00;00;09;21 - 00;00;31;11

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. Let's go. Welcome back to the Profit First Real podcast. I'm your host, David Richter, and have Mike Michalik here again.

00;00;31;12 - 00;00;47;27

Unknown

He is the author of. Yes. This is our third one in a row of profit. First, the original book. So, Mike, even before we get into this, because we're going to talk about how we can help real estate investors. But what how did you even come up with Profit First? I want to make sure we get that out there.

00;00;47;29 - 00;01;12;23

Unknown

I mean, the inception of looking for the system was when I lost all my money and I had this realization I don't know how to manage money. What's funny? David, I was doing a presentation on stage and I was teaching profit first. And the person in the audience is a large audience who raises his hand. He goes, hey, I want to ask you something because your your teaching is private first, but you're you're clearly very good with money.

00;01;12;23 - 00;01;32;25

Unknown

So what about someone that doesn't get money? And I said, I don't get money. I actually I suck with money because I proved I could lose money left and right, and it was the system that saved me. And the money habit, which is the the complimentary book for personal finances. It's a system my wife and I have been using for 20 years, but prior to that we've been married 30 years.

00;01;32;26 - 00;01;54;10

Unknown

It was ten years of agony because I didn't understand how to manage money. So a great system does it. So I was in search of a great system. And first is nothing new. It's actually it's the envelope system meets the pay yourself first principle meets, you know, x, y, z. The systems exist since biblical times in the Bible.

00;01;54;10 - 00;02;18;13

Unknown

It references financial techniques like tithing. Tithing is where you preserve money for an intended use to contribute to community church got prior to paying yourself. That's the first. It's actually all all religious literature. The Qur'an has a version. Everyone has a version of. Preserve money for its intended uses. Carve it up. And so it's nothing new. I discovered something already existed.

00;02;18;14 - 00;02;35;29

Unknown

The only thing I really did was modernize it by doing it at the bank level. Yeah, no, that's very interesting. I did want to ask you to because Profit First has been very popular, and a lot of the entrepreneurial spaces, and especially in the real estate investing in space. Do you mind me asking live here, how many books have you sold of profit?

00;02;36;01 - 00;03;02;14

Unknown

I can tell you exactly. It's 1.1 1.2 million. So we'd run these analytics and that includes it's sold in multiple languages. I think it's in 31 languages now. Yeah. And you know, you've arrived in international translations when it's not popular. Languages like Spanish is a major language. Chinese is a major language. But when it's like in Estonian or something, I don't even know if it's a language, to be honest.

00;03;02;14 - 00;03;21;17

Unknown

But like when it's in these languages where the population that speaks it is like 500,000 people. Yeah, that's a, that's a big that's a city here. Not even a big city. That's a small city in the United States. There's some languages like that. It's been translated into those languages. And to me, that's the ultimate success because it's permeating into our entire globe.

00;03;21;19 - 00;03;38;01

Unknown

Wow. Did you ever think it would get this big? I always intended, I honestly intended that way. I didn't know if it would happen. I. Every book I've written. So I've written ten business books. Every book I've written, I'm like, this is the one I know. This is the one. And none of them have been the one. Like profit First.

00;03;38;03 - 00;03;59;01

Unknown

So you've written a lot of books because you want to help the entrepreneur on their journey. You've written one for systems for acquiring customers or right customers marketing? Yes, for the money. Obviously with profit first, but profit first is just taken off like wildfire. Wildfire. It's the one that landed. So I was talking with a musician and he talks about music and he's like every song.

00;03;59;01 - 00;04;16;08

Unknown

You're right. You think this is the one? Like, you put your heart and soul into every book I've written. And he goes, you don't necessarily know that this one's going to go. And I had no idea that Profit First would go. I did get inklings. So I do a little test if I can. Sometimes it's through speaking. I'll start talking about something like I wrote a book called Get Different on marketing.

00;04;16;14 - 00;04;33;11

Unknown

I was talking about that, talking about it, and it lands with audiences enough. Like this needs to be a book profit first. I wrote an article for the Wall Street Journal, and I started getting all these inquiries, and I've written many articles. I used to write for them for a while, and I would never get much comments. I would occasionally, but profit first is getting all these comments.

00;04;33;11 - 00;04;50;00

Unknown

I'm like, There's a lot of interest in this beyond anything else. And so then I was like, this will potentially go big. Yeah, but the big secret about all my books is I don't write it first and foremost for others. I write it because I don't get it. I wrote Profit First because I didn't really understand manage profit.

00;04;50;00 - 00;05;06;16

Unknown

I wrote Get Different to codify really how good marketing works so I could elevate my own game. And I think once I find a system that really serves someone else, then I have a responsibility to bring it to others who could benefit from it. Oh that's awesome and we appreciate you writing this post. Obviously, we wouldn't even have this podcast.

00;05;06;17 - 00;05;26;25

Unknown

It wouldn't exist if we didn't wouldn't have. So it's a blessing. And thank you for carrying it so much further and so much deeper. Yeah. You're bringing to a community that maybe could have conceptually understood profit first, but now they can tactically implement it. And that's because of you. Yeah. And I appreciate that because if you're a real estate investor listening to this, Mike wrote the original profit first.

00;05;26;25 - 00;05;40;28

Unknown

I wrote profit first for real estate investing. So all that you're hearing from Mike is that he took that idea and was able to go deep with it and get this system. And I love what you said about it being something that you needed help with or something that you need to focus on because that comes through your books.

00;05;40;29 - 00;05;58;13

Unknown

You're very down to earth. If you don't read his audio or listen to the audio books, I highly encourage you because he reads them himself and it's just very relatable of your stories. They just it feels like you're telling the story and not just reading from the book. So it's very relatable there. I just don't like really fun with reading.

00;05;58;13 - 00;06;19;27

Unknown

So I know I'm diverting from what we need to talk about today, but I feel compelled. It's very okay. Okay, okay, cool. So I went online on YouTube and I was doing Atomic Habits by James Clear. Yeah. And it comes up and the full audio is there. And I notice it's not his audio. It doesn't it's not published on James clear Channel is his voice.

00;06;19;28 - 00;06;34;27

Unknown

Yeah, it's his book. And it's eight hours of content produced by someone else. And I was like, I kept on looking. There must have been like 30 or 40 videos of his book that got ripped, and they put up a static image and they play it. So I'm like, I wonder if it's happening to my books. So I type in profit first.

00;06;34;28 - 00;06;49;03

Unknown

There must be 30 or 40 versions of first out there. I'm like, oh my gosh, people are ripping off this content. So there's two choices I have. I can try to enforce this and call YouTube and so forth, or like, oh, this is a path people are following. There's one version of first that has like 300,000 downloads. Whoa.

00;06;49;04 - 00;07;06;19

Unknown

So I said, okay, I can fight him or I can join him. Yeah, I'm joining him. So with the money habit, I and Matt, who's producing this right now, came to the studio with me. I read the book, I read all my own books, filmed the entire thing. We posted the Money habit online for free on YouTube, the entire audiobook.

00;07;06;19 - 00;07;20;14

Unknown

But it's the true one from me. And you see me reading the book because I'm not going to beat people that are ripping off, right? So I might as well put it out there for free. Yeah. And the interesting thing is there's consumers that maybe can't afford the book or don't want to afford the book, but they also deserve the content.

00;07;20;15 - 00;07;35;11

Unknown

So I think it's actually a great way to be of service. It is a win win because a lot of people go to YouTube for so many good things, right? To learn, to listen to music, even entertainment, obviously, all that stuff. And that's where if they are more inclined to watch something, even you're reading the book that's so interesting.

00;07;35;11 - 00;07;52;28

Unknown

I love that because with YouTube, you're right there you they get to know you if you're the one out there versus like someone just ripping off your audio or something like that. But that's that's pretty incredible and had bonus content. So there's certain things on the video that's not not even in the audio. I look at the camera and I start talking and say, hey, here's something just for me and you.

00;07;52;29 - 00;08;10;15

Unknown

Yeah. And so you get some bonus stuff. Yeah, that's very cool. So in the real estate world, yeah, a lot of the profit. First, a lot of people have inconsistent deal flow, but a lot of them want consistency in their business. So that's what I want to focus on a little bit here in this episode. So let's let's riff on that a little bit.

00;08;10;15 - 00;08;30;13

Unknown

So how can they get consistency in their business if they're just always up and down with deals closing not closing big checks, small checks, good months, bad months. Like what would you say? Some advice there. I got a call from this guy John. He owns a plowing business. Now, where you are, you don't need snow plows, but no, thankfully.

00;08;30;13 - 00;08;47;09

Unknown

Yeah, I'm done with that. But up this way, up this way. You need snow plows. And he called me. It was February, so just a couple of months ago. And he says, Mike, I had an amazing year. He goes, I crushed it. We made so much money this past February because we had actually the biggest snowstorms in a long time in this area.

00;08;47;09 - 00;09;05;05

Unknown

And I'm like, oh, I'm waiting for the next call. And it happened just a couple days ago, he said, Mike, because the snow stopped in February. So March was snowing and now we're in April. He's like, hey, the money's going away pretty quickly. And I'm fearful for the summer because by the summer there's going to be nothing. So what happens?

00;09;05;08 - 00;09;30;17

Unknown

Similar to Deal Flow is he gets this spike of income, snow plow time, and then he spends it because he thinks that's the norm for the business. And then when there's a dry season, literally he's in trouble. So I told John is okay, you better today set up what I call a drip account and realize this, that the money that comes in during a certain period is designed to cover you for the entirety of the year until the next surge comes.

00;09;30;18 - 00;09;49;24

Unknown

So the technical way to do this, and this is almost a little too extreme, but it'll express it pretty well, is if you earn $12,000 this month and you make all your money in this one month, as will say March's or February is the snowplow month, and you don't make it answer time. What we're going to do is we're going to carve it up into pieces.

00;09;49;24 - 00;10;12;03

Unknown

So we're going to put it into account. We're going to call it drip. But then in March we're going to take 1000 out, not 12,000 and take 1000 out in April 1000. And we're going to continue sequence so that 12,000 of income is dispersed in $1,000 increments in legal services or something like that, where you get a retainer, you have to earn the money.

00;10;12;03 - 00;10;30;06

Unknown

It's called earned income. So you receive the money in advance, but you have to earn it. A drip account acts the same way you receive the money, but it has a responsibility to cover you over the time. So you carve it in smaller pieces and it normalizes the way you operate your business. So if a real estate investor, let's just do a hypothetical situation there new in real estate.

00;10;30;06 - 00;10;52;27

Unknown

But they got a coach and they were able to pay. So they got some actually good leads. They converted them. They get a couple of deals and within one month they make $100,000. And that's what they made the last year in their W-2. Well you would say, okay, for this 100,000, let's divvy it up maybe over the 12 months and drip out, you know, like 8000 a month to, to be able to live like they were before.

00;10;52;28 - 00;11;16;08

Unknown

Only now they've just gotten all that money up front versus obviously over time, that's how they can be consistent. That's exactly right. Yeah. There's what's called a received income and an earned or recognized income. So we're going to receive 100,000. But we're going to recognize 8000 per month. Now that's almost too simple and clean because the reality is when you make 100,000 you also have some expenses associated with that.

00;11;16;09 - 00;11;35;05

Unknown

So you may have certain demands that you have to dress in the beginning. So maybe you receive 100,000. And on month one you got to spend say 30,000. Sure. Right. But now you take that remaining 70,000 and we slice that up into pieces of 6000 a month or whatever. Yeah. Okay. So it's just making sure that you have a system in place to be able to divvy that money.

00;11;35;08 - 00;11;54;24

Unknown

Is it? Right. It's just being able to do that. Oh man. There's just so many good things with this because so many people in the real estate world, they have those peaks and valleys all the time. Deals get pushed back, things go wrong, things fall through the, you know, the through the cracks. This is where having that system be able to say, okay, this month we might have to pay these things.

00;11;54;24 - 00;12;16;03

Unknown

But having that to where you're splitting out the money, you're intentional with the dollars and making sure that in an inconsistent business that you have something very consistent and that could be your cash flow, especially if you're getting bigger chunks. I did want to mention, though, if you're in real estate and you are doing rentals or have a portfolio or have any type of I air quotes here, passive income.

00;12;16;04 - 00;12;38;05

Unknown

Yeah, that's where that's almost setting you up like profit first because that's usually monthly income. So you're already apportioning out, you know, the year's worth of rent over 12 months. So that way you've got more consistency. That is more of a subscription style business. And the real estate world, you know, having rentals. So if you're listening to this, I'm not I'm not encouraging you or enforcing or anything.

00;12;38;05 - 00;12;53;16

Unknown

It's just a different way to think. If you've only been wholesaling and flipping, those are usually big chunks at a time that you have to have a system, or you will eat up all that money. If you don't have a system, you're going to eat it up. It's just going to be out there and it's going to it's Parkinson's Law again.

00;12;53;18 - 00;13;10;24

Unknown

You know, you're going to have all that money, but if you're going into rentals, it's already kind of forcing you to do that. But then if you add profit first to any of these, that's where the system can really come in. Because, Mike, I don't know if you see this, but a lot of people have systems for operations and for sales for marketing, but then nothing for when the money hits their bank account.

00;13;10;25 - 00;13;29;05

Unknown

So it's the most more thing a lot of people tell me, I wish I had more, which is monthly recurring revenue. Yeah. And some people say, well, I don't have a business that I can support that every business can support. Mr.. The question is, is the customer doing it for you by sending you a check every month, or are you employing it within your system?

00;13;29;09 - 00;13;53;15

Unknown

That's so good. So it is a choice and you should do it. What's interesting too, and we talked about this a few episodes ago, is the Neanderthal mind of this. It's called optimal foraging theory. But this hunt and gorge mentality is historically when we get something in lump sum, we see the risk of it rotting away and therefore we are programed to consume it unless it's portioned and preserved.

00;13;53;15 - 00;14;10;13

Unknown

So if you receive a lump sum of money, the most important thing to do is to secure some in some fashion. You can do a drip account. We also have these things called vault accounts, which are slightly different. Yeah. But then you slowly pull it out in extracted pieces and sure enough you'll normalize your spend. You'll be much more responsible by default.

00;14;10;13 - 00;14;32;08

Unknown

What's a vault account? Just in case someone doesn't want to do the drip, or if they don't need to drip it out. The most predictable bill in the world is the unpredictable. Yes. So you said, like, you know, problems will happen. Yeah, I guarantee it. This roof will leak at some point. It's guaranteed. Not right now. We not, as we're talking literally was doing a podcast a month ago.

00;14;32;10 - 00;14;46;08

Unknown

I was interviewing someone. They flew me out to do this. It was like a big deal. It was pouring in LA and the roof started leaking. And right in the middle of the table, blink, blink, blink. We couldn't change the setup. So this video, we had some of the table back, there is a drip and we had to pretend it wasn't happening.

00;14;46;10 - 00;15;09;05

Unknown

As you see, it's a little shiny blip. At least you're not entrepreneurs with ADHD. Okay, it was just keep talking. So vault account is a preservation of money for the unexpected expense. There are some rules of thumb for most businesses. A preservation of three months of all out expenses is a good preservation. And the reason is, is because it lasts you more than three months.

00;15;09;07 - 00;15;26;29

Unknown

What it does, it gives you a buffer. So if you say my, my monthly nut is $10,000, yeah, that'd be $30,000. My vault account. What will happen is I reserve this money and now disaster strikes, there's an earthquake and construction is done. Month one, I can cover my expenses as normal, saying, well, maybe we're going to recover quickly.

00;15;27;00 - 00;15;48;07

Unknown

Month two. Now I'm in a decision state and say I better start cutting expenses and being responsible here. Now, if I cut expenses from 10,000 a month down to say, 2000 a month, in extreme case, now I have $20,000 left at 2000 a month. That affords me ten months so you can start stretching. But if you don't have enough buffer to make cognitive decisions, prudent decisions, you become reactionary and you destroy yourself.

00;15;48;09 - 00;16;07;23

Unknown

Oh, I love that. So half three months, minimally, ideally six months. In our case, I'm the extreme dude. I have one year of of reserves for our business. That's what Bill gates did right back with Microsoft. He was adamant that he had to have 12 months, like if they got no revenue coming in. Yeah. And that's where he grew, you know, to be able to have that.

00;16;07;23 - 00;16;26;22

Unknown

And he always had that reserve. But lots of people that don't have a reserve, that's one of the quickest ways you can get that back. Like your mental capacity back is by just having a buffer. I love that you brought that up. Most people make decisions from fear and not from their confidence, because they have to be on the edge of their seat all the time.

00;16;26;22 - 00;16;44;17

Unknown

And so when there is inconsistency, even though we know the inconsistency is coming. We don't we're not prepared for that or we don't have a system to counteract that. And that's what we're talking about here. So if there's one thing you do from this episode, I would say it's that drip account. I would say you do at least the drip account so you can have something over time.

00;16;44;17 - 00;17;03;06

Unknown

But if you don't do that, the other thing would be like one A is that vault account making sure you have those reserves and at least put a lot of that money there just for the love of God, don't reinvest everything back into the business. Just the work, right? I like it when it's intentional. I just don't like it when most people say it.

00;17;03;06 - 00;17;17;20

Unknown

Because all that means is I have no idea what I'm doing. I'm just going to throw money back out there to see what sticks. It's a soft term. There is a person who has struggled with their weight and they said, I'm a little fluffy. I'm like, I want to say something. I'm not trying to be offensive, but you're obese.

00;17;17;27 - 00;17;39;21

Unknown

And fluffy is a way to soften the term so we don't see action. But when you acknowledge your obese, now you have to confront it. And so I wasn't trying to be confrontational, but I was trying to be honest and clear and direct. And so some business owners will will do that with their numbers and say, you know, I just I want to reinvest or plow back the money because I'm going to hear that too.

00;17;39;23 - 00;17;56;12

Unknown

Those are horrible terms because those basically say, I am not running my business efficiently, and I'm going to forego profit and throw it into the business as an expense. Yeah. So I'm like, let's call it what it is. It's an inefficient business that you throw more money into to operate it, and you're running a business poorly. Let's just call it the truth and you're being confrontational.

00;17;56;14 - 00;18;17;09

Unknown

No, we have to face the truth to fix it. Yeah, exactly. That's where in the seasons of our business I've had that mentality sometimes. Thank God for profit first. You know, and for a system like that, or now, people holding me accountable like my own CFO and my own person on the team. So being able to have that person there, that's constantly like, okay, are we doing this just because we want to?

00;18;17;10 - 00;18;32;19

Unknown

Or it's like, is this going to actually get us a return? Or like being able to be that yin to my yang? And I really needed that in my business. But I think that's been great. Is there anything else that you want to get out there for? Like if they're inconsistent, I'll give you one final thing is by having a vault account or a drip.

00;18;32;23 - 00;18;49;28

Unknown

But ideally the two is the most powerful negotiation tool. So I read the book by Chris Voss, Never Split the difference. Extraordinary book on negotiations. And there's one more chapter I like to add in is when you don't have to do the deal, it's the best way to do the deal. I got a call from a guy yesterday, I love that, yeah, it really is.

00;18;49;28 - 00;19;03;00

Unknown

I got a call from this guy yesterday. He's like, I want to do business with you, and here's what I need and want. And he's like, waving a big check in front of me. I don't need it. And so I was like, well, the deal sounds exciting, except there's a few parameters that I'm not going to do. He's like, well, that's that's required.

00;19;03;01 - 00;19;17;06

Unknown

I said, okay, we're going to pass on it. He's like, you know how much money this is? I'm like, yeah, I realize it, but I don't I don't need it. That's so awesome. Yeah. So he came back the next day and said, you know what? We agree with what you're saying. And and gave me the deal the way I wanted it.

00;19;17;07 - 00;19;35;19

Unknown

Yeah. Because I didn't need it. And when you have that vault account, you won't do those things just to make money compromising the integrity of your business, those marginal deals that you think you have to do, the deals that you do anymore because a bad deal is worse than no deal. If it takes you backwards, it's going to take you a lot further.

00;19;35;19 - 00;19;54;06

Unknown

Oh my God, then not doing. You're speaking man. Well, this is where where the rubber meets the road. We want to help you from this podcast be able to say okay, number one, have that drip account. If you're going to get large chunks at a time, protect yourself from yourself. Number two is the vault account. Protect your business like from you as well to making sure that you have that there.

00;19;54;06 - 00;20;16;15

Unknown

But then also as a benefit to you. You don't have to take those marginal deals anymore. You do not have to risk getting into a bad deal when no deal would have been better. Man, that is hard for me sometimes because I'm like, oh, I want to go. I want to do a new thing. I'm the entrepreneur. I like the lots of people in the real estate world are deal junkies, so sometimes it's just being able to say, no, you don't need to get that deal just for the sake of the deal.

00;20;16;15 - 00;20;31;05

Unknown

So this has been awesome. If you need to work with someone that's going to help you hold accountable, that's us. Simple CFO. You can also read Mike's book Profit First. He's also got one for the personal finances, which is the money habit. It's also for your team as well. So Mike, thank you so much for being on the podcast.

00;20;31;05 - 00;20;46;21

Unknown

This has been a fun series. Thanks for doing this with me. Yeah. 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.