How to Implement Profit First in Your Real Estate Investing Business

When Natali and I first read Profit First by Mike Michalowicz, it totally transformed our business! Profit First is a simple and effective formula designed to help businesses stake claim on their income by prioritizing profit above sales and expenses. The system operates as a means to allocate money appropriately so that the business not only runs smoothly, but so the business owner is paid.

Profit First consists of four different divisions for money: profit, owner pay, taxes, and expenses. Five percent of your total income is allocated into the profit account. This is set up so that your business is designed to make money. The profit accrues, and every quarter, half of the money is withdrawn for an enjoyable, non-business expense.

Fifty percent should be dispersed for owner pay. If there are multiple owners within your business structure, that fifty percent is divided among them. This division is set up solely for entrepreneurs—it is not designed for payroll.

Then, fifteen percent of total income is set aside for taxes. This allows your business to run smoothly and effectively. This account is to remain untouched until tax time, whether that is quarterly or annually for your business. It’s important to keep in mind that this money is allocated specifically for the government, and it does not belong to you or your business.

Finally, thirty percent of total income is distributed for owner expenses. For real estate, this could be spent on repairs or vacancy. Additionally, this account will also pay the wages of your property management team.  

To help you implement Profit First in your real estate business, I’ve created a freebie called Setting Up Profit First for Your Real Estate Biz. It’s a simple spreadsheet that will automatically keep a running total of your revenue, and will help you determine the Profit First distributions for your specific business.

 Free spreadsheet to help implement Profit First in your real estate business. Automatically keeps a running total of your revenue, and helps determine the Profit First distributions for your specific business.

The Basic Foundation of a Real Estate Investing Business

If you take real estate investing seriously, you’ll want to conduct your venture as a business. Doing so makes your investing more profitable, more organized, and more successful! I recommend setting up a business in order to reap all the benefits of being a business owner.

In my experience, there are six specific steps you should take to set up the groundwork of your real estate business. When you operate as a business, you reap the tax benefits and overall income benefits of owning rental real estate!  

  1. Know what your goals are! If you don’t have a clear goal, you have no direction. If you haven’t yet set a goal, download our Freedom Cheat Sheet. It’s the perfect roadmap to financial freedom.
  2. Choose a legal entity. We use LLCs per the counsel of our accountants. Be sure to seek the advice of your own team. Operating as a business allows you to receive incredible tax benefits! Not to mention, you can offset your rental income by writing off business expenses.
  3. Implement the Profit First System. This system has overhauled my entire business. Profit First is a simple and effective formula designed to help businesses stake claim on their income by prioritizing profit above sales and expenses. You can hear my interview with Profit First author Mike Michalowicz here, and how Natali and I use Profit First in our personal business here.
  4. Organize yourself early in the game. This is something I wish I had done. I had a few properties under my belt before I decided to take organization seriously. The sooner you start organizing, the easier it will be. Check out episode 100 of Investing in Real Estate to hear about our real estate organization system.
  5. Never stop purchasing real estate investments! Why? You pay more at tax time on your rental income if you aren’t offsetting it by purchasing more real estate! Here’s more about the “buy until you die” strategy.
  6. Set a vision goal. Think about your future in real estate, and what you want it to look like. Setting goals can help you hire the right team and outsource your business. Doing so makes your experience passive! 
 there are six specific steps you should take to set up the groundwork of your real estate business.

5 Start Up Costs for Real Estate Investors

We’ve discussed the regular expenses you should account for as a real estate investor, but what should you expect when you’re just getting started? There are a few start up costs you will incur when you begin investing in real estate.

The types of properties that we provide at Morris Invest are single-family homes in the Midwest. These properties are typically in the $40-50k range. For this kind of investment, there are a few costs you should expect when you’re getting started.

  1. Setting up your business entity. Typically, this will be an LLC. There are a few ways to do this, but I typically recommend going right to the source—the department of state website where your property is located. In some states, you may need to use an attorney. To set up an LLC, you should expect to pay anywhere from $100-300.
  2. Insurance on your rental property. This amount can vary, as it depends on your location and coverage. Typically, I pay anywhere from $400-600 per year for rental coverage and liability insurance.
  3. Setting up a business checking account. You’ll need to have a business checking account to collect rent every month. Some banks charge a monthly service fee as well as minimum opening deposit. Local banks may have free accounts, so shop around.
  4. Closing costs. When you purchase your rental property, the title company will charge fees. A good rule of thumb is anywhere from $300-500. This amount accounts for running a title search and recording the deed.
  5. Landlord license. This cost is not applicable in every state, but some states do require a landlord license. If your property is located in a state that requires a landlord license, you can expect to pay $100-150 on a yearly basis.
 We’ve discussed the regular expenses you should account for as a real estate investor, but what should you expect when you’re just getting started? There are a few start up costs you will incur when you begin investing in real estate.

Choosing a Legal Entity for Real Estate Investing

Disclaimer: I’m not a lawyer, tax accountant, or financial advisor.

I’m just a real estate investor who wants to share with other real estate investors what has worked for me.  Here’s what I know: it’s imperative to purchase your rental properties under a legal entity. Doing so provides legal protection to your personal assets.

Why is this important? Let’s say, god forbid, that someone slips and falls at one of your rental properties and decides to sue you. If you own the property personally, they can go after all of your personal assets, including your home and your children’s college funds. Yikes. A legal entity protects you personally.

Also, it’s much more tax-friendly to purchase properties as a legal entity instead of an individual. When your investing becomes a business, it is taxed as so. Businesses don’t pay taxes on the money they spend on business expenses. Any legitimate business purchases can be tax write-offs. Additionally, my favorite accountant, Tom Wheelwright calls depreciation magic!

There are many business entities to choose from: LLCs, sole proprietorships, S-Corps, C-Corps, etc. Personally, I’ve been advised to establish LLCs, because it limits liabilities. I think you’ll find that many accountants and lawyers will tell you that owning rental properties inside an LLC is the best option.

I’ve also been advised to set up the LLCs in the states where my properties are. I’ve also been instructed to hold approximately $150,000 worth of property in one entity. For us, that’s about three rental properties. Then, all of our LLCs report to a holding company.

Again, seek the counsel of your own lawyer and accountant to make the best decision for you and your real estate business.

We get tons of questions about this topic. Natali and I recorded an entire live stream about business entities! We answered questions about getting a mortgage in an LLC, liability insurance, and more. You can find that video here.  

 Here’s what I know: it’s imperative to purchase your rental properties under a legal entity. Doing so provides legal protection to your personal assets.

How to Buy Rental Properties Out of State

When most people decide to become a real estate investor, they typically start searching for properties in their hometown. I get it. It seems like the easiest way to begin. If you find yourself searching for homes on Zillow, or driving around your neighborhood, I’d advise you to stop as soon as possible.

Hear me out: The markets with the highest ROI are most likely not where you live. I know for me, the best properties are not close to home. Here in New Jersey, it’s expensive to acquire a home. And don’t even get me started on the property taxes…

That’s why I recommend investing across state lines. You might think that sounds scary. Most people think that being so far away from your rentals sounds like a pounding headache.

It can be, but it doesn’t have to be. If you put the right strategies in place, your real estate business will run seamlessly, and you’ll reach your ultimate goal: passive income! Here are seven steps you need to take in order to invest out of state.

1 ) Know that you can’t do it alone. You need to have a team in place; otherwise you’ll be pulling your hair out. You can either use a turnkey provider, and if you’re interested we’d love to help you with that. Otherwise, get busy assembling a team. You’ll need to surround yourself with reliable people you can trust—a contractor, property manager, insurance company, and a title company.

2) Fall in love with ROI, not real estate. I’ve said it before, and I’ll say it again: all properties are the same! They’re just four walls and a roof. It doesn’t matter what your property looks like. What matters is that you’re receiving cash flow every month. Find the right deal, not the cutest house.

3) Choose a legal entity. Personally, I use LLCs at the discretion of my accountant and lawyer. You should also consult your accountants and lawyers. Once you figure out which business structure is most beneficial, and in which state you need it, it’s very simple to set up. Find the department of state website in your property’s state, and click on the “Start a New Business” tab. In my experience, it’s very easy and costs about $100.

4)  Use a property management team. This is critical. If you’re thinking, “I can collect a rent check myself,” please reconsider. There are endless benefits to working with a property management team. They’re experienced and on site. They know the market, how to price appropriately, how to screen tenants, etc. Here’s how to find the right team for the job.  

5) Do your research! Take a look at the market, the neighborhood, and read up on the process of real estate investing! If you need a few suggestions, here are five of my favorite real estate books. However, there is such a thing as doing too much research! Don’t get so caught up in the learning phase that you never take action. There has to be a balance. Figure out the basics, and then learn as you go.

6) Get an inspection. Your property needs to be up to codes. Additionally, this is not ALL about the money. Part of your motivation should be to provide a safe and stable home for your tenants. For more about appraisals and how to handle them, check out this video series.  

7) Now, relax! If you’ve got these pieces in place, everything will work out. If you make mistakes along the way, don’t allow it to derail your progress. Stay motivated, focused, and start collecting those rent checks! 

 In my experience, the best way to build a profitable and robust portfolio is to invest in the best rental markets in the US where ROI is high, and risk is low. That may not be where you live. Check out this 7-step guide to buying rental property out of state!

The Ultimate Guide to Creating Passive Income Through Real Estate

If you’re ready to create passive income through real estate investing, you’re in the right place. I’m about to walk you through nine simple steps you can use to purchase your first rental property and begin earning a passive income! This is the EXACT strategy that I, along with hundreds of other investors, have used to become financially free.

There are plenty of other strategies out there, but this technique is for you if you’re looking for a tried-and-true method to get your feet wet in real estate investing. This strategy will absolutely change your life. Keep reading The Ultimate Guide to Passive Income if you’re ready to become a successful real estate investor!

I want to be clear: I am not a genius. I’m exactly like you. It wasn’t that long ago that I was frustrated with my finances. It seemed like I worked so hard every day, but at the end of the month I had nothing to show for it. I could hardly make ends meet. In fact, I had to sell my possessions in order to pay my bills. l From that struggle, I created the Freedom Cheat Sheet. It’s a totally free PDF designed to help you determine how many rental properties you’ll need to become financially free.

Again, I’ve not done anything special; I’ve simply followed a path laid out by real estate investors before me. If I can follow this strategy, I know you can do it too. Think about this: all successful real estate investors started with ONE property. You have to start somewhere! And if you can begin, I know you can grow your portfolio and attain financial freedom.

But what about a lack of money? I’ve been there too. In fact, when I began my real estate journey, I was going through a foreclosure and all my assets were frozen. I hit rock bottom financially, and climbed my way up. So please, get all of your fears, objections, and worries about money out of the way. Money is NOT an obstacle.

Here are the nine steps to creating passive income through real estate investing:

1)   Find a house! How? There are a multitude of ways. You can utilize the services of a realtor, work with a turnkey provider, search for homes on Craigslist, or identify houses for sale by owner. It doesn’t matter how you find the property, but there is one key detail you need to know: the best properties are NOT in your backyard. The chances are high that the best investments will not be located in your own neighborhood. You’re looking to get the most value, and the highest ROI, so don't be surprised if the best investments are not located in your neighborhood, or even your state. 

2)   Hire a contractor! Since you won’t be local to your property, how will you find a trustworthy and capable contractor? It’s doable. Here’s a tip: if it’s your first time, don’t rely on one contractor. Simply go to a job board, such as Craigslist, in the city of your property. Find three contractors that offer free estimates, and utilize their services. However, don’t take advantage of them. Please value their time, be respectful, and go in with full intentions of hiring one of these professionals. Let them know you’re buying a rental property, and what your expectations are. Since you won’t be living in the property, you don’t need everything to be top notch. You want to make your investment a fantastic home for your tenants, but you also don’t need to install all the bells and whistles. Make it clear to the contractors that they have competition! This will ensure you’ll receive a fair and honest estimate. Also let them know you’re looking to establish a long-term working relationship. Evaluate your three estimates, and choose a contractor! I typically like to choose the contractor who has provided a middle-of-the-road estimate. I don't want cheap work, but I also don't want to work with someone whose fees are astronomical. 

3)   Get an inspection. Let me forewarn you: it is an inspector’s job to be thorough. They WILL nitpick the property, so don’t be intimidated when you receive an inspection that is pages and pages long. This is the norm. What you need to do after you receive the report is compare it with the estimate from your contractor. As a landlord, you don’t need to repair every single item on that list. Find the items that are structural issues or safety concerns, and take them seriously. Identify which items are small, cosmetic faults, and decide if they’re worth your time. You’re trying to establish a stable, solid investment that won’t need much maintenance in the following years. The little things can slide by, but I like to replace things that support the integrity of the house, like old electrical wiring, windows, and outdated plumbing. Most of my properties receive new furnaces and water heaters, and we always install new carpet and paint.

4)   Make sure all of your numbers are in alignment. Calculate your return on investment, and see if the numbers make sense! When you add up the totality of your repairs and purchase, you want to make sure you come out below the market value. That way, you’ll have equity in the property. Remember ROI is king! If the ROI doesn’t make sense, this is not the house for you! Don’t fall in love with the house; fall in love with ROI. ROI is what will bring you passive income every month.

 Nine simple steps you can use to purchase your first rental property and begin earning a passive income through real estate! This is the EXACT strategy that I, along with hundreds of other investors, have used to become financially free.

5)   Buy the house! If the numbers make sense, go for it! There are many ways to purchase the house. You can use cash, or use financing through a private lender or traditional loan. Other strategies include borrowing from your 401k, using an IRA, HELOC, etc! Again, don’t let a perceived lack of money get in your way! You can do this; you just have to be creative.

6)   Hire a property management team. This is an essential piece of the puzzle! Having a reputable, effective property management team is critical to your success as a landlord. Here’s why you need to hire a property management team, and here’s how to do it properly

7)   Rent out the property. You want to place a tenant in the property as quickly as possible, in order to start earning. This should not take long, and a great property management team should ensure that your property is filled with a reliable tenant.

8)   Take out the equity on your property to purchase another. This is where the magic happens! This is how high level investors go from one property to 100 in a short period of time. Again, there are multiple ways to pull this off. Most banks will be happy to do a cash out refinance. You can also do a HELOC, or initiate a deal with a private lender.

9)   Repeat! Keep this snowball strategy going until you hit your Freedom Number! Once you gain momentum, you’ll be amazed at how quickly you can pick up properties and move closer to your goal.

How To Organize Your Rental Property Documents In The Cloud

 
 

An important part of real estate investing is keeping all of your ducks in a row. When you start to own rental property, you will be sent all manner of documents that you will have to organize and keep at-the-ready. Examples include: 

  • Closing documents
  • Financing documents
  • Insurance documents
  • Rental agreements with property managers
  • Leases with tenants
  • Tax bills from the city
  • Assessments, violations, notices, etc. from the city
  • Bills from contractors
  • Contracts with contractors
  • Receipts for purchases and investments in the property
  • Etc. 

This isn't 1985 so you're not necessarily keeping these documents in a hard copy in a drawer or filing cabinet. Most of them will exist online and you have to know how to get to them because you never know when an insurance provider wants a current copy of the lease or when a financing agent wants a copy of the insurance binder or you have to dispute a price with a contractor. Or worse! The IRS disputes a tax deduction and you have to prove that you did in fact buy that property an oven at Home Depot and not a jacuzzi for your personal residence! 

The point is to keep everything organized from the word go! Here is how I do it. 

I do keep hard copies when they are sent to me and I keep them in a file folder labeled with the property address and the year. So for example: 123 Main Street, 2016. This is NOT the folder where I keep the ownership and closing documents. Those are kept in a separate folder called 123 Main Street Ownership Documents. Use whatever naming convention you want but the point is to have a quick place to access these documents and keep your yearly records separate from your ownership papers. 

I also keep digital records of all of these documents. If I get a hard copy in the mail, I make a digital copy using Scannable by Evernote. Best app ever! Then I file it in the EXACT same way that I file the hard copies. In an online folder called 123 Main Street, 2016. Separate from this file but in the same host folder is 123 Main Street Ownership Documents. 

Do I keep these on my computer hard drive? Hell to the no! I use the cloud of course! I actually like to triple up because I'm an organization junkie. I keep the same documents in Dropbox, Google Drive, and our home shared Drobo using the same filing convention. This is WAY overkill so don't do what I do. Choose one and stick with it. None of them have ever failed me, ever! (Knocking on wood!!!) 

Since we have a variety in our investment portfolio, I keep our information separated by the type of investment. So the main folder is Real Estate Investments. The sub folder is Cash Flowing Properties. The sub, sub folder is 123 Main Street. The sub, sub, sub folder is 123 Main Street 2015, 123 Main Street 2016, etc. and 123 Main Street Ownership Documents. 

Now repeat for any notes you may have out to other investors, investments inside of IRAs or other investment funds, etc. 

These systems take mere minutes to set up and keep up but they are oh so important. You don't want to be searching your email inbox for this type of information. That is a waste of time and energy. 

And can you have a bookkeeper do this for you? Some of it. The receipt part definitely. But the ownership part and the contract part, well, unless you have a large real estate investment company with several employees, these are things you should be able to get to yourself. Maybe some day you'll hand it all off to your assistant's assistant's assistant bookkeeper. But if you're a home business like we are, you've got to develop good habits from the start. And anyway, it's back to school time so who wouldn't want this excuse to shop for office supplies!?