00;00;05;18 - 00;00;25;28

Unknown

You're listening to the Profit First for Real Estate Investors podcast. This show is all about helping real estate investors and entrepreneurs bring clarity and structure to the financial side of their business. In these sole episodes, we focus on practical financial strategies that real estate investors and business owners can actually implement, whether it's profit, cash flow, forecasting or mindset.

00;00;25;29 - 00;00;49;11

Unknown

The goal is simple to help you run your business with more confidence and less financial stress. Enjoy the episode. Most investors, and let's just be honest, entrepreneurs in general obsess over the wrong KPIs, and it's killing your profit and your cash. First of all, KPI key performance indicator. It's also the most important numbers in your business. Here's some ones that I wrote down.

00;00;49;11 - 00;01;12;28

Unknown

When we ask people, what do you think that you should be tracking in your business? Let me get that right. Now. Here's some of the metrics. Deal volume. Revenue doors. Owned a couple of those right there. I would call those ones vanity metrics. If you show up somewhere and you're like, hey, I own 100 doors or, you know, we did $2 million this year, someone like me is going to say, okay, that's great.

00;01;12;28 - 00;01;31;23

Unknown

What was your net profit? Or how much cash did you add to your bank accounts that you didn't have to give to the taxman or you didn't have to give, and that you're not in expenses or anything like that? That's where I want you to obsess over the right things. The obsession is that the problem? It's the obsession over just those vanity metrics.

00;01;31;23 - 00;01;48;14

Unknown

So what are some metrics that I would have for you as a real estate investor or as a business owner? Here's some of the ones that I wrote down that actually matter. Number one. Net profit margin. What is margin if you don't know? That's if you've ever seen a piece of paper before where there's like the edge on the outside.

00;01;48;17 - 00;02;18;23

Unknown

That's all that margin is in your business. It's literally the safety net. Because if you're going to have the meat and potatoes of the business, you want to make sure that there's a little room on the outside. That's the margin that you have, that cash safety net to make sure that no matter what happens in your business, whether you need cash and you need to take it out for yourself as the owner, or whether it's there's some random expense that pops up or an opportunity that you want to take advantage of, that net profit is for you to be able to either add to your cash balance or to be able to reinvest back in

00;02;18;23 - 00;02;38;03

Unknown

your business, because I want you growing from your reserves, not just from your revenue. So you need a net profit margin because you need reserves. You need that money there. What's another one to obsess over? This is something that I would obsess over, especially if you're in the real estate industry. Your cash flow per deal, that could be any type of deal.

00;02;38;05 - 00;02;58;10

Unknown

If you're doing wholesale, how much cash is going to come to you when the actual closing happens? How about for a fix and flip? That one's a little trickier because with the wholesale deal, when you assign it or you do a double close at the closing table, you usually just get the money for the assignment fee or the spread between the double closed, the by and the cell.

00;02;58;13 - 00;03;25;19

Unknown

And that's all the money you might have out in the deal, because you're not really getting a lender for a wholesale deal. Fixing flip is quite a bit different if you're doing a fixed and flip, and you had your own money in the deal, maybe you had lenders funds in the deal when it all shakes out. You need to know the difference between what was money that you put into the deal that might just be coming back to you across the table that was already yours versus the actual profit from that deal, but now is coming back as cash.

00;03;25;25 - 00;03;42;04

Unknown

That's why I want you to be very clear on the cash flow per deal. That means how much actual cash are you going to receive from this deal? Number one, is that your cash or is that someone else's cash, or was it your cash that you put into the deal? And it's just coming back to you across the closing table?

00;03;42;11 - 00;04;00;14

Unknown

I want you to know your cash flow per deal. That's very important. One thing to look out for, too, is if you know your cash flow per deal and you have different exit strategies, this is one thing. My background is actually real estate investing. I know it looks like it's finances because that's what I'm talking about, but I was actually in the real estate world for about ten years.

00;04;00;14 - 00;04;21;27

Unknown

We did about 800 deals while I was a part of a big company in my early 20s, and we didn't track this like we should have the cash flow per deal, because if we did, it would have shown us that we were great at wholesaling, we were great at the quick turns. We were great at marketing for to get a deal at the lowest possible barrier and then selling it very quickly.

00;04;22;00 - 00;04;42;20

Unknown

We also did fix and flips and turn keys, and those were not as profitable for us, but we still did those exit strategies. Sometimes you're in the real estate space and one of your exit strategies is very much outperforming another one. I want you to be able to understand the difference, because if you need to cut something, then you need to cut it.

00;04;42;21 - 00;05;08;28

Unknown

Okay. I'll give you another example. Another guy I worked with, he had a portfolio of Airbnbs. He had about 20 Airbnb properties. And we dove into his numbers and his broke down what he said on paper, he was supposed to make per Airbnb, which he was thinking between 700 to 1000. And then we actually ran the numbers of what's the cash flow per door and per deal here for him.

00;05;09;02 - 00;05;36;11

Unknown

And it turns out he was making only about 200 to about 300 per door as an Airbnb, he said, I'm doing about four times the work as a standard rental, and I'm making about just as much. Or if half of what I can make on a standard rental in my area. He did. He converted his Airbnbs to long term rentals, to standard rentals, and he had some midterms in there as well, too, like for traveling nurses, insurance companies, that type of thing.

00;05;36;13 - 00;05;51;13

Unknown

But that's just from looking at the numbers now, there have been people on the other side of that. I don't want you to think I'm slamming Airbnb. There are people that are making thousands of dollars there, or they do something like a pad split, or they're doing renting by the room and they're making 1 to $4000 a month on a standard property.

00;05;51;16 - 00;06;10;29

Unknown

So I'm not saying it's a bad way to go. I'm just saying this is a copy for you to obsess over is knowing per deal and per door, what cash are you making? What's another one that I wrote down here? Your cost per acquisition? Do you know how much it takes for you to actually get a deal in the door?

00;06;11;01 - 00;06;28;26

Unknown

That one's a pretty standard one, but that is one that if you're not tracking it, you have to start tracking it. Cost per acquisition. I would also break that down to the sources of how do you market and what are the returns on those sources. So you could see if I acquire a property and I sell it as a wholesale deal.

00;06;29;00 - 00;06;50;01

Unknown

Where did it come from? What was the original channel. So that way I know my cost per acquisition. What did it take to acquire that property? How much did I pay for that and what channel was it marked to? How did I sell it? There's actually a couple KPIs all wrapped into that one single KPI, and you could go a little bit deeper on that, but I at least need you to have the cost per acquisition.

00;06;50;02 - 00;07;06;07

Unknown

Do you know how much it takes for you to acquire a property? Do you know your debt service coverage ratio? Do you know how much debt you have to your portfolio? Do you know if you had do you know sometimes as well too? I like to tell investors you should know your loan to value at any given time.

00;07;06;09 - 00;07;36;29

Unknown

Do you know how much debt you have versus how much you own in those properties? Like what's your RV and what's the value versus what you owe on the property? Sometimes I won't even say sometimes. Most of the time if you are missing money or if you're like, where did all my funds go? And you're ever buying and holding, that is one place I would look immediately is how much of your own cash have you poured into your portfolio, versus how much of the loans were you able to get to cover those rentals, or those buying holds that you have?

00;07;37;03 - 00;08;01;28

Unknown

That is a big one. If you didn't do that, or if you've never done that exercise of saying, okay, this is how much I own and what they're worth versus how much I owe. And if your LTV is like 90, 95, 100%, or 100% plus you're in some scary territory, that means that you've gotten so much loans and the values not there that if you had to sell everything, you might not walk away with anything and you might have to bring money to the table.

00;08;01;29 - 00;08;24;12

Unknown

Now, the flip side, we've worked with some people where their loan to value is more like 20 or 30 or 40%, meaning they had anywhere from 60 to 80% equity in the property. So they had this huge chunk of cash sitting there because they had put a lot of their own money to either by the property or to fix it up, or when they're turning tenants, they're putting their own money into it.

00;08;24;17 - 00;08;51;03

Unknown

This is where if you are feeling the cash crunch, but you have a low loan to value, that could be an area where you could refinance and to be able to get cash in your pocket. I've seen that happen multiple times. That might be where your money is hidden, but if you're tracking these KPIs, these key performance, these key performance indicators on a regular basis, that's where you're going to be able to make a decision that puts real money in your pocket.

00;08;51;04 - 00;09;09;22

Unknown

So that's what I want for you. So I want to give a couple for two different areas specifically for the fix and flippers out there. I want you to have an actual versus the budgeted rehab cost. Everyone out there. If you're a fixing flipper, for the love of God, have a scope of work and a budget attached to it.

00;09;09;22 - 00;09;28;03

Unknown

But then I want to see your actual versus the budgeted amount. How consistently are we going? Over 5% over the budget amount and 10% over if 10% is the norm, you know, to build that in to your project as a buffer, if you know your average that you go over, I would build that into every property, every project.

00;09;28;03 - 00;09;50;06

Unknown

So that way when you're asking for a loan, when you're actually purchasing the property, all of that is calculated upfront. So it doesn't surprise you if you're consistently going over budget. It should never be a surprise for you, and it might actually help you budget better for future projects. If you know I'm consistently going over 10% wherever it might be, because some projects it might be 30% because there was this foundation issue, you had no idea.

00;09;50;09 - 00;10;08;07

Unknown

Some projects that might be 5% because, hey, we didn't have to do this thing or over here. It actually went pretty smooth. But there's always something that comes up. It was just a little bit less whatever that average is. I would just bake it into all your deals. But knowing the budget, actual rehab costs versus your actual that is going to help you immensely.

00;10;08;07 - 00;10;31;20

Unknown

Here's another one as a fix and flipper. Do you know your days to sell? I would even say what's a better metric there is. Do you know your cash conversion cycle from when you actually pay money to buy a property, to when you get that money back for a fix and flipper? That could be anywhere from, I won't say, 30 days because you might have to be whole tailing, but 60 days to, I don't know, maybe a year.

00;10;31;20 - 00;10;53;19

Unknown

I was at a project last month in Tampa where the guy had been working on it for 13 months now. This is like a multiple million dollar project where he's taking his time, and it's going to be this, like $4 million property at the end of the day. But do you know your timelines? Do you know from when you outweigh the cash to when you'll get cash back in that you can cover that amount?

00;10;53;19 - 00;11;18;02

Unknown

Or do you have drawers or loans to be able to cover it until you get the property profit once it's sold? So that's another big one. What's another one profit per flip? Do you know that? Do you know if I asked you right now through the screen, how much are you making per flip? What is your average? Some people I get on the phone with them and they tell me a range 25 to 35,000.

00;11;18;03 - 00;11;35;17

Unknown

I'm pretty sure I'm like, okay, that's quite different though. 25,000 per flip versus 35,000, whatever that number is for you, I would have it to the penny and you say, hey, you're the finance guy. Of course you want it to the penny. But for you to know, what are you really making on these projects? What's worth your time or not?

00;11;35;20 - 00;11;54;19

Unknown

Is it worth it to do more deals, or is it worth it to do less deals but more profit? There was a guy today. I was literally at a project with someone and they said, we do it in volume, but they're buying, holding well there. No, they are building from the ground up and they're fixing flipping. I want you to know, the fixed and flips.

00;11;54;19 - 00;12;13;05

Unknown

This is how much we're making. They knew they were making about average 5000 on the fix and flip on the the ground up builds. They're making a lot more. They're making about 100 to 150,000, which is a range. But knowing those numbers to say, okay, if I fix and flip, I know that this is my average versus I'm going to do new construction.

00;12;13;07 - 00;12;30;19

Unknown

You having that is going to help you turn the dials in the switches to know, okay. Should I focus on this or should I go all in on this one area? Should I go from a fixing flipper just to new construction? Is there enough lots? Can I get enough actual progression in my pipeline to be able to switch fully from one to the other?

00;12;30;21 - 00;12;46;00

Unknown

If you know these numbers, you're able to move to the puck where the puck is going, right? The Wayne Gretzky line. I want you to know exactly where you are and where you stand. There's just some for the fix and flip world. Here's some for the by and holds out there. If you're a landlord, you're cash on cash return.

00;12;46;02 - 00;13;02;29

Unknown

Do you know your cash on cash return? Like how much cash you put into this project and this property versus how much cash you actually receive in rents, whether that's on a monthly basis, that annual basis, knowing your cash on cash return of the actual cash outlay that you have is number one. Another one would be your net operating income.

00;13;03;01 - 00;13;23;04

Unknown

Do you know what you're really making parental and per door. And for your overall your overall portfolio. This also goes back and I'm doing a call back here to when I said a very important KPI is your cash per deal for your portfolio. Do you know your actual cash per door and do you know your property profit per door?

00;13;23;05 - 00;13;43;29

Unknown

They're very different. You know why? If you have a standard mortgage on your rental property, like you've refinanced, and maybe you have a lower percentage than just a private loan from someone, part of your payment sits on the balance sheet, and part of your payment sits on the profit and loss. So you can't really see your cash flow if you just look at each statement individually.

00;13;44;01 - 00;14;00;23

Unknown

That's why knowing your cash per door is very important, and also knowing how efficient your portfolio is as well. Do you know the net profit because you're going to have to pay some taxes on that. Are you able to push that down? Can you take some of the depreciation. Those types of questions. Now you're walking into your tax meetings.

00;14;00;23 - 00;14;19;15

Unknown

Maybe you just do that once a year. But you're walking in smarter to say, how do I drive down this net profit that I have here? Because I don't want to pay as much in taxes. That's why you're looking for that specific key performance indicators. Then for any business, another one I'm going to throw out there is your reserve your reserve fund health.

00;14;19;17 - 00;14;38;02

Unknown

Do you know how much you have in reserves? Do you know if it's three months, six months I advise everyone I don't say three months anymore. I say six months at least. You know why. Now, I've lived long enough to where? I've seen several market cycles in the real estate world. I've seen several cycles where it's been high highs and lows.

00;14;38;06 - 00;14;59;09

Unknown

What I want you to do is have those reserves. So that way, no matter what happens, you're able to cover whether it's something that's personal, whether it's market related, whatever it might be for you, that's another big one. Is do you know how much cash on hand you have right now? Not that's for projects, not for properties, but that if you had an emergency, you needed that money to cover it.

00;14;59;10 - 00;15;30;17

Unknown

That's another big one that everyone I believe as a business owner that you should be tracking. I want you to be able to know, yes, these KPIs that I gave you specifically. But at the end of the day, if you're going to track a number, here's your witness test. What does that mean? This is the actual test of if you're going to use this number or not, does it help you make a decision at the end of the day, is that decision going to be made from that number, or is it just a vanity metric like my revenue or something like that, or just how many deals I did?

00;15;30;24 - 00;15;49;08

Unknown

I want you to know the ones that I gave you, because all of the ones I gave you can help you make decisions in your business versus the vanity metrics that sound good when you go to an event. But at the bottom line. Do you have any real profit? Do you have cash reserves? Do you know how much you're actually spending to acquire those deals, and is it too much?

00;15;49;12 - 00;15;56;28

Unknown

Do you know your overhead, those types of things that matter to you that will help you make these decisions that help you put more money in your pocket?