Real estate investing is a lucrative business that requires careful financial management to ensure its success. The typical approach to financial management in real estate investing involves taking the sales or revenue generated and using it to pay for operating expenses such as marketing, employee salaries, rent, technology costs, and supplies. Any leftover amount is taken as profit. However, the approach called “Profit First” flips this model and instead allocates a percentage of the revenue towards profit before paying any operating expenses.
The principle behind Profit First is that all revenue generated should be directed towards profit first, and then the operating expenses and other expenses can be paid. This helps ensure that the business is run efficiently and with a lot less resources going towards operating expenses.
In Profit First, the main operating account is set aside with a percentage of the revenue allocated towards profit allocation. For example, if a real estate investor generates $500,000 in revenue, they would take 10-15% of that amount, or $50,000 to $75,000, and move it into a separate bank account for profit allocation. The idea behind this is that if the money is not easily accessible in the main bank account, there is a lower chance of spending it.
The same revenue amount is then used to pay the investor a salary, which should be set at a fair and reasonable amount. The salary should reflect the revenue the investor would receive if they were to replace themselves with an employee.
Finally, a portion of the revenue should be set aside for taxes, which can range from 15 to 20% depending on the income bracket and state the investor is in. In this example, if 10% is allocated towards profit, 10% towards salary, and 15% towards taxes, then 35% of the revenue is allocated for profit, salary, and taxes. This leaves 65% of the revenue to pay for all the operating expenses such as marketing, employee salaries, rent, and supplies.
The goal with Profit First is to keep squeezing the number allocated towards operating expenses down to 50% to 55% of the revenue, while still maintaining the same business and generating the same revenue. The net profit percentage should be between 45% to 50% of the gross revenue.
In conclusion, Profit First is a new and innovative approach to financial management in real estate investing that helps ensure the business is run efficiently and with more resources directed towards profit. By allocating a portion of the revenue towards profit, salary, and taxes before paying operating expenses, real estate investors can improve their financial management and increase their profits.