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Profit-First with David Richter
Wednesday, 18 October, 2023
David Richter is a former real estate investor who now runs a fractional CFO business for real estate investors. He started his CFO business because he saw a need for real estate investors to have a better understanding of their finances. Richter believes that it is important for real estate investors to know where their money is coming in from, where it is going out to, and how much they are keeping. He says that this information is essential for making good business decisions. Richter also believes that it is important for real estate investors to have a system in place for managing their finances. He recommends the Profit First system, which is a way to allocate money to different areas of your business, such as taxes, profit, and operating expenses. Richter says that the Profit First system has helped him and his clients to become more profitable and to have more control over their finances. Richter says that many real estate investors are struggling with their finances because they are not taking the time to understand their numbers. He says that it is important for real estate investors to know where their money is coming in from, where it is going out to, and how much they are keeping. Richter also says that it is important for real estate investors to have a system in place for managing their finances. He recommends the Profit First system, which is a way to allocate money to different areas of your business, such as taxes, profit, and operating expenses. Richter says that the Profit First system has helped him and his clients to become more profitable and to have more control over their finances. Ryan Goldfarb (00:05.322) Welcome back to the Brick by Brick podcast. I am John Errico here as always with Ryan Goldfarb today We are extremely excited to have a special guest David Richter David is a many was many hats but is also a podcast host as we are for the profit first for our podcast right i have appeared on david's podcast i don't know when that will be released relative to when this is being released but please check us out on that podcast and check out the podcast in general uh... is great information but david uh... first of all welcome thank you for being on our podcast yeah thanks for having me and always it's always a pleasure to get on and spread the message as much as possible so they want to start uh... if you could give us sort of the high level of review of what you currently do and that I would love to kind of drill down into your career, how and why you are doing what you're doing and then branch off from there. So currently I'm the author of Profit First for Real Estate Investing, a book out there for the real estate investing community. But I also run a fractional CFO business, so part-time chief financial officers, because everyone has a sucky bookkeeper in CPA usually, and they don't have anyone to be the glue there to actually say what's actually going on the financial side. So where are they making it, spending it, and are they keeping any of it? So that's what we really focus on to make sure people are keeping more of the money that they're making. That's what I'm into right now and trying to spread the message of profit first as well too. Just making sure people make profit a habit inside their business. Ryan Goldfarb (01:41.174) That's awesome. So I would love to hear how that I, you know, I believe if I'm not mistaken that your path to that involved real estate, right? Owning real estate, closing deals, wholesaling, et cetera, et cetera. I would love to hear a little bit about that, that journey. First of all, do you have a background in finance? Is that how the CFO fractional CFO business kind of generated? If you can see me, I don't know if people are just listening to this or can see me. I know I look like I should have a background in finance and then I have a I'm a fractional CFO company, but I have zero background in finance. I wasn't a bookkeeper, wasn't a CPA, didn't get my accounting degree or anything, but I run a fractional CFO firm. But the reason I did, I started that because my background is as a real estate investor. And so I started about 10 years ago, bought my first house on 12, and have never looked back. I read Rich Dad, Poor Dad, someone gave me that in college. That's what changed everything for me and my mindset. So it was a very typical story there. Ryan Goldfarb (02:41.408) The deal flow from about five deals a month, about 25 deals a month, doing wholesale, fix and flips, turnkey, rental, short term, long term, everything in between, lease options, subject to deals. I got to learn a lot in the five years I was there. And then one of the things I did learn, I did get to sit in a finance seat there even without a financial background because they must have looked at me too and said, you should fit in this seat. But then I sat there and I was like, okay, now that I understand because I literally sat down with our CPA for like six months and said, tell me everything. Like I want to understand how the money flows through here and what does all these mean on the profit and loss, the balance sheet, everything. Once I had that, that power in my hands, I could like tell the full story because I had worked in sales and acquisitions and selling the properties and property management and a lot of different seats up to that point. And now I understood how the money flowed through and if we were profitable or not. So I'm like, this is good stuff. But then at the same time, we were doing 25 deals a month, but spending 26 worth out the door. This is not working. So that's where it was like, okay, this sucks. So that was my first eye-opening experience to where it didn't matter that we did more deals that we had grown that much. If we weren't gonna keep more of it on the way up too, then I would go to these other events and hear on like different places, like whether it was a mastermind or a meetup or whatever, that people were like, oh yeah, we just did our most deals ever. We did a million dollars last year, whatever it might be. And then they're crying at the bar later. because they're like, yeah, but I don't know where any of the money is. You know, like, all the money goes in, money goes out. Have no idea what's going on. I just kept hearing that story over and over again. Then I moved across the country after five years of working there. I moved to Virginia, started with another guy, and since I had the power of seeing the numbers on the back end, I immediately asked him like... I don't care anything that you tell me how many deals you're doing, what's coming in, I want to see your books. Like I want to see your numbers. The numbers will tell your story." And he didn't have books. Like I mean he had books and a bookkeeper, but they weren't real estate investing bookkeepers. So it was like it was a mess. Like the story that I got was just a jumbled mess where I couldn't read it at all. So I'm like, we have to clean this up. We have to get it to where you know and are very confident. What are you making, spending, keeping? Ryan Goldfarb (04:55.642) on a monthly basis, like I need to get that. So got that within three months. And then from there, I wanted to make sure that he had a good system to like, you know, know where all the numbers were. So then we went through and was like, here's where all your cash is, it's in your rentals. Like it's over here because he had bought a bunch of rental properties and all of his equity was tied up there. He only had like 30% loan to value. So it was like, that's where all his money was. So that's where now I was able to just help him understand where the money was. So to me, He said to me at that time, just knowing what I make, spend, and keep, then from here also knowing where the money was going inside of my business has been life changing because now I can make better decisions around my money. So that's where to me I felt called to do the company that I have today, to start Simple CFO because I'm like I have a real estate background but so many people I know are struggling with they think income. solves all problems and it's like we're not taking the root cause and really knowing what's going on. So that's where I'm like. Yeah. So there's a lot there. Yeah, a lot. So thank you for that. Yeah, there's a ton of unpackers. So my initial impressions, first of all, I hear that. That strikes a very chord with me about money coming in, money coming out. One of the things I was shocked before I went into business for my own at all, right, is I worked a normal job. probably like most people have at some point in their life. And when I went into business, I sort of had this naive assumption that every business that I had interacted with before as a W2 earner or would start, knew exactly how much money they were making. They had everything buttoned up. It was just this kind of magic thing that every business had. And I was shocked to realize that even something like. For example, as we talked about in this podcast, Ryan and I have operated and currently operate a construction business, right? But even determining something as, shall we say trivial, sounding trivial, sounding as saying like, did I make money on this construction project, right? Period, like as a general contractor, right? Did I pull in more money than what I made? That itself is not. Ryan Goldfarb (07:09.346) One, that's not a trivial question, and two, if you ask general contractors, no one knows the answer to that. That's like, I don't know, maybe. And if so, how much? Did I make a lot? Did I make a little? Is that good? Is that bad? I don't know. We encounter that a lot. With our affiliated businesses, for a construction company, it doesn't really matter how much we make, because we don't really take any money out of that business. But even something like that is, it's like, It's almost like forensic accounting type of stuff, right? It's like going back being like, well, I bid this up and then I had this over to this and that and then I rented this car and that was kind of for this, kind of for, you know, it's just like, oh my God. Yeah. So I feel that pain a lot. And then the secondary question to that is, if you made money, was it worth all the time? Exactly. Yeah. Yeah, exactly. Very much so. One thing that you said that I found interesting and I want to drill down on too is, when you were doing real estate investing and now you're kind of interfacing with real estate investing, I'm sure you're still investing, but interfacing also with other investors in a different way. Is it the case that... A topic that comes up a lot in real estate investing is, do I make money through cash flow, through rental, revenue or whatever, or do I make money on appreciation? Why am I doing it? Am I making money so I don't have to work a day job? Am I making money so that I can retire? I think that those distinctions are pretty important, and I'll just say candidly from my own experience in real estate, I've made money through cash flow, through rents. Ryan Goldfarb (08:51.412) a lot of my real money, like the money that I would actually go into real estate for from like selling properties, right? Like from appreciation. So I wonder what your, A, what your background for the five years that you were working in this company was with that and B, what are your opinions on that today? Oh, sure. So back then I was buying my own rentals and I like the cashflow game, but I also like the appreciation game as well too. I mean, my first house was a home run where I like rented it out, then lived in it for a lease option on it and then the tenant cashed me out six months later so there was like no capital gains because of the tax law. This was a great deal. I got everything from it. I got cash flow, I got rent, I got the lease option, then I got the actual cash out. So that's where in the business too we were doing a bunch of different exit strategies. So we were doing wholesale and flipping and rentals and so I liked all of that so we had a mixture. I also feel like too at that point, one of the reasons why we were doing 25 deals but too unfocused. We had too many exit strategies, so it was too much overhead and the people that we had to employ to do the different types of exit strategies and growing that big. So I feel like that was part of the downfall. If I had my way, we would have kept growing the lease option portfolio we had. We had about 80 lease options in Indiana and like a Michigan area and then we had about 20 year long term rentals and the lease option properties were really good and because this was like 2014, 15, 16, a lot of people still couldn't get a loan or because of the bankruptcies of 2008, 9, 10. So it was like we were helping people that were good people that just couldn't go out there and get a mortgage at that point. So it was like I really like that and they paid better as well too because they had an option to purchase the property. They had first rights to purchase it. So it was like... We did a lot of good stuff back then. So that's probably what I leaned a little bit more towards because it was, you got the cash flow, but then you got the option. Ryan Goldfarb (10:48.234) to sell it to them as well too. And then to capitalize on that appreciation at some point of like, okay, I know I can at least make this much on this house and lock that in and maybe give them a good deal if it does keep appreciating, they're going to have some equity too. So I felt that was a win, win. Then in today's market, I am all about what is the best thing for your business? What can you capitalize on and be intentional about? That's where even when we were talking on my podcast and Ryan, I had asked him, I had you like you've done a lot of things in real estate like why'd you pick the different things that you're doing it's like Finding what doesn't work, you know Like what doesn't work for me because like what you can do and your expertise is gonna be different than someone else's So I feel like in today's market, of course with higher interest rates It might be difficult to do like the burr strategy as much as you were doing it a year or two ago So it's like some of those strategies you're gonna just have to pivot into something different Maybe subject to is a lot better acquisition strategy at this point because maybe you could get one of those two three four percent that someone has locked in so you're so that way you have more options when you acquire that property to can I sell this can I just keep it because it's such a low interest rate and then I could do a short-term renta
