underleveraged
- He had a small portfolio of rental properties
- He was super underleveraged with his loans – what he owed on the the properties was 30% of what they were worth
- He told the owner…
- “Now that we know what your numbers are, we can access the equity to…”
- Pull cash out (he was able to pull hundreds of thousands of dollars out)
- Buy more properties
- Create a “reserves” account – giving him piece of mind!
- “Now that we know what your numbers are, we can access the equity to…”
- The owner told David, “This is changing my life!”
- Knowing the numbers
- Knowing how much I’m making each month
- Knowing what my portfolio is worth
- It’s changing my life, my kids’ lives
- Now I’m able to pass something on to them that I have control over
Setting-up His Own Business
- This was David’s “lightbulb moment” too
- He saw how he could help other people to do the same!
- He told a mentor of his that he was going to start his own business to help others facing the same dilemmas
- His mentor asked him, “Have you ever read Profit First?”
- David read the book and said, “Boom! This is a great framework for the cash flow of the business!”
- His mentor asked him, “Have you ever read Profit First?”
- David started implementing the Profit First principles with his his own company
- He saw, first hand, how important cash flow was to a business
- He also saw how important the numbers are to a business – “The numbers tell your story!”
- Your business is your epic saga story! – You need to know what that story is!
- David found out that most owners don’t care about the numbers!
- They think, “I’m not going to think about it! I’m going to hand it off to an accountant or bookkeeper!”
- He didn’t want to see other companies make the same mistakes as the first company he worked for
“Profit First” Principles
- Profit First has two guiding principles
- Mindset
- Practical Application
- Mindset
- Accountants, bookkeepers and others (who don’t know what they’re talking about) have fed us a formula that is at the heart of the problem…
- Sales minus Expenses equals Profits
- In other words…
- I make a sale
- I take the cash and pay everyone and their mother
- And, hopefully, with what is left over, I make a profit
- We’re creating a bad habit by seeing profit as last
- And then, never being able to take a profit
- In other words…
- Profit First flips it! It says…
- Sales minus Profits equals Expenses
- Meaning…
- I make a sale, where I build in my profit AND take the Profit out FIRST and then, what I have left over, are the Expenses for the business
- Meaning…
- Sales minus Profits equals Expenses
- The mindset is
- “I’m setting up a profitable business from the get go!”
- I know I’m making money – a profit – every time a make a sale!
- Books that reinforce the Profit First approach:
- Rich Dad Poor Dad
- Richest Man in Babylon
- They teach the “pay yourself first” philosophy
- But Profit First provides an actual system to make it a reality!
- Most businesses work like this:
- They have one bank account that receives and disperses all money
- Money comes in and goes out and most owners have no idea what the money was for
- They just hope there’s enough money there when they need it
- It creates bad habits
- When there’s a lot there, I can spend it
- When there’s very little, I’m more frugal
- Profit first works differently:
- Instead of one bank account and no control over where your money is…
- Create several smaller bank accounts (like Dave Ramsey’s envelope system)
- The sole purpose of these accounts is for the profitability of the company
- Richard calls the first 3 bank accounts “The Golden Trio”
- He got that from epic movies he loves that have 3 heroes:
- Star Wars – Luke, Hans, Princess Leia
- Your business is your “epic saga”
- And, like all epic sagas, you want to win in the end!
- It’s your legacy that you want to hand down one day to your children
- You need heroes so you can pass on that saga!
- The three main accounts are
- Profit
- For the reward of having an actual profitable company
- For funneling a portion of your income
- You take from it once a quarter, up to 50%
- Owner’s Compensation
- This is for the work you do in the business
- You’re paid on a regular basis – a regular salary
- To pay yourself on a consistent basis
- Owner’s Tax
- If you owe tax at the end of the year
- You save for it throughout the year
- When you first get started, you may not be able to fully-fund these accounts
- You may have to slowly fill those buckets as you grow your portfolio
- If you’re more active like flipping, wholesaling, etc., you may be able to fill up the buckets faster
- Having those 3 accounts causing a mindset shift
- You have these accounts so you will become more profitable
- Profit
- He got that from epic movies he loves that have 3 heroes:
- Richard calls the first 3 bank accounts “The Golden Trio”
- Instead of one bank account and no control over where your money is…
- If your expenses are too high to fill those accounts, that’s a big red flag!
- Sometimes you can only put a little bit in those accounts but the idea is to make profit it a habit in your business
- Eventually, the system will work
- Your properties are a business and you need to treat them as such!
- There are ways on a deal basis or on a monthly basis with rentals that you are funding those accounts and funding profitability
- Using this system, it makes it much easier for you to know how to scale your business and what it will take to be profitable and, eventually, achieve financial independence
- Most businesses work like this:
- Sales minus Expenses equals Profits
- Accountants, bookkeepers and others (who don’t know what they’re talking about) have fed us a formula that is at the heart of the problem…
Advice for the Not-So-Financially-Gifted Investor
- One great aspect of the Profit First system/methodology is that it primarily deals with cash
- You technically don’t need a bookkeeper, QuickBooks or other accounting software
- All you need are bank accounts and the ability to transfer between them to fill up your “buckets”
- A spreadsheet could be helpful but not necessarily required if you want to track it
- YOU DON’T HAVE TO BE A FINANCE WIZ TO START THIS PROCESS!
- If you want to get serious, and as your business grows and more and more transactions occur, yes, it makes sense to get a bookkeeper and finance software
- David recommends QuickBooks online where you and your bookkeeper and/or accountant can all have access
- But to get started, no, it’s not necessary
- David has a fractional or “part-time” CFO business where he can provide investors with the professional accounting support for those who may want or need the high-level support
- A lot of investors have bookkeepers and CPAs but they don’t always talk the same language as the entrepreneur
- That’s why David created Simple CFO to help bridge that need
Biggest Investor Profit Mistakes
- Having only one bank account that has no clarity nor control
- A lot of real estate investors avoid financial management – they stick their heads in the sand
- They like doing deals, closing deals, sales
- But they don’t want anything to do with the financial side
- They only talk with their CPAs once a year, at tax time
- This is a big mistake
- There is so much power in using your numbers to grow to where you want to be
- You will not be able to grow if you don’t know those numbers and are not building in those habits to get you to those goals
- Another mistake is people who steal from themselves
- Mixing business and personal
- Interchanging business and personal accounts and interchanging transactions
- If you have multiple entities
- Passive income and active income
- Taking money out of your flipping business to fund your rental business
- Passive income and active income
Biggest Successes
- Having good mentors from the beginning
- He works with mentors and key people a lot for advice and direction
- Taking Action
- He read Rich Dad Poor Dad and then bought a house
- That house led to 850 more deals
- He started his Profit First company and…
- It led to working with 150 real estate investing companies
- He has helped those companies to implement Profit First and become financially free
- He read Rich Dad Poor Dad and then bought a house
Advice for Old Dawgs Looking at Real Estate Investing to Help Them in Their Retirement Years
- Take Action!
- Call an investor-friendly Relator or broker
- Do something to get a property under contract
- Get the deals in the door to make the money
- Use the Profit First system to keep the money!
Current Business
- He’s excited to see business owners excited about their businesses AND generating profits!
- He’s excited about his book, which is available on Amazon
- The audio version is coming soon
- He’s working hard to help business owners feel like true business owners and to achieve true financial freedom
- He wants to grow his business to help even more people
- His goal is to help 400 people on a monthly basis
- He has 30 CFOs on his team to help business clients and wants to keep that number growing
Rap-It-Up
- Favorite real estate book: Rich Dad Poor Dad by Robert Kiyosaki
- Favorite business book: The Road Less Stupid by Keith Cunningham
- Most valuable web site for success (other than your own): Google Sheets and Docs and QuickBooks online
- Favorite app: Kindle and Audible
- Favorite quote: “How you do anything is how you do everything”
- If you lost everything – all your assets – and had to start all over, knowing what you already know, and you only had $1,000, what would you do to re-launch your real estate investing business? Partner with someone who is already doing deals to get right into the real estate game! Would probably focus on wholesaling or owner financing. Use his sales skills. Maybe pay for mentorship
How to Get His Book: Profit First for Real Estate Investors
- Link to Purchase David’s book: Profit First for Real Estate Investing by David Richter
How to Reach David
- Website: SimpleCFOSolutions.com
- Schedule a free call with his team
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