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How to Set Up Profit First for Real Estate InvestorsREAL ESTATE (HTTPS://LEJIMMY.STORYCHIEF.IO/CATEGORY/REAL-ESTATE)  —  6 min read

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So you stumbled upon or heard about the book Pro�t First and you're wondering if it'll work for people inreal estate industry? I hear you! The only other content I could �nd on the interwebs was Clayton Morris'article over on Morris Invest (https://morrisinvest.com/blog/2017/7/21/how-to-implement-pro�t-�rst-in-your-real-estate-investing-business). However, it was a bit general and left some questionsunanswered like:

1. Is my rent considered total revenue or real revenue?

2. Exactly how do I go about implementing this for my real estate business?

This post may contain a�liate links. For more information, see my full disclosures here. (https://lejimmy.com)

BackgroundLike many people who delve into the world of real estate, I started my journey with the end set on earlyretirement via a large portfolio of rental homes. I thought, if I had 10 properties netting me $500/mo, Icould essentially retire!

Not so fast boyo.

Along the way, I found I was making extreme sacri�ces with my personal �nances in the hopes of betterbusiness pro�ts.

The worldview I kept repeating to myself was: If I invest $1 now, it will be worth $5 in some distantfuture.

Even after I successfully closed several deals, I was still crossing my �ngers that no major repairs wouldcome up, and hoping that everyone makes their rent payments on time this month. This type of thinkingslowly cornered me into a scarcity mindset and led me down a path of arti�cial poverty.

Wait a second. Didn't we want a business to design itself around our lifestyle and not the other wayaround?

I went looking for answers...

I don't quite remember how I stumbled upon the book Pro�t First by Mike Michalowicz(https://amzn.to/2K7AsBo), but I knew within one chapter - this was going to be a game changer. This isexactly what I was looking for.

(https://amzn.to/2V1IuA6)

Pro�t First by Mike Michalowicz

Why Profit First?One of the primary building blocks of Mike's book revolves around how GAAP (Generally AcceptedAccounting Principles) is utilized determining pro�t and how in the real world it does notpsychologically work for entrepreneurs!

GAAP Formula: Sales - Expenses = Pro�t

Though this formula is technically true, entrepreneurs would gladly make sacri�ces in time, money, andenergy to make their business grow - the last thing they are thinking about is paying themselves a livingwage.

However, Mike proposes a small but fundamental shift to the formula:

Pro�t First Formula: Sales - Pro�t = Expenses

Another fundamental concept in Mike's book is Parkinson's Law, which suggests that the demand for aresource increases to meet the supply of it. For example, when we are given two weeks to complete aproject, it takes us two weeks. But when we are given eight weeks to do the same project, we also �nish in

eight weeks. By taking your pro�ts �rst, Mike suggests we are grabbing Parkinson's Law by the hornsand using it in our best interests.

If we only give ourselves only 50% of our typical operational expense to get the same things done, wemight surprise ourselves with our own genius.

Of course, neither myself or Mike suggests you jump straight cutting your opex by 50%! There is anadaptation phase that can take some time. Mike brilliantly has baby action steps riddled throughout hisbook (https://amzn.to/2K7AsBo) to help you make the shift.

Real Estate Specific QuestionsTo answer some of the questions posed at the beginning of this post:

1. Is my rent considered total revenue or real revenue?

In Mike's book, he mentions that a business should only adjust to Real Revenue if a signi�cant portion ofthe operations requires materials and subcontractors that is more than 20% of the Total Income.

In the world of real estate, your debt service and HOA payments are usually more than 20% of your rentalincome. I set aside these �xed costs into the Materials & Subs account, and the remainder is sent into theReal Revenue account.

2. Exactly how do I go about implementing this for my real estate business?

To test the system out myself, I knew it needed to be dead simple. If it was too much of a hassle, I knew Iwouldn't follow through.

To keep myself accountable to the system without having to continually calculate the target allocationpercentages, I came up with the following spreadsheet to truly take the emotions out of the process!

Profit First Implementation Spreadsheet

Pro�t First Implementation Spreadsheet

In this spreadsheet, I layout the necessary baby steps to instantly become a pro�table real estate investorand tame the psychological battle between you and your real estate �nances.

In the �rst month, you should set up your bank accounts and set aside a mere 3% of revenue towardsPro�t, Owner's Pay, and Taxes. Even if you are accustomed to plowing back 100% of your revenue backinto your business, surely you can keep things running on 97% of your usual budget.

Set your target allocation percentage in 12 months from now. The spreadsheet will linearly adjust yourallocation percentages every month until you reach your target allocation percentage goal.

On the Pro�t First website, there is a post (https://www.mikemichalowicz.com/�nd-banks-support-pro�t-�rst/) dedicated to helping you �nd a bank that supports the Pro�t First System in your area. Afterresearching the Houston area, I found a local BBVA Compass bank had great starter business accountswith a $0 minimum balance.

Expect this process to take about an hour and for the banker to be a bit confused when you tell them youwant to open up 7 free checking accounts.

Also, Mike suggests you open up a Pro�t and Tax Hold accounts in a separate bank since they are only tobe accessed once a quarter. By having them at a second bank, it adds another layer to remove anytemptations to borrow from your own Pro�t and Tax accounts. Out of sight, out of mind.

For my Bank 2, I found that the Barclays Online Savings worked best for me. They are a perfect contenderas they o�er leading interest rates (2%+), they don't have local branches and funds take several days toclear.

Suggested Target Allocation Percentages by Real Revenue from Pro�t First

A sample workflow:1. Transfer Total Income (Red). On the 15th and 25th of the month, I look at all the rental income sources

and move the corresponding mortgage/HOA payments to the Materials & Subs account. Then, I movethe remainder of the Total Income account to the Real Revenue account.

2. Distribute Materials & Subs. Make online monthly payments to mortgages and HOAs.

3. Transfer Real Revenue (Blue). Based on the target allocation percentages in the spreadsheet, I movethe funds to the appropriate Pro�t, Taxes, Owner's Pay, and Opex checking accounts.

4. Transfer Pro�t and Tax to Bank 2 (Orange). I move the funds in the Pro�t and Tax accounts from Bank1 to the corresponding accounts at Bank 2. Out of sight out of mind.

5. Transfer Owner's Pay (Orange). Distribute your own paycheck!

6. Distribute Opex. Pay sta� and other overhead monthly bills.

Sample Distribution Work�ow

This entire process should take you no longer than 5 minutes to complete!

Trust the process and overtime you will adapt to running your business on less!

Fill out the form below to get a copy of the spreadsheet and let me know how it goes!

Where should I send the link to download the spreadsheet?

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Need more help?Shoot me an email me at le.jimmy@me.com (mailto:mailto:le.jimmy@me.com) and I'll try to help yaout!

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