Profit First for Real Estate Investing

Do you have multiple real estate properties? Perhaps when you look on paper you are asset-rich, but when it comes to cash flow and paying bills on time, you realise you are cash-poor. This can be very stressful. It can also lead you to make rash business decisions that may not be the best decisions for the long run, like settling for a quick tenant rather than the right tenant who can afford the right price or selling a property quickly to get some cash back in your account.

What you need is a cash flow money management system that can help you get your finances back in order, and allow you to say farewell to stress and hasty business decisions. What you need is Profit First!

Profit First is the brainchild of entrepreneur mastermind, Mike Michalowicz. It challenges the traditional accounting systems and methods of:

Sales -Expenses = Profit

Profit First flips this traditional equation on its head, and implores its adapters to prioritise profit, by using this equation instead:

Sales – Profit = Expenses

The secret to the strategy’s success is in settling up multiple bank accounts.  Whether you are buying property to rent out as an investment or purchasing to flip, the principles remain the same. When doing so it helps keep you accountable and in charge of where your money is going, and how it is being spent.

These are the accounts you need to set up including their function:

Revenue
Where all your money is deposited.

Profit
Where your allocated percentage of revenue is stored. As a guide this is between 5-20% of revenue.

Tax
Revenue is kept aside for taxes such as GST, company tax, PAYG instalments, payroll tax, these will vary depending on your business structure and location, as a guide 15%.

However, when it comes to investing in properties, tax does play an important role, therefore you may need more than the standard 15% that other industry business owners may need.

This is to cover additional expenses such as capital gains tax, stamp duty (if applicable). We can assist you in tailoring your percentages to suit your needs.

OPEX
Your operating expenses account. This includes software, utilities, wages, real estate commissions, insurance, marketing etc as a guide this is 30-65% of revenue.

Owners Pay
This is a percentage allocated from your revenue. This is the owner’s pay put aside for the owner’s wages and superannuation. As a guide, this is 0-50% of revenue.

There are no limits to the number of accounts you can open like it says in the book… when in doubt, open an account! When you are prioritising your profit first, it is helping with your money mindset. It is giving you the win that you need to keep you feeling motivated within our business and keep you on track to reach your goals.

Whether your real estate business focus is on buying to rent or buying to flip Profit First can be implemented. The percentage that you transfer into each account is also dependent on each business, and its structure. We are able to assist you by conducting a Profit Assessment on your business to ensure that your percentages are specific to your business needs and goals.

Should your real estate focus be on buy to rent, you would need to ensure that your rental price is covering your expenses and you are able to turn a profit. We can help you determine this, by ensuring that your rental price is high enough to cover management fees, insurance, cleaning and maintenance, strata (if applicable), interest payments and more.

Perhaps your real estate dream is achieved by purchasing, renovating and flipping for profit. There are many factors at play, and being in control of your finances is imperative if you intend to make sound business decisions. How much can you afford to spend on renovating? Have you put aside the money needed for any applications to the council that you may need to submit? Have you allowed for the time this may take to be approved? Do you plan on living in this property after completion to save on some taxes, before selling? These are just some of the questions you need to know answers to when dealing with property. As we are aware the property market is volatile and with interest rates going up rather than down, money management is key to a successful investment.

When you utilise this system and embrace the format, it will encourage you to keep, create and grow your wealth. It can also aid in an exit plan that can assist in generational wealth and security for you and your family. Perhaps setting up a trust may also be in your best interest financially as well as for your family’s future security. We can assist you with this.

When you have the security of good cash flow and financial clarity, it enables you to be able to generate additional profit from deals and businesses you already have. Relationships with other business owners in the industry can flourish and you can leverage these relationships to make sound business decisions. For example, if you can pay upfront with stakeholders this could allow the opportunity to negotiate on price, resulting in an overall net win for you.

If you need assistance in setting up your accounts, knowing your percentages, and implementing Profit First into your real estate business, please give us a call. We are experts when it comes to money management. We use the Profit First methodology in our own business, so you can rest assured knowing that your business is utilising a tried, tested and successful system.

Contact Us.