How to Set Up Profit First for Real Estate Investing with Mike Michalowicz

How to Set Up Profit First for Real Estate Investing with Mike Michalowicz

[MUSIC PLAYING] Welcome, everyone, once
again to the Investing in Real Estate Podcast. I am Clayton Morris, and I am
joined this week by my wife. Say hello. Hello. That’s Natali Morris. You know her over
from, and of course, we like to have
her join us here once a week– or, I’m sorry, once a
month here on the podcast to dive into sort of
like the family structure and how we do things with taxes,
and how we really maximize our real estate investing. But we are joined by a
really special guest today. I’m saying really special
because the book that, I think, changed our lives and the way
in which we structure our family business, we can all point
to one man, Mike Michalowicz. His book, Profit First,
which the subtitle is– A Simple System to
Transform Any Business From a Cash-Eating Monster
to a Money-Making Machine. We have structured our entire
family, business, spreadsheets, everything around the
Profit First system. And I am thrilled to have Mike
on the show today with us. Mike, are you ready? I am ready, and thank you for
having me, and thanks for– wow– engaging Profit
First to its fullest. That’s pretty freaking cool. Well, we hope that we have
engaged it to its fullest. I blame Natali,
because she’s really the brains behind
implementing the system. I read the book I think
maybe a year and a half ago to two years ago. And I said, Natalie, read
this and implement it. [LAUGHTER] Nice. Well, good job, Natali. Yeah. Thank you, thank you. I’m not sure I’m doing
it 100% correctly, even though I diligently
took notes and downloaded your sheets, and I go
exactly by your distribution according to how much
we make per year. But I still have
so many questions. So that’s why I was so
excited that we actually have you in the flesh. Well, on Skype. Yeah, right. We don’t have him tied
up, and we’re not forcing him to answer questions. I want to break it down,
because we have a limited amount of time, obviously, with Mike. So I want to at least
set a little frame of reference for people. Mike, can you give
us a little overview of the Profit First system? Obviously, you’ve got
a lot of great books, and we can all do whole
other episodes on The Pumpkin Plan, which I love as well. But today, I really want to
focus on real estate investing, and how someone who
maybe owns one property, wants to get to 10
properties, 15 properties, can really implement the Profit
First system in their lives to maximize the profits
and tax benefits of it. Can you give us an overview
of the Profit First system? Absolutely. So Profit First is
I guess summarized into a behavioral-based
cash management system. And maybe that sounds
a little bit heady, but I’ll give a story
behind it of how this works and what it is. I was blown away by
a statistic I heard, and I think it was the
SBIA who reported it. I don’t know the
actual original source. But it said that
83% of businesses, small businesses, that do
under $25 million in revenue– that’s how it’s defined– 83% are not profitable. 83% are living check by check,
and that’s true in real estate to rolling cigars. I mean, any kind of business,
if it’s a small business, most businesses
aren’t surviving. But what struck me was,
how can so many people be smart enough
and capable enough to get into their industry, to
track clients and prospects, do their services, make
real money doing it, have clients raving or
happy about the experience. There’s thousands of elements
to running a business successfully, and we
literally get it all right except one little piece. Most businesses can’t
figure out profit. So first, I thought it was us. Like, is there
something wrong with us? Like, has our brain been
lobotomized out of profit? And then, I came to realize
it’s a behavioral response to the system we’ve been told
to use, which is totally flawed. We’re told that sales minus
expenses equals profit. And while logically, it makes
sense, you have to sell stuff, you have to pay for stuff, and
what’s left over, you keep, profit. Logically, it makes sense. Behaviorally, it’s
totally flawed. Because it’s human nature,
when something’s put last, that we disregard
its significance. We basically ignore it. Like, you wouldn’t
get sick, Clayton, and all of a sudden
say, I’m going to start putting my health last. No, you say, my health’s first. Right. What’s important
gets prioritized. And so the old formula,
sales minus expenses, were saying sales and
expenses are first. And so we try to sell
hard and we try to grow– that’s the word you use
for expenses– constantly, and profit never happens. The summary is– in Profit First
I say take your profit first. Sales minus profit,
take that profit first, and every transaction
equals expenses. And by taking your
profit first, you’re now prioritizing
what’s important. So what I write about
a lot on my blog is how to make your family
finances into some kind of formal business, whether
it’s some kind of real estate investment business,
or maybe you sell graphic design on Etsy,
or maybe you’re a dog walker. Whatever it is,
the tax code really favors people who
are entrepreneurial. So I talk a lot about
how people can somehow turn their family into some
kind of legitimate business. And for us, that’s
real estate investing. And so, one of the big
paradigm shifts I had to make was to think of us as a startup,
because that’s what we are is that we are a startup
as real estate investors. And so we started small, and
we’re gaining our portfolio, building it out as much as
we can, as fast as we can. And that’s why your book
was so game-changing for us, because if I think of
us as a startup, then I can think about
how I pay us, and how I save to invest
in the business, and how I save for taxes,
and how I save for owner pay. And this quarterly bonus that
we take based on your system really helps us a lot. It’s like, last quarter,
we used it to take our kids to Disney World. Oh, that’s awesome. Because it said it has
to be something fun. You can’t like pay a
credit card with it, and we take it seriously. So maybe you can– if we all can wrap our
heads around our families as a startup, then we can
implement this system. So maybe we can sort of break
it down little by little, and you can take us
through the four places that you funnel your
money when you make money. Yeah. So the practical application
of it– so the concept is take your profit first. What that means is when money
comes into your business through sales or however
you generate money, that it then gets pre-allocated
to specific purposes. Let me talk about
the problem first. The traditional business setup
or family business set up is that money comes in and we
see that one checking account, and we say, oh, I have X number
of dollars available to do what I need to do next. And it often becomes an expense. And we use soft terms
for expenses inevitably. Oh, I’m plowing it back, I’m
reinvesting, I’m growing, I’m facilitating growth. But in the Profit First
method, what we do is we allocate money first
to its different purposes. It’s kind of like– my
mother did the envelope system when I was growing up. Like, she would get money in. She’s put some money
into the food envelope, some money into the give
back to community envelope, and so forth. And when she went
food shopping, when she got to the food market,
she always had enough money. Now, the interesting
thing is it wasn’t always the same amount of
money, but she always had enough, because she would
make do with what was in there. And that’s what the profit
first concept is based on. When, say, $1,000, because
it’s a round number, we pre-determine a profit
percentage, let’s say 10%. So $1,000 comes
in. $100, 10% will go into an account, an actual
standalone checking or savings account at your bank, and
we allocate $100 there. We also have tax
responsibilities. So we have to allocate
money to taxes, maybe, just picking random number, 15%. So $150 goes there. Then there’s owner’s pay. As operators of this business,
running the business, you need to be paid
for what you do. Don’t confuse, by the way,
profit and owner’s pay. Owner’s pay is designed
to support your lifestyle. That is the money you’re being
paid to run your business, and you’re being paid– and that money
you take out of it is to support your
current lifestyle. The profit account
is distributions that are above and
beyond your lifestyle. That’s why I argue it’s
got to be a reward, however you want
it to be a reward. Disney, pretty freaking
awesome, and you can use it in any purpose, but
not to support your existing lifestyle. For most business
owners, we kind of glum all that money
together, glop it together, and then when it comes
out, we can’t distinguish. Is this to support my lifestyle? Is something above and beyond? So we usually wrap
our lifestyles up to the very last
penny we have coming in, and we live check by
check now in our life. So our business is now going to
allocate money to owner’s pay. That’s one of the accounts,
and to profit and tax. And then the last account
is operating expenses. And what’s so
interesting about this, when you run the percentages,
maybe the operating expenses account is 50%. Depending on your
business, it can vary. Maybe it’s 75%. Some businesses run
it very tightly. Maybe it’s 30% or 20%. But let’s just say it’s 50%. What that means is when $1,000
comes in, we used to say ah, I have $1,000 to
run my business. Now, the Profit First
system says, no, no, you don’t have $1,000 to
run your business. You have $500, that 50%
in operating expenses, to run your business. The rest has been
reserved already for your benefit
and other purposes, but not to run your business on. OK. And so, some of the
comments that I’ve had on my blog when I’ve
preached this system religiously is, oh
my gosh, you have to have four different
accounts, and that sounds like a pain in the butt. Right. And maybe it is kind
of a pain in the butt, especially as real
estate investors. We just had a meeting
with our tax accountant, and they’re like, well,
we want different LLCs for different assets. And I’m like, that’s different
LLCs with four different bank accounts, and oh my gosh,
my head is spinning. But I really think that
you have to separate it like your mom’s envelopes,
because if you don’t, it’s too tempting to spend the
government’s money, right? You must separate it. And I’ve presented literally
two days ago, or three days ago now, 1,000 people in the
Bahamas and I’m talking to them about Profit First. And the first hand
comes up and says, gosh, it’s so many
accounts, I can’t do it. And I’m like, part of me wants
to say, stop your whining. I mean, literally, is it that
hard to set up a bank account? I think we’re very
drawn to the familiar. We’ve been running our business
one way, with one checking account doing different things,
and it’s not been working. And it’s very
compelling, ironically, to keep doing what’s familiar,
even though it’s not working, than trying something new. And when we just use this
hard work of setting up four accounts or five
accounts, or whatever you do for your business,
we use that as an argument to go back to what’s already
familiar and not working. So yeah, it’s going to take
an hour to go to the bank and set up these accounts,
but when it’s done, you have absolute clarity. Now, other people have come
to me, Natalie and Clayton, and said, oh, why isn’t this
in a spreadsheet, or better yet, why don’t I just it
in my accounting system? I can keep one bank
account, but I’ll just do this in my accounting
system or a spreadsheet. Well, here’s the reality,
every accounting system already allocates money. It’s called the
chart of accounts. There’s money allocated
to tons of things. How’s that working for you now? For most people,
it doesn’t work. And the reason Profit First
does work is because it’s a behavioral system. It’s in what’s called our
immediate behavioral path. When I manage my money, I
honestly do not look at my P&L. I do not look at my balance
sheet and my cash flow statement. Quite frankly, I don’t even
know how to read those properly. And then, as my accountant
says, tie them all together and run KPIs against it,
Key Performance Indicators, and operating cash flow
metrics, and then I’ll know where my money is. That stuff is so
far over my head, I revert to my natural
behavioral path, which is log into
my bank account and see what’s available
and make a gut decision. Profit First is set
up that it works within your natural
default behavior. It’s at your bank account. You cannot avoid it. It brings absolute
clarity every time you log into your bank account. That’s why these accounts
are so important. I love it. And the structure of
the business, for me, it’s so much clarity to know
what you’re working with. You mentioned this
operating expenses account. It’s like, OK, so if we
want to spend $1,000 a month on marketing, or whatever
your business happens to be and you’re going to spend,
you can log right in. Maybe it’s Facebook
advertising, or maybe it’s some other thing you’re
spending money on. You can log right in and
see how much money you have to work with, and you’re
not having to back that out. It’s right there. And you’ve already taken
all of those other– all of your profit out. Everything is set aside. The taxes are set aside. And so you’re not scrambling
every quarter to pay taxes, or at the end of the year. Oh my god, we didn’t
even save for taxes because we’ve been spending
everything on expenses. Right. So there’s a lot of little
behavioral things that go on. In regards to taxes, there
is a behavioral response called loss aversion. And loss aversion states
that it’s human nature that when we are in a
position of losing something that we already
possess, we will go to an extreme, often irrational,
measure to retain it. Yet, we won’t go to
that same extreme to gain something equivalent. Here’s an example. We’ll talk about houses
in the real estate market. If you or I get a call from
a mortgage company saying, we’re going to
repossess your house, or we’re going to
call in your mortgage because you haven’t
made a payment. You’re going to lose your house. I will go to an extraordinary
measure not to lose my home. I will start working for Uber. I’ll do whatever it takes,
whatever hours are required, to retain my house. Now, the irony is I could always
have done that level of work to gain the bigger house down
the street, but I don’t do it. It’s human propensity
that we are willing to make basically
double the effort to keep what we already possess. So how this
translates to taxes is if you get taxes paid to
you through a distribution or paycheck or however you take
money out of your business, and then taxes are due, we
experience loss aversion, because we had the money. It’s like me giving
you $10 and saying, oh, hey, Clayton, give me
back three of those bucks. It’s like, thanks for $10, but
what are you doing with the $3? That’s weird. And we’ll go to an
extreme measure. Conversely if I just
gave you $7 and said, hey thanks for having
me on your show. Here’s $7 to get
yourself a cup of coffee. It’s like, that’s
still kind of weird, but you don’t feel loss aversion
of me taking the money back. When we experience loss
aversion, especially around taxes, we go
to extreme measures, often spending radically and
irrationally, to reduce the tax consequences, literally
spending $10 to save $3, which makes no sense whatsoever. That’s amazing. One of the lessons I
learned from another book that I think put in
conjunction with your book is really game-changing
was Tax-Free Wealth by Tom Wheelwright. And he really makes the
point that investment, capital investment, in
a business, whether it’s buying real estate or
any other real estate or any other business expense,
is a taxable deduction. So if you can maximize
your deductions, you lower your tax rate. And you say in
your book, really, like 15% should be enough
to put aside for taxes. And before, we just
were like, well, we hope that we’ll
have that money. We’ll just try not to spend it. But now, we literally put
it in a different bank with a transfer. So I can’t even
really get to it, because it was just too
tempting to spend it. And she won’t even
let me see it, Mike. I mean, I don’t even– Because she knows that I’ll
just buy a house with that cash. I literally don’t
even have access. She was smart. She hasn’t even given me– she’s like, no, you
can’t look at it. It’s our tax account,
don’t touch it. And the game-changing thing for
us as real estate investors, Mike, was that at of
the year, we actually got money back on our taxes
because we buy real estate. So the tax benefits of real
estate are astronomical. And I said to her, I
said, wait a second, have we been putting 15% away? And she said, yeah. So we have about 60,000
in an account for taxes, but we got money back for taxes. So that money is
like extra money that we could then
buy real estate with. Yeah, then you can use
it the way you see fit. But it’s money he hadn’t
psychologically possessed. That was the game-changer,
because he couldn’t see it. He didn’t know it existed. It took the discipline of
getting it out of his sight. That is the whole goal. So I am bowing to
both of you right now. I wish you could see me,
because [INAUDIBLE] perfectly. The draw of temptation
is very powerful, and when it’s close
and accessible, we have to use
willpower, and willpower fatigues like a muscle. For me, it’s chocolate
chip cookies. If there was a baked
chocolate chip cookie batch in front of me, I
would say no the first time. The second time,
I’d be like, eh. The third time, I’d
start sniffing it. And the fourth time, I would
be diving in with that stuff. So my wife and family know keep
the chocolate chip cookies out of daddy’s way because
he’s an animal. And because there’s no chocolate
chip cookies in this house, I don’t eat them. I do not eat them. So that’s the lesson. Money, even if we pre-reserve
money for clear purposes, like profit or our tax
liabilities or anything like that, there will come the
moment where our mind says, well, it’s just sitting there. We don’t need to use that for
three, four months anyway. The tax bill isn’t
coming for a while. Why don’t you just kind of
borrow from that account? And that’s where we actually
are stealing from ourselves and damaging ourselves, and then
undermining the entire system. So keep it out of sight. Now, I want to ask a question
about paying yourself though, because the owner
pay is up to 50%, right, in the way that
you allocate your money. Owners get at least 50%. Well, let me just couch that. OK First of all, it depends on
the size of your business. A business doing under 500,000
or under 250,000, that applies. A bigger business, it changes. Secondly, I want share
that those are numbers based upon these fiscally– I surveyed 1,000 companies. That is the typical setup for
a broad range of companies. So the final answer is 50%
is just a suggested target, but it may not be perfect. You actually might be
higher, you may be less, but it’s just a rough target. OK. Because the first time I did
this, I realized if I take 50% and I issue it to
us as individuals, then we have to report it on
our social security number as personal earnings. And I want to
minimize the amount that I take out of my business,
because the business is a tax-friendlier vehicle
then just paying it as Natali Morris the lady
and Clayton Morris the man. So I always look
at that 50% and I say, well, I don’t want
to be taxed on that 50%. So is that personal income? Is that tax? Do you have any tips on that? Because I’m not sure
I’m doing it right, and my accountant this
year, I was like, well, I’ll just 1099 myself
from the business. He’s like, you
can’t 1099 yourself. So I did that wrong. What tips do you have for me? Great question. So I’m actually
rewriting Profit First for an expanded and a
new and improved edition, as questions like
this have come in. The answer is that profit– or,
I call it owner’s pay account. Not profit, owner’s pay account. I really have called it
owner’s compensation, because you can extract
benefit in multiple ways. Like, you may lease
a car or own a car, but the company can pay for it. But quite frankly, you derive
the vast majority of benefits. It’s your personal vehicle
and maybe some business use, but the business can pay for
it, and that’s a legitimate tax expense. So I’ve changed owner’s pay
to owner’s compensation. And then I suggest work very
closely with your accountant to find ways to reduce
the tax consequences and extract the most
benefit from it. But still allocate
50% to owner’s comp, because I want you,
Natalie, and you, Clayton, benefiting from that 50%. The way it’s extracted
out may not be a paycheck, because it causes higher taxes. It may be a car or a
quasi-investment or maybe a– whatever, but an accountant
will direct you on it. The lesson is always
allocate that percentage, and then when it’s the
actual extraction that money, get the direction of a
sophisticated account on that. OK, I see what I
did wrong there. Because I wasn’t sure that
you couldn’t 1099 yourself, and then my accountant
was like, what did you do? I don’t know. He was like, we have
to talk about this. So the point is to benefit
from it legitimately, but it doesn’t have to be on
your personal social security. Right, it doesn’t
have to be pay. OK. Shame on me, because in the
book, I didn’t explain that. I just said this is for
your benefit as your pay. But really, I want people to
understand that you don’t have to take money out as money. You can take it out
in different vehicles, and I don’t mean necessarily
a car, but different ways that reduce your tax consequences
or negate it fully, but you still extract
all the benefit. Because my parents owned a small
business as I was growing up, and they always paid my
father a very small salary, because they wanted to
reinvest in the business. And it didn’t make sense to me
until I read your book and Tom Wheelwright’s book. And now that makes sense
why we owned cars inside of the business, but my dad
still took a small salary. So I’m doing the
same thing for us, trying to live as leanly as
possible out of the profit, out of the owner pay
portion of our profit. And the only tweak I’ll
make to that is I suggest don’t reinvest in the business
as much as reinvest in you. Now, I’ve got to be very
careful how I explain this, because it sounds like a very
negative thing, but I’m not. When we allocate
money to owner’s comp, I want you and Clayton to
benefit from that money. And I want you to do it
through your business to reduce your tax
consequences, but I don’t want it going necessarily
back into the business to facilitate growth
of the business. And the reason I’m saying that
is because most of the time, reinvested money
never facilitates the growth of business. It actually compromises it. And I’ll give you
an example of this. NASA made back–
this is in the ’70s– an oxygen filter tank. And you’re probably
already familiar with this, because if you saw
the movie Apollo 13, a big core of this movie
revolved around that component. There were astronauts– this
is a true story– astronauts up in outer space
circling the moon, and their oxygen filter
system was failing, and they were given about
12 more hours of oxygen before they were
all going to die. And it’s a true story, again. The tanks in the oxygen
filter system, NASA spent tens of millions of
dollars to make those things. And then, I don’t know
if– did either of you see that movie, by any chance? Yeah, sure. OK. So then you’ll know the
next scene that happens. The oxygen tanks are failing. The lead engineer
in Houston calls in all the engineers, a
team of like five or six men and women, takes a box, a
cardboard box with stuff and dumps it on
the table and says, that’s what we have
left on that shuttle up there in that capsule. Make an oxygen filter. And they did. They did. They made an oxygen filter out
of duct tape and used parts. Now, here’s the irony. When NASA was given
tens of millions of dollars to reinvest, to plow
back, to push into this program to develop an oxygen
filter, they did, and it cost tens of millions. And when they were given just
spare parts and were told, you have to make oxygen
filter, they did. And so the lesson is this. If we avail the money
to our business, our business will find the
way to utilize that money, but not necessarily be
innovative about it. That’s the great irony. When we have to get
the same results with less money or greater
results with less money, it forces us to find new
ways, rule-breaking ways, innovative ways. So that’s why I’m
hesitant when people say, oh, I’m going to
reserve more money and plow it back in my business
or reinvest in my business, be really careful of that. You actually may be following
the easy and obvious path, because now you have the means. When you don’t give
yourself the means, you have to find an
innovative, breakthrough way of doing the same thing. Makes sense. It might be instead
of us investing it back in Morris Invest,
our investment company, instead Natali and I just
buy another property, which benefits us,
but it also helps mitigate our overall taxes. Right, that could be a strategy. That totally could
be a strategy. Love it. So I wanted to ask you from
a real estate perspective, as our listeners are setting up
their family structure, given your experience
with real estate, buying properties,
rental income, are there any unique
things that we would need to do to implement
the Profit First system? Yeah, so I’d say
that’s over my head, because I don’t do real estate. I’m not an investor
in real estate. And I specifically
have avoided it, because I’m not versed in it. And I’ve found that
for me– and I believe it’s true for most
people– is when you find what your
strength and capability is, go all in on that. I think strength’s can
be amplified by tenfold, but trying to walk in an
area that I’m not familiar, I may stumble and trip up. So I’m not the guy. Now, let me just
also couch that one. And I’m not trying to pitch
myself here or anything, but I started an
organization specifically because I questions like this. I got a call from a
manufacturer saying, hey, how do you employ lean
manufacturing processes when it comes to Profit First? And real estate
investors like yourself, and every category in the sun,
retail stores, everything. So I started an organization
called Profit First Professionals where we now have
industry-specific experts who can address all the nuances
1,000 times better than I can. Si I hate to say this, but
I’d have to defer to that. I don’t– I actually have a buddy of mine
who actually hired and worked with your company, and
it’s been a game-changer for his business. Oh. So that’s a testimonial,
an unsolicited testimonial, right there for that. So I’m just curious if there was
any structuring of like when, obviously, we get rental
income that comes in, we’re treating it as– if there was any specific
difference from the Profit First system. But it sounds like, Natalie,
we’re doing it really according to the book, right? Mostly, yeah. Yeah, you are. I mean, these are more
generalities, but something specific for real estate. So when income comes in,
we want to put it typically all in one tray. I call it the income account. So this now is actually
a fifth account. We talked about profit,
owner’s pay, tax, and operating expenses. A fifth account is income. And this may help a lot, and
if you’re not doing it yet, this is something I actually
had in the advanced section of Profit First the
book, but now I’m putting it right
in the beginning because I found it had
the greatest impact. It’s if we set
one account solely to collect that rental income
and whatever other income you generate into
this income account, that’s the serving tray. And you start understanding
the cash flow, the inbound cash flow, because that money
accumulates and then periodically, maybe twice a
month, on the 10th and 25th, for example, you would
allocate that money out based on the percentages
to different accounts. So that income account goes from
wherever it was back to zero. And then cash starts
accumulating there again, and it goes back to zero,
and then accumulating again. And it keeps going through
this iterative process, and you start seeing what your
normal inbound cash flow is. But the other thing,
too, to consider is the four or five
accounts, that’s just the basic foundation. My businesses– I now
own three businesses– they have, on average,
eight or nine accounts. And the reason I have so
many accounts is sometimes for businesses, there’s
very specific needs. If you need to accumulate
cash specifically to buy new real estate,
new properties, maybe you want to have a real
estate purchasing account. And you allocate a
percentage there, and that becomes the trigger. So you have your normal
operating expenses for the ongoing
maintenance and services you need to provide for
existing real estate. But then you set up
this additional account that’s specific to
buying new property, and now It’s very easy
to distinguish where you stand on each account. Oh, I love that. I love that. We don’t have that set up yet. That could be a
game-changer for us. No, we don’t. And at the end of
your book, you talk about how you can– it’s sort
of like extra credit accounts, and that kind of blew my
mind open a little bit, and I was like, whoa, too much. But I think right now
we have to go back. And now that I–
because I just wanted to try like Profit
First for dummies, like the first four accounts. And now that I think with– I think we’ve been
at this about a year. After I think I got
a good handle on it, I can go back through and do
the extra credit accounts. So I’m ready for that. But I did have one
reader question based on my blog post that
said, we’re a new startup and we’re trying
to pay off debt. And this was a
startup that I think they make like
cookies or something, like some food product. So they had to make a capital
investment in the equipment. And so they were like, where
do we allocate our money? We can’t take 50% off. What do you say to people
who have debt to pay off in their business first? Yeah. So now I’m going to sound
like a total schmo first, but whenever
someone says had to, like I had to buy equipment, I’m
like, did you really have to, or did you not consider the
alternatives because you had the availability of money? So they got that money
somehow, and then they follow the obvious path. So I’m being a
little schmucky here, but I always like to
criticize that because– Right. And I don’t know how to make
these specific types of– I don’t know that they’re
cake walks or whatever. Nor do I. But I always
like to challenge people and say, there’s an alternative
path if we’re simply willing to consider it, or
force ourselves to consider it. But if you have
debt, first of all, welcome to 83% of
small businesses. Like, that’s the norm. I’m not saying that’s a good
thing, but that’s the norm. And listen, I’ve been there. It sucks. Here’s what you do. You still set up
a profit account. Some people have come
to me and said, Mike, I can’t be profitable
until I’m out of debt. Then I’ll be profitable. And my answer is– the
only way to get out of debt is by being profitable. You have to be. You have to make more money
than you’re spending in order to pay back what you owe. So you have to be profitable. So you set the
accounts the same way. You allocate money toward
profit the same way. But when you do your
profit distribution, and I suggest doing a quarterly
profit distribution literally every 90 days. When that money or the portion
of the profit that you decide to take out comes out, the vast
majority of it, 95% or more, goes toward that
debt eradication. You whack that debt,
but you must still reward yourself with a portion. So say $1,000 comes out
of your profit account. If we’re doing 95%,
$950, a big payment goes and hits that debt. As much as you can,
in the meantime, you’re maintaining and paying
the debt as best you can. But every time you do
a profit distribution, a big portion goes to
crushing that debt. But you still keep 5%,
say $50, to celebrate. And this is the mistake. I’ve seen too many businesses,
and even some experts report this too. Do everything you
can to crush debt. Eradicate debt. Eradicate debt. At all costs, eradicate debt. The problem is if you’re simply
in eradicating debt mode, you never have a
celebratory mode. You never have that celebration. You start to resent
your business. Can you imagine five
years, four years, three, your business doesn’t pay
you, you keep deferring it? So listen, we’ve got to
get rid of that debt, but we still have
to reward ourselves. That positive and very
material affirmation that this is working
is extremely important to keep the momentum going. So that’s how I’d
handle it with them. I love it. I love it. So I think we probably ate
up so much of your time, but I think this was fantastic. Is there any ground, Natali,
you don’t think we covered? I want our audience to
really go out there and start implementing this right
away as they’re acquiring their first rental property,
and getting things set up the right way. Is there anything we didn’t
cover that we need to? Well, I also want to be
able to give you the chance to plug the fact that you have
a network of accountants who can implement this for you,
right, if you don’t feel up to doing it yourself. You can go to Mike’s
website, and he can point you in the right
direction of someone in your area who
understands this system and can implement it for you. Yeah, thank you. And I did kind of mention it
earlier, really not attempting to plug it. But it’s a resource
that’s available for you. So here’s what I found. The core concept of Profit
First is very simple– pay yourself first
in your business. That’s it. But it’s kind of like
the stock market. Everyone knows the core
principles of the stock market, buy low, sell high. Do that again and again,
you’ll be a billionaire. That’s it. But there’s a reason there’s
stock brokers and investment bankers and all these
different people, because of how
sophisticated the market is after that basic principle. So in Profit First
it’s the same way. What we just discussed
is the basic principles of Profit First, but
it’s in the nuances where the real execution happens. So I did start a group
with a colleague. His name is Ron. Ron and I started this company. We now have 128 different
accountants and bookkeepers specializing in
different industries that know all the nuances
about Profit First. So they’ll help you
get it implemented. And then, secondly,
they’ll actually go through all the
different elements of it to make sure you continue on
the path of reducing your tax consequences,
maximizing your profit, and taking home as much as
you deserve to take home. And the site that we
set up that has this is called If you go there and
click on the Find button, we’ll find you someone
that’s a match for you. Amazing. The book is Profit First– A Simple System to
Transform Any Business from a Cash-Eating Monster
to a Money-Making Machine. Our guest has been
Mike Michalowicz. It’s been a true pleasure. We get to thank you
personally for sort of shifting and changing
our lives with our structure and our family business. Thank you for saying that. Mike, you are the man. And we hope everyone we’ll go
over to our show notes page. Go to We’re going to have
links to everything we just talked about, including
going over to Mike’s company to find an account in your
area, click on the Find tab, and find somebody who
can work with you. Also, links to the
book and spreadsheets that Natali was talking
about so you can implement this in your own family. We’ll see you back
here next time on another episode of
Investing in Real Estate. Thanks, everyone. [MUSIC PLAYING]

15 thoughts on “How to Set Up Profit First for Real Estate Investing with Mike Michalowicz

  1. Yes but has anyone really been far even as decided to use even go want to do look more like?

  2. My favorite Youtube Station.

  3. Hi just a suggestion for a video- since you invest in long distance property’s do u have project managers- talk about handling of supplies and money of you projects- it would be a great video… ty

  4. Hi I have an off-topic question here if you don't mind.

    If I purchase my investment properties in cash should I still get an appraisal done? And a land survey?


  5. I love you guys !

  6. Profit first changed my business for the better. It really works.

  7. Mike Michalowicz is not an investor in real estate? What? Why? Very strange. He needs to get on board

  8. Hey Clayton. How do you handle profit first with a debt service? Is the tax account including property taxes? instead of depositing the owner pay into your personal account, is it better to pay the debt service down and/or pay for electric, internet, etc… from the business account instead of your personal account

  9. I know you usually like top pull out 40% from rent for taxes, expenses, vacancies, etc. Is that 40% one of your 4 accounts?

  10. Great Video!

  11. Do you own your own property management company or do you find one in each city where you invest? Do you have a rehab construction team in each city or do you just find someone who does your rehabs for you?

  12. My profit first profit account is actually one of my HELOCs. I really like the idea of keeping a small portion out of the profit for Celebrating. Celebrating your success is critical. The nice thing about having a HELOC loan is if I get a little tight with funds I can borrow some of my money back.

  13. Funny that Morris Invest is setup with Profit First. I have read a couple of Michaels books and loved them. I have my own version of Profit first that has worked very well long term.

  14. So how exactly do you guys set up your Accounts for real estate purposes? Do you partition then into 4 or 5 different accounts? For example,1st. Rental income 2. cashflow perhaps etc?

  15. Is that 4 different business accounts? Or just one business account and 3 checkings account?

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