00;00;09;21 - 00;00;39;02

Unknown

Welcome to the Profit First for Real Estate Investing podcast. Every week we bring you top investors and experts sharing how they create clarity, cash flow and consistent profit. This episode is brought to you by simple CFO. Profit first. Profit always. Lets go. This is David Richter again with the Profit First Rea podcast. Again with Mike here live. We're doing several recordings and I'm super excited about this because we already had one and it was so such a good conversation.

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Unknown

So if you didn't already listen to that one, make sure you go out and find that on our podcast. It's on YouTube. All that good stuff. But Mike, thanks for being back on our podcast and thanks for making the effort to come out here. I know it's a big trip from Florida. It was a direct flight though, right?

00;00;52;06 - 00;01;13;07

Unknown

Direct flight thankfully. Thanks. Yes, yes. You went to Newark, which, you know, it's not the easiest place to get to because while I'm in new Jersey and I'm only maybe 20 miles from Newark, it's still like an hour drive to get out here. Plus, did you drive yourself or did you? I did, Turo. Oh, okay. Okay, okay. I drove myself, depending on which way you came.

00;01;13;08 - 00;01;27;07

Unknown

Some people come to the road and it starts getting more and more narrow. More and more narrow. And now it's like, almost like a one liner. And you're deep in the woods and people are like. I don't know if I feel safe out here. There was a deer, right? As I was thinking I was going super slow. It didn't dart in front of me or anything, but I'm like, wow, this is real out here.

00;01;27;09 - 00;01;44;07

Unknown

This is true story. I'm coming home. This is a few years ago. Snow is coming down and I see this woman wearing a fur jacket who had the biggest. But I've seen my planet walking down the street. I'm like, she's drunk. Well, who does up here? Well, I don't have my glasses. I'm getting closer. It's a bear. It's a black bear.

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Unknown

It's a black bear. I was so embarrassed about a woman where my mind went. Man. Yeah, I have so many things that I could say there. I'm just like, what? What would be acceptable here on this podcast? Because, you know, it's like it's late at night. You're near your house. Is this a family member that you just forgot about?

00;02;00;27 - 00;02;21;14

Unknown

Like, no, it's a bear. So we got bears, coyote, wolves, supposedly to see a wolf. Oh, wow. Yeah. But the coolest thing is a friend of mine was visiting, ironically, from Huntsville, Alabama. Really? Yeah. Todd Murphy's his name. He was up here visiting. He lives outside Huntsville in that area. And he goes, I never knew new Jersey was so rural.

00;02;21;15 - 00;02;36;03

Unknown

And their sections, they're very rural. We have an orchard behind the house. And I said, yeah, yeah, I go, we even have eagles. Well, I haven't seen an eagle in five years. So I said, but I haven't seen in a while, but we even have eagles as I said it, like divine intervention is eagle swoops down in front of us, takes off.

00;02;36;04 - 00;02;51;28

Unknown

There's a lake up the hill and flew back. He was listening to you? Yeah, yeah, yeah, that was awesome. I'm impressed. That's pretty cool. Yeah, it is pretty interesting when I came here, just. It is very back set off, you know, the road and it's a it's a beautiful place. New Jersey. So far what I've seen, this is the first time I've been to new Jersey.

00;02;51;28 - 00;03;10;23

Unknown

So what I've seen is New York. But come back in summer, we'll do some blueberry picking. Get some fruit there. You heard it on the podcast. He just invited me back for summer, so to do blueberry picking. So I have this as a reference for everyone out there. But this is the Real Estate Investing podcast and you are the creator of Profit First.

00;03;10;23 - 00;03;31;22

Unknown

And like you went out there and helped a lot of people at the beginning and a lot of real estate investors, they do not know what to do with their money because they're out there running and gunning it. They have a lot of hidden mistakes. I would say there's a lot of things that can pop up, but do you see that in just across entrepreneurs as well to or do you see that just as real estate investing?

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Unknown

Yeah, because I think people confuse the technical work with business ownership and radically different. So I see outside the real estate investing industry as an example, my father in law was an auto mechanic and extraordinary at it. So he's like, I'll start an auto shop. That doesn't necessarily translate to being a good business owner. He could repair cars, but he also became the linchpin of the business.

00;03;54;20 - 00;04;12;08

Unknown

If he was out sick. Everyone's like, well, what do we do now? And he was very fortunate. He had another mechanic that rose up and slowly kind of pushed him out. But in most cases, I see people are very good technically and they say that's the business I should own. There are two different things. I was saying that an entrepreneurs job is not to do the job, but to create jobs.

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Unknown

And once you decide to run a business of a certain sort, you have to extract yourself from doing it. One little story and you should try it on your way home. When I travel at an airport, I'll look for a McDonald's and I'll go to it. Sometimes I do purchase the Big Mac. I'll ask the cashier. I'll say, May speak with the owner.

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Unknown

I think I've done this now 70 times. There's not been a single instance the owners there, because the job of the owner is not to be flipping burgers or making the fries the job. The owner is to go back to the franchise headquarters and determine, is there new ways for us to generate profit? Is there new locations we should be in?

00;04;45;11 - 00;05;02;05

Unknown

Their job is to create jobs for everyone else. Yeah, and as a real estate investor, if you are the one maintaining the property, if you're the one even doing the transactions and stuff, I don't know if you're there yet. I don't know if you own a real estate investing business as much or as an investor yourself. And I think you can uplevel.

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Unknown

You have to change that perspective. Yeah, I believe that too. And if the owner did come out at a McDonald's or something, I'd be super surprised. But that would be wouldn't it be wild? That would be wild. But also, if you ever do get a hold of them, can you just tell them like they it seems like they've just gone like just corporate and it's all great.

00;05;18;24 - 00;05;34;29

Unknown

You see all those comparisons like 1990 McDonald's versus Donald. So if you could just put in a word, I will bring back the like the characters and all that stuff like grimace and stuff. Yeah, I know, I wish they come back, put in a good word when you get a hold of the owner, but I will tell you if the owner was there.

00;05;35;01 - 00;05;56;12

Unknown

That also means someone can't do a job. There was a study about business ownership. About 17% of people in the world will ever attempt to start a business, including real estate investing. Wow. Only 20% will actually do it successfully for a sustained period where they can employ others. That's 3% of the population are 3.4, which means if you look back, I call it the kindergarten class analysis.

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Unknown

If you would like 20 or 25 kids in a class or more, multiply that by 3.4 and you'll find it's roughly one kid, which is you, David, you're the kid from your school who said, I'm going to start a business. And that means the other 19 or 24 kids are looking for good jobs, with good companies to live good lives, to have a good impact.

00;06;12;09 - 00;06;26;17

Unknown

Our job is to give them that job. Wow. And if we're if we're doing the work, shame on us. We're stealing the work from somebody else. Yeah, we have a we have a big, important mission. We got to deliver on it. Yeah. And that's. I love what you said. It's not to do the job is to create the jobs.

00;06;26;17 - 00;06;46;23

Unknown

And it seems like a lot of people go out there and they do the job or they, like you said what the myth, right, talks about that, you know, being the pie baker versus like the shop owner. And as a real estate investor, I would say if you're a wholesaler, like even in real estate, there's different aspects to where it lends itself to that or not wholesaling.

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Unknown

You're probably just a marketing company and you won't have continued revenue, so you're going to always have to kill and hunt and like, maybe you can find enough people and you can level yourself up enough. They're fixing flipping. You're a little bit more where you're going to have GCS project manager. So maybe removing yourself, but if you have rentals and you do it correctly, that's one that's its own business, where it's the house almost stands as a business, and then the portfolio is its own business, and then you've got the outside management and everything that all create a business inside of a business.

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Unknown

So it's like you could even uplevel yourself as a real estate investor to be able to really, at the end of the day, keep more of what you're really wanting to and not have to work the 18 9000 hour weeks that a lot of people do. This list you prepared is interesting, because it's the traps of what keeps people in the business as opposed to, as Gerber say, working on the business.

00;07;34;06 - 00;07;55;05

Unknown

And the number one thing you have listed here is we confuse revenue and profit. Yeah. And that's such a danger. I've seen real estate investors and countless entrepreneurs get a deposit of some sort, receive some money in some capacity and say, oh, I just earned that. I had a guy, he's a homebuilder who, for the contract he was doing, got $100,000 deposit and he received it.

00;07;55;05 - 00;08;14;15

Unknown

And true story, next day he had a shiny new boat because I earned $100,000. No you didn't. So the biomaterials was the only thing, right? So the homeowner, sadly, in the circumstance, paid the cost of this because he couldn't do the work he needed to do. He was cutting corners. He's panic. But listen, he's responsible for that problem.

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Unknown

But also that's very common that if you don't separate out your profit from the get go profit first, it's very confusing on what you've actually earned versus what you're responsible for managing. Right. And a lot of people don't have that skill set as entrepreneurs at the beginning. So at the beginning we can tell you, like, okay, it's really not your fault.

00;08;32;05 - 00;08;53;24

Unknown

We really need to tell you this and teach you now that your eyes are open. If you do that again, then it is on you. You know, 100% now. You once bitten twice. Exactly. You need to know the difference between the revenue and the profit. And then another big thing that they do okay with this guy even on point number two that we have here, ignoring those taxes, like how many times have you seen this mic where tax time comes?

00;08;53;25 - 00;09;10;11

Unknown

We're recording this and we're kind of right in the thick of it. Like, how many people have you known that are running around like a chicken with their head cut off? Yeah, exactly. Thousands of times with me, I've, I was the guy who for decades was shocked by taxes every time. And it was shocking that I was shocked every time.

00;09;10;11 - 00;09;27;27

Unknown

They're very predictable. It's April 15th. It's a percentage of your income that you earned. Everyone knows what's going to be. And every time it was like, what? How much? And I'm pod at the CFO or my accountant and saying, why do I owe this? And I shoot the messenger. And then I realized, and this is how I frame it to myself.

00;09;27;27 - 00;09;43;20

Unknown

I said, oh, I'm an agent for the government. So like it or not, you and I, everyone listening is an agent for the government. The government says you have the privilege of running a company. You own a business. Congratulations. As part of the responsibility is you're going to pay us a percentage of your success. You are an agent to collect this money.

00;09;43;20 - 00;10;01;11

Unknown

So when your client pays you a dollar, you owe us 20% of that or whatever. So the client isn't paying you dollar, they're paying you $0.80 and $0.20. That goes to the government. So we've responsibility to carve this out and then pay it in the installments to the government. So to be shocked by taxes is actually shocking. You should never be shocked by it.

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Unknown

But I was the way to address it is you set up a dedicated account similar to sales tax. If I had a real tail store in new Jersey, it's 7% sales tax, 7% is required by law to go to the government, and even business owners in the retail space don't see that. They see that 7% they earn, they take it for themselves and you get burned like that's a jail offense.

00;10;21;19 - 00;10;39;21

Unknown

So you accept account for 7% what? We're going to do the same thing for every business. Usually the number that's magical is about 15% of your top line income generally is your tax liabilities. So we're going to set up an account called tax, allocate 15% toward it. And 90% of the cases it'll cover your tax liabilities. And you're required by law to do that.

00;10;39;22 - 00;10;55;13

Unknown

Yeah. And that's where we've seen people do this. And I call it the peace of mind account, because so many people that we've seen do that and actually implement have that peace of mind. I had someone at an event I was at a few months ago said, man, we set that up. And at the beginning we were like, oh, I don't want to be doing this.

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Unknown

You know? It's like it's hard to see the money sitting there. Then tax time came and they had about 80 grand in that one account. And then their accountant said, oh 16 and they were like, we love you. That's funny. Yeah. They were like, we love that. We could just pay that. Then we had that extra and I said, what are you going to do with it?

00;11;11;10 - 00;11;26;01

Unknown

They were like, actually, we've been wanting to do this, that, you know, like with the family, it feels like. Bonus. Exactly. It feels like a bonus if you're an entrepreneur, and especially if you're in your first few years, it might be like, oh man, I actually have to pay taxes and you're getting used to it. But how would you like to give yourself a tax refund?

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Unknown

Like instead of the government giving it to you, you have to give it to yourself. It's like at least you've saved more. The people that do this, a lot of them save more than what's actually owed. Correct. That's what ends up happening. And I love that because then they get on and they're like, I paid my taxes and I've got X amount of dollars.

00;11;40;12 - 00;12;00;27

Unknown

And I'm like, it feels exactly. It's a profit is a behavioral management system. And what's so interesting is logically that's not the optimal move. So so I'll give you an example. My mother just I did her tax with her. She's in her 90s and she's getting a return a couple actually $1,000 or more. And she's like, oh my gosh, I'm getting a refund.

00;12;00;27 - 00;12;20;08

Unknown

And the accountant said the words, I'm like, don't say it. He kind of says, well, next time when you do your prepayments installments, we want to reduce it because you really want to have $0. Optimally. You don't want to have a refund and you don't want to. Oh, right. And logically, it makes sense. But the thing is, if she optimized it, she is preventing a way to save.

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Unknown

Now, I know getting a tax refund is not good savings mechanism, but you're paying it. And it feels like I say I've got this money back. This feels great. You actually invoked a savings mechanism. You were storing money away with the government. You didn't earn interest, I get it, but you actually saved the money and you didn't even think about it.

00;12;34;10 - 00;12;48;03

Unknown

So my mother's getting $1,000 back, and she's like, this is amazing. I can do so much with it. We're doing the same thing, but to our advantage. Exactly. We're storing the money in our accounts, we're getting interest on our money, and we're holding it as long as we can. And then we're paying. The government is allowed to do.

00;12;48;04 - 00;13;06;00

Unknown

And if there's some left over. Awesome. You've actually invoked a better savings mechanism for yourself. Well, you've created that habit. You're always trying to build a habit muscle. And I love in Morgan book Psychology and Money, I think. Or it might have been the art of spending money. He says income minus ego equals savings. Okay, I love that.

00;13;06;01 - 00;13;21;10

Unknown

That's beautiful. Because and this you really taking the ego out like, hey, I know I'm going to owe it and I know I have to put it there. And even though it's painful as an entrepreneur, I'm building that habit muscle. So I need to take my ego out of it. And then that savings builds. And then hopefully it's these types of situations, real estate though.

00;13;21;11 - 00;13;40;18

Unknown

Mike, I see this all the time where they do save more, especially if they're acquiring any type of rental property because that forces depreciation into their tax schedule where they're able to take less, put less on their income. So that way they have less that they owe. So 15% a lot of times if they're in a rental situation can be higher.

00;13;40;18 - 00;14;01;05

Unknown

But then they're always surprised, like, oh wow, I have a lot more than what I needed. And then they have these types of situations and they love it. And psychologically your business is paying your bills. So you feel like my business is caring for me, which gets us to our next point. The biggest thing that is not happening in business that needs to be done, is that your business needs to pay you a fair compensation, right?

00;14;01;06 - 00;14;14;13

Unknown

Which is different than profit. Yeah, people confuse this. You know, profits are reward for taking risks. You started the business. You're an investor, you want to share in stock, but owners pay is to pay for the work you do in your business and the small business. As much as we want to extract you from doing work, you are doing work.

00;14;14;13 - 00;14;32;03

Unknown

And if you had to hire person to replace you, what would you pay them? That's the number we want to set the owner's comp and most people aren't doing it. So I have a question for you because this is what I've been teaching people, and I want to see if this is if you're okay with this. When I tell people like if I'm speaking to a big group, I say one account at least, like walk away with one account.

00;14;32;03 - 00;14;56;24

Unknown

I usually tell them not profit, but owner's comp because I want them to start paying themselves. I like that, so I usually have seen more transformation in business owners when they actually start paying themselves and they don't feel guilty about it. And it's coming in consistently because a lot of people never pay themselves consistently. They might say, oh, I take draws when I need it, or I put it on the credit card and then I pay the credit card off of the business and it's like, wait a second.

00;14;56;25 - 00;15;13;22

Unknown

So I say, set up that one account owner's comp because that'll show you like right up at the beginning that you can pay yourself, and then you'll see those habits forming, and then we can branch out from there. So do you like that I do I actually I don't advise that not because I don't like it. I never consider that.

00;15;13;23 - 00;15;32;10

Unknown

Yeah, that's a great idea. There's this thing called homeostasis. It's kind of the average temperature. Our bodies are very capable at it 98.6 degrees. You know, we go there and it can be as hot as whatever as a popcorn maker trying to keep it PG. But you know what I'm saying. It can be in our body will find a way to cool itself.

00;15;32;12 - 00;15;49;28

Unknown

But conversely it could be freezing cold and your body heats itself. The interesting thing about a predictable salary is you adjust your lifestyle to that homeostasis like you nail it. When you have peak and valley income, your lifestyle will often adjust to the peak and not be prepared for the value we talked about in our last episode with loss aversion and so forth.

00;15;49;28 - 00;16;07;05

Unknown

And you actually live a much more precarious financial lifestyle when you have volatile income. So I like that I got to absorb it a little bit more, but I think I'm leaning your way. Yeah. I just have seen the people that we work with and if they can start to pay themselves something, it's just getting consistently. That's when they.

00;16;07;07 - 00;16;26;13

Unknown

And as well, if they aren't out of their W2, that's where they can see, okay, can I fill this account up enough to start to pay myself to be able to then quit the W2? It's like forcing them to pay themselves from the business and getting some savings there. And like, how many months do you want before you want to quit your W2?

00;16;26;14 - 00;16;45;07

Unknown

So that's another thing, I think. Another thing we want to go down this road. And the last one that we're talking about here, if you are still listening to this, this is Mike. He's the author of Profit First, the original author, and I'm David Richter, the author of Proverbs for Real Estate Investing. We're talking about the hidden financial mistakes that a lot of people make, real estate investors, but just entrepreneurs in general.

00;16;45;08 - 00;17;08;23

Unknown

This last one, the lack of visibility. Yeah, not knowing where things are and just having chaos there on organization. We've talked about the taxes. We've talked about paying yourself. We talked about these things. But talk about that. What do you see? Mike, as far as like the chaos that people have in their businesses, ignorance ain't bliss. Yeah, it's true, it's not maybe in certain aspects of life, but but I'll tell you, when it comes to finances, it's not.

00;17;08;23 - 00;17;32;02

Unknown

And I've seen businesses get rocked because they weren't paying attention to numbers or they didn't understand where it was, and then they were in a desperate state and they were saying, desperate people do desperate things. I've seen businesses go under. You were sharing last episode, or maybe it was another thing we were doing together about a guy who calls you and he's got 25 investments before going bad, and he's like, I got declare bankruptcy.

00;17;32;04 - 00;17;50;22

Unknown

That is a desperate response. But it's also a normal and appropriate response when when there's volatility money and you're caught off guard and you're in a real deep spot, I got to get out of this and we start running. And that will crush your business. If you don't have regular visibility to your numbers and you're caught off guard, you're going to overreact in one way or the other.

00;17;50;22 - 00;18;07;18

Unknown

If you see a large amount of money comes in and you log in, you're like, oh, we got tons of money. I had no idea what we're doing. So good. Let's buy, let's buy, let's go. Oh, there's no money there. You're like, we're done and you're going to overreact. So the key is frequency and clarity. I encourage people to log into your bank account daily, if that's who you are.

00;18;07;19 - 00;18;24;26

Unknown

That's awesome. Keep doing that. But we have to when we log in, see where the money is in different accounts. So we know what it's available is. But we also have have trigger dates. So I do it once a week myself. In the book I recommend minimally twice a month a 10th and 25th rule I call it, but I check in.

00;18;24;26 - 00;18;40;19

Unknown

I call it Financial Friday now every Friday. So today we're recording on Friday. This afternoon I'm logging my bank accounts. I'm going through all of them, see what money is available. What it does is maybe I subconscious level. I actually know where the numbers should be. And the second it varies from that. I call my profit first professional immediately.

00;18;40;20 - 00;18;57;27

Unknown

Karen. Hey Karen, the numbers are off. What do we do? And the numbers are off today. So I've come to Karen and actually with my business partner to to review and say we have to make some adjustments now because of the numbers are off. And it's nice to have yellow flags versus red flags. Yeah. So that's what I tell people with profit first a lot.

00;18;57;28 - 00;19;12;13

Unknown

This is going to give you a system of yellow flags. And this does not solve all your problems. This does not solve the world's problems. But it definitely gives you these yellow flags versus red flags. But it gives you good habits, good systems, these triggers where you're having this conversation versus the what the heck? Like what's going on?

00;19;12;13 - 00;19;38;21

Unknown

What are we going to have to do? Which is so much worse? And I also heard you say kind of behind the scenes there, if you have that clarity, you have more energy, like you're managing your energy, because if you are constantly up and down, if your business is up and down and you're up and down, you are so burnt out you can't go home and be the spouse, the father, the husband, like whatever, you know, like you can't be that person that you were meant to be if you got that energy just going out constantly around the finances.

00;19;38;21 - 00;19;57;10

Unknown

That's what I tell people with profit first, that it's really about you not having to think about the money. So it's Gump. It's like it's one less thing, you know, like, yeah, you want money to not be that issue that blocks you from the good things that are in your life and all these other places. Well, winding this down, you gave some good action steps there.

00;19;57;10 - 00;20;13;23

Unknown

I would say set up that profit first account of taxes for sure. Yeah. Or set up the owner's column if you need to set that up. And then making sure you have some of those accounts. So you have that visibility, that clarity, getting the taxes, getting the stuff off your plate. If you need help with this, you can go to simple CFO.

00;20;13;26 - 00;20;35;21

Unknown

I want to make sure that you get that help if you need someone to walk you through it. Mike, any last words? Go to simple CFO. Com now there you go. I appreciate that, Mike. Thanks for being on. Thank you. That's it for today's show. Be sure to subscribe, review and share this episode. If you're serious about financial systems and keeping more of your profit, visit Simple CFO to take your free discovery call today.