Tuesday, April 11, 2023

Profit First for Real Estate: How Asheville Investors Can Keep More of What They Make

Meetup Recap
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From the AVLmeetup event on April 11, 2023

Profit First: Transform Your RE Business from a Cash-Eating Monster to a Money-Making Machine

Event details, podcast, and full transcript ›

AVLmeetup's April 2023 event, Profit First, answered a question most real estate businesses avoid: once the deal closes, where does the money actually go? David Richter, who wrote Profit First for Real Estate Investing and runs the profit-advising firm Simple CFO Solutions, LLC, presented on April 11, 2023 at Archetype Brewing North in Asheville. His framing in the first minute set the tone: "I really don't care about your growth. I care about what you keep in your pocket."

Key Takeaways

  • The talk inverts the standard formula. Instead of sales minus expenses equals profit, Profit First is sales minus profit equals expenses. Profit comes off the top of every closing, and what remains runs the business.
  • Three accounts open first, called the golden trio: profit, owner's compensation, and owner's tax. An income account and an operating expenses account sit around them.
  • The system runs on a calendar. Move the money by the Friday after a property closes, review it monthly, and take up to 50% out of the profit account each quarter, or up to 90% if bad debt is crippling the business.
  • Joey, the investor whose story anchored the talk, lost $70,000 in 2019 while working 80-hour weeks and pushing from one or two deals a month up to three or four. Richter recounted his line: "David, 2019, I did more deals than I've ever done, and I lost more money than I've ever lost."

Why More Deals Did Not Mean More Money

The problem is rarely revenue. It is that most owners cannot state three numbers: what they make, what they spend, and what they keep. The talk argued that anyone who can pull those three monthly is ahead of 95% of the investing world, because everyone talks gross and nobody talks net. Zac Ruiz had put AVLmeetup's version of that earlier in the night, noting that "focusing on your gross is just gross."

Joey's turnaround came from one exercise: figuring out what he needed to keep each month, then converting that into deal count. He needed five deals in all of 2020, not the three or four a month he had been chasing. He hit it and had the best year of his life. A few years later he gave $71,500 to a camp for kids out of his profit account alone, almost exactly what he lost in 2019.

The Golden Trio of Bank Accounts

The system is a modernized envelope system run on bank balances. Money deposits into an income account, then transfers move it into profit, owner's compensation, and owner's tax before anything reaches operating expenses.

Each has a distinct job. Owner's tax spreads the bill across the year so a deal does not have to be scrambled together at filing time. Owner's compensation is the habit of paying yourself, and it exists because the talk described calls with people making seven figures who paid themselves $30,000 to $50,000 a year and scraped by. Profit is the icing on the cake, drawn quarterly. The talk pointed to Relay, a Profit First bank that opens up to 20 accounts for free.

What the Asheville Market Looked Like That Month

New listings in Buncombe County jumped 74% month over month in the March 2023 report, the sharpest signal in the market update that opened the night. Ruiz has published the Ruiz Report since the start of the pandemic and told the room this was its 37th month. He also reported 32% more homes going under contract than in February and 24% more closed sales, a lagging number reflecting January contracts.

His segment then turned to acquisition loops, borrowed from the tech growth curriculum at Reforge. Referrals are a viral loop, hiring sales reps is a sales loop, buying leads is a paid loop, and a recurring market report or podcast is a content loop. Paid loops are the least sustainable, because a lead cohort degrades in quality while the ad spend does not. Content loops hold you in what Ruiz called the habit zone, contact between daily and monthly, so sellers know who to call.

Questions

  • Should I set up all these accounts for every entity I own? David Richter called this his most asked question. Organize by business function, not by legal entity. If you hold a stack of rental LLCs under a holding company, run one set of accounts for rentals as a collective. For genuinely different businesses, set up the core accounts for each, since this is cash management rather than accounting.

  • What was Joey actually spending all that money on? More deals, more people, events, and marketing. Richter said marketing is usually the first thing to go out of whack, because owners dump more into it while trying to scale without knowing their return on ad spend. Richter's second place to look is payroll: is everyone in the business producing, or are some a charity case?

  • I am just starting out. Should I still do this, and how do I split the percentages? Richter said to set it up anyway. "The earlier you can implement it in your business life, the better your habits will be when you get to be a bigger business." Start with percentages you can sustain rather than the targets on his tap sheet. If you still hold a W2 job, take what you need from that paycheck and route 5% to owner's compensation.

  • My property manager controls what I actually receive. Does this still work? Richter said the system applies to the cash you receive, not the cash you control. Whatever the manager disperses is what you direct into buckets. He flagged reserves for capital expenditures, repairs, vacancy, and turnover, since one repair can wipe out a year of cash flow on a rental. His tap sheet has a line for exactly that.

AVLmeetup's next meetup, on May 2, 2023, was The Power of Local with the owners of Looking Glass Realty, Mosaic Realty, and Loso Realty.

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