Strength in Numbers with Marcus Crigler

Episode 64: The Hidden Financial Problem Killing Real Estate Investors - Part 2

• Marcus Crigler • Episode 64

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0:00 | 48:56

In this episode of the Strength in Numbers podcast, Marcus Crigler continues the conversation on the hidden financial problems that quietly destroy real estate businesses.

Listen as they break down why so many investors stay stuck in the hustle cycle, how expanding too fast creates cash flow problems, and why reserves matter more than revenue. They also talk about today’s “earn it” market, where operators can no longer rely on luck and instead need sharper systems, tighter operations, and stronger financial discipline.

You’ll also hear practical insights on business ratios, forecasting, taxes, cash flow timing, and what separates investors who survive from those who thrive.

Enjoy the show!


You’ll Learn How To:

  • Build reserves before scaling your business
  • Track the right financial ratios to protect your profits
  • Avoid cash flow traps that kill businesses
  • Create a stronger business in today’s market


What You’ll Learn in This Episode:

(01:30) The pattern every entrepreneur goes through

(02:16) Most investors stay stuck in the hustle phase

(03:02) Getting out of the hustle phase

(03:43) The “secure phase” in your business

(04:44) Why expansion becomes easier with reserves in place

(05:06) You grow your expenses with reserves

(06:33) The long-term investment stage that real estate investors want to reach

(07:09) The problem of expanding the business too fast

(09:10) The “earn it” market for investors

(14:47) Why today’s market still creates opportunities for strong operators

(18:14) Better products and smarter upgrades attract buyers faster

(20:50) Lower-priced homes are struggling in today’s market

(23:44) The “wine fridge” strategy explained

(26:13) Studying the buyer instead of running on autopilot

(28:39) Using KPIs and ratios to spot problems early

(30:00) Three distinct expense categories in a business

(32:26) Understanding current ratio and working capital

(34:40) Why forecasting is critical in real estate investing

(36:15) The importance of reserves

(39:32) How tax strategy changes as income grows

(40:34) Bonus depreciation and cost segregation explained

(44:47) A real client story about saving taxes while increasing liquidity


Who This Episode Is For:

  • Real estate investors who are trying to improve profitability
  • House flippers and operators managing growth
  • Entrepreneurs stuck in survival mode
  • Business owners who want stronger cash flow and reserves


Why You Should Listen:

This episode is a practical breakdown of what causes financial stress inside growing real estate businesses and how disciplined operators avoid it. Marcus and his guest share real-world strategies around reserves, forecasting, hiring, profitability, and tax planning that can help investors build businesses that survive changing markets.


Connect with Marcus Crigler:

SPEAKER_02

Just how do you make your property different? How do you focus on the in buyer? And as long as you do that focused on the customer, your customers are in buyer, you should be good, right? Don't overcomplicate it. Focused on what your in buyer wants and you'll have a buyer.

SPEAKER_00

Welcome to Strength in Numbers, the podcast for real estate entrepreneurs who are tired of being broke and not having control of their finances. If you're ready to finally take control of your money, slash your taxes, and start building real wealth, you're in the right place. And now here's your host, Marcus Krigler.

SPEAKER_01

How are those things looking kind of as you have progressed and as time has has gone on? And you know, are those are the things that you're talking to real estate investors about today, you know, this the same? Is is it really just a continuation of those common themes, or are you seeing anything, you know, kind of unique and and different in today's environment? A lot of tax changes with with you know the tax legislation that was passed earlier this year. There's just seems like the environment in general, not even real estate, right? But just the general business environment has been changing. I'm just curious if you're seeing a different set of challenges today. And and then, of course, would love to hear kind of what you're what you're thinking about as we look forward into our cloudy crystal balls.

SPEAKER_02

Sure. Uh yeah, I've got a lot of thoughts here on this. And so for the first thing is we talk about this pattern that I believe every entrepreneur goes through. And I think if you go through it in the right order and do it the right way, you can get in again. We all go into this industry with some sort of framework of wanting some sort of freedom, right? That's the that's the commonality of it: legacy wealth, freedom, time freedom, whatever it is. It all ends up back to hey, I want to do what I want to do when I want to do it. And and that's kind of why I got here doing it. I'm a firm believer if you do it the right way, you only need a decade. You don't need to wait until you're 60 something years old to retire. You only need a decade, but you got to have a focused decade and go through these processes and these steps. And that steps first is number one hustle. That hustle part of your life is a life that you're gonna be in, but you're gonna get out of, and you never want to go back to it. And this is one of the things that people experience over and over again. And my belief is you should only experience it once. And so we we could probably think about a few clients right now that are back in the hustle stage after they've already grown a business and done the successful stuff and had the successful things, but yet they're back, you know, scratching and clawing just to make the next month's rent, right? And we've seen that happen and we see it happen over and over again. And it's very common in the real estate industry, but that's what costs most people decades, right? Is that they end up back in that hustle phase. And so, well, we believe there's there's certain things that get you out of the hustle phase. First thing is you got to actually run it like a business, you got to get all your I's dotted, T's crossed, you got to have your balance sheet, your PL, you got to have all those things, you got to have three times personal expenses saved, right? So that's a very true monetary thing. You got to actually have money saved. And then when you get to a spot where you're actually consistently making money, right? That's another piece of this puzzle. You have to consistently make money. You move to this spot where you're in the secure phase. And this is where most people don't spend enough time, right? And and the ones that figure this out, they're the ones that generally make the most amount of money for the longest amount of time. But this secure phase in your business is where you're getting your business reserves up to the level that they need to be at, right? You got at least three times business expenses. If you're taking short-term debt with your flips, like we're talking, like we're talking about, like James lends so much on. We expect you to have 10% of liquidity with every dollar of debt that you get. So for every dollar of debt that you put on your balance sheet, I want you to have 10 cents of liquidity. Why? Because that secures up your business. I want you to be paying yourself as an owner consistently every single month. Now, I have a belief that you need to get to $20,000 a month, but you're not going to start there, right? But eventually your business needs to be able to pay $20,000 a month. And when you're in this secure phase and you allow yourself to sit here and allow your business to actually be profitable for their amount of time, not expand beyond your means to only expand with your reserves. You got your debt reserves, you've got your business reserves. Now the next phase is expansion. The expansion phase becomes very, very easy because you've got everything that you need, right? You've got your business reserves, you've got your personal reserves, you've got a business that works. And what you do during during the expansion phase, this is so simple. Most people miss it. They grow their revenue or they go grow their expenses with revenue. That's the wrong way to do it. You grow your expenses with reserves. That is the math equation. The ones that figure that out that, hey, I'm not going to hire this next person until my current expense ratio is allowing me to cash flow enough to put that money in the bank. Let's say you have to hire a $100,000 person. Great. Well, you need three times that in the bank before you hire them, three times a monthly salary. So let's call it $10,000 a month, just for simple math. You need $30,000 in the bank before you hire that person. How much weight does that take off your shoulder of being able to hire that person, put that person into play and allow them to train because we know it's at least 90 days, anyways, before they're going to be profitable for you, right? So then you get to the expansion phase, and that's where you're, again, growing your business, focusing on what you need to focus on in your business, reinvesting in your people, reinvesting in your systems, reinvesting in your staff, doing all those things. And then you get to the last stage, right? You've got your business where you want it. It's it's making you more money than you can truly spend, right? Because we're getting to this $20,000 a month. But once you get to $20,000 a month, guess what happens? You're you start making $30,000 and 40 and $50. We're gonna live off the 20. That's the secret here, right? When you start living off the 20 and stay living off that 20, as you expand and you're making that hundred grand a month, you get to get to this next phase, which is investment. And that's what you're truly hoping for as a real estate entrepreneur is you're trying to get to that invest stage where, hey, my life is secure. I've got a business that's working, but I know that I got in this industry for the investment side of it. And I want to be able to take advantage of that. And that's how you truly get take advantage of it. And eventually you end up in this kind of hockey stick effect where yes, it's slow, slow, slow, slow, slow. And then bang, you're you're taking off through the roof. And we've seen those happen, right? And we see those people that take off through the roof and they never end up back in the hustle phase. And what we'll find, what you'll see, and you'll start seeing this pattern now that we've talked about it, is a lot of people end up in the expand phase too fast. They didn't secure their business, which is why they end up in the hustle phase. So that ends up being kind of that rat race or that hamster wheel. They go hustle, expand, hustle, expand, hustle, expand. And then finally they figure out all right, two, three decades later, let me secure things, let me get the reserves, let me get the stuff that I need to have in place, and then expand. And now I've got a solid foundation to expand on. It's like building a house without putting down the foundation. You wouldn't do that. Otherwise, the house isn't going to be there very long. But yeah, sometimes we build a business that way. And so that's that works, by the way, in any economy. It works today, it worked 10 years ago, it worked 50 years ago. That's just the process of how it how it works. But you asked me what was what's changed recently, right? Here's what I'll say changed recently. 2022, 2023 was a boom for real estate investors, right? No doubt. If you were in the industry, unless you just tried not to make money, you made good money, right? But I was on a call this week, literally, this week, having this conversation with somebody that we both know, somebody that we both highly respect. They had the same top line in 2025 as 2024, yet they lost, they didn't lose, they made 2.5 million dollars less profit in 2025 versus 2024. Same top line, profit diminished, and it was simply because they got bloated in 2022 and 2023, 2024, they had some good fortune, and then 2025, they got to a spot where they were so bloated and the market gave them so much that now when they have to earn it back, which we're in an earning market now. I don't that's what I would call today's market is like you got to earn it if you're gonna make money. The days of getting lucky are over, you're in an earning market, and so they had people on their team that weren't earning the payroll that they had, and so they got too bloated. And so we looked at payroll, payroll cost was you know, 45% of their overall revenue got a problem. I know where the issue is. You bloated in payroll, and they're not paying for their themselves, and so you know, the the market kind of hit some sins, allowed us to build maybe bigger than we should have built. And now what I felt in the in the latter part of 2024, certainly 2025, and you know, I'm seeing a lot of good things in 2026 where people are realized, hey, we can't have these big businesses that are this bloated and you know, this fat, and have you know, assistance of assistance of assistance. We need to have people that are here producing revenue and people that are helping them produce revenue, and that's that's about it, and that's as simple as the business gets. So I'm seeing a lot of people going back to the just blocking and tackling. I've never seen an area, and I know I'm talking a lot, but I've never seen a time period, at least that I've been doing it, where more owners are getting back involved in their businesses that they weren't involved in, right? Where they're stepping into the table and saying, whoa, whoa, whoa, whoa, whoa, whoa, hold on. What the heck is going on here? I haven't had my eye on the ball as much because again, we're all human, got expanded, profits were great, check distribution numbers were good, everything's going good until the market's not doesn't have that that tailwind, it has headwinds. Now we got headwinds. The owners are like, whoa, whoa, whoa, what? What happened? Well, how did how did we get here? And then they start kind of looking at into it and figuring out that you know what was going on within their business are not the decisions that they would have made. And I think that's a scary place to be, especially when you've got headwinds.

SPEAKER_01

I think there's it's a lot of great stuff in there. I think by nature, human beings tend to, hey, when things are going great, you tend to project that this is now the baseline. And that has definitely never been the case in real estate, right? We we know that real estate is cyclical, so you're gonna have good times. You you also must plan on the things getting worse. And then, you know, you typically kind of have this up and down nature of it. And I think, you know, when I was listening to some of the challenges that you you commonly see, and I think you laid that out really well. I think one of the things that comes to mind, the word that keep kept coming to my mind was, you know, discipline. You need to have a plan and you need to stick to that plan using discipline. And, you know, again, real estate investors by nature tend to be fairly risk tolerant. And that might be putting it mildly, right? These are folks that are they are hustlers. And I I love that you kept dropping the the word hustle because it's it's in the name of the podcast. And that's that's really a thing that we we think about a lot at at Renovo, but I think it really applies to this whole industry is you know, these these folks that are out there, they are hustling. And you know, they tend to be, you know, pretty risk tolerant. And so, you know, it's very easy, I think, to overplay that hand and put yourself in a in a jam when things don't turn out to be, you know, as good tomorrow or next year as they are maybe right now. And so it makes sense to me that that you're seeing a lot more people kind of going back to the basics because it's it can be, I think, very easy to let that slide. And of course, you know, when you're having success and you're hiring people, that all feels really good, right? You know, there's an ego component to that, but there's also like, hey, this is what I wanted to build a team. I wanted to help people improve their lives and and help them build careers, you end up hiring people and then times change. It's very difficult sometimes to right-size the business because you've got the human element involved as well. So having someone like yourself there to kind of be that sounding board to say, totally understand where you're coming from. But if you want this thing to work and be healthy and survive for the rest of your team, you have to consider some difficult choices, but it's going to be for the best in the long run in terms of the viability and you know, sustainability of your business. And I think it's really important to have that voice. You know, a lot of entrepreneurs will pick a partner that kind of complements their strengths and weaknesses, right? You know, you tend to see the visionary kind of maverick CEO. And then, you know, having a counterparty that that is high in the organization that can really balance that risk-taking appetite with some grounded reality. But a lot of times folks are getting into this industry and they they're maybe coming at it as a solo and they don't have that. And I think, you know, someone like yourself can can kind of be that as an outsourced option that can really help you stay on track, which I think is super, super important. How are you thinking about, you know, the coming? I mean, the the markets uh by and large, I mean, you look at the country as a whole, real estate market is functionally functioning very well. Uh, I wouldn't say, you know, it's not as you put it, right? It's a, I think you called it an earn it market. So you got to get out there and work and earn it. It's no longer falling in your lap and margins are getting squeezed from all directions. So it is definitely a lot more friction today, but the market's still working. Um, you know, there's still a lot of opportunity, but you need to be financially prepared for it. Are you expecting this market to, and I know you don't have a crystal ball, but do you see that, you know, kind of where we are today with a little bit of these additional friction factors persisting for a while? Uh how I mean, and if you don't have an opinion on this, totally get it. But like I'm curious because you see all these businesses, you know, kind of in the raw, if you will. You know, how are you thinking about the next couple of years?

SPEAKER_02

There's a lot of different ways I can take this question. I think it really comes back down to honestly, if you're a real estate entrepreneur, you should be thrilled about the market right now. The ones that aren't thrilled about the market are the ones that probably shouldn't be thrilled. They should be scared of the market. And that means you're likely not putting out a great product. You're probably not doing the things that you need to be doing to run a successful real estate business. But if you're one of those people that you're good at what you do and you run a successful business, then there's plenty of revenue to be generated. I don't that this market is not a market where, you know, we saw in 2008 and 2009 you couldn't buy something and sell it the next day without it just tanking again, right? It's just not that's not the market we're in. We've got some stability in most markets, we've got predictability in a lot of markets, what the price will be, which is what you actually really want. And quite honestly, you're in a market where the best ones are going to thrive, the worst ones are gonna get pushed out. You need to be focused on being one of the best ones. And I think the world or with the universe or God, whatever you want to call it, that it rewards the prepared. If you spent the last couple of years not setting in a hot tub of cash and you know, buying Lamborghinis and Ferraris and hoping that this world would always stay the same, and you kind of put some chestnuts away and you, you know, got your business secured up. And even if you struggled, even if your business isn't like I've talked to several businesses where they're right sizing their business right now, but they're still excited for 2026 because they know how to run the business, they just have bloat in the business. And once you solve the bloat problem, which is a painful heart thing, like just like you said, it pains me to get rid of this vendor, it pains me to get rid of this human because there's this human element in small businesses that corporations don't really have to feel or don't feel as much. We feel that, and so we're usually late to the party of letting those things go. And so what we're seeing, and what I believe is if you're right sizing your business and you do a good job in this in the industry, I don't see that the market's going to go against you. Aside from a black swan event, we end up in some sort of World War III, or you know, AI bots are knocking out our door, kicking us out of our houses. You know, I don't know any about about any of that stuff. But certainly if you're if we're kicking and screaming in the market that we're in, I think you should be excited. I think you should be ready to be better than your competition because there is competition out there that's making money. I I see it every single day. And if you're struggling to make money right now, it's not the market. That's a blame game. Get yourself look in the mirror and say, hey, what do I need to do better? Do I need to get better at negotiating better deals? Do I need to get better at having better contractors? Do I need to upgrade my properties? Do I need to put better, you know, fixtures in them for them to sell better, faster? Do I need to stage them? What are the things that you need to do better so that you're actually the guy to compete with or the girl to compete with in the market versus being the one that's trying to catch the person that is the leader in the market? And I think that's the key right now. I there's no crystal ball that's gonna up or down. I don't think that matters. I think it's just focusing on being better in what you do.

SPEAKER_01

I did an episode that we released last week. So it'll probably be two weeks from when this comes out, talking about kind of what I'm seeing in the market and kind of how I'm looking at the future. And it's very similar. I mean, I think, you know, my comments around that are, you know, I think this is a time to really sharpen your pencil. You got to be good. You know, you mentioned 22, 23 being amazing years. A lot of people got in without a lot of experience. They did very well. This market is likely to shake out some of the pretenders. And I think the people that are not really like attacking their business and like really paying close attention. I mean, I think that's probably why you see folks who had, you know, at CG, we like to say they had moved to the owner's box. They were the business, they grew a team, they have a trustworthy team that they believe in. They entrusted the business to their team and they kind of took a step back out of the day-to-day. And all of a sudden, it's like, whoa, what is happening? You know, what are you guys doing to my business? You know, now they're having to jump back in and fix a lot of things. This is the kind of market that that necessitates that additional level of scrutiny and that discipline to really make sure you're running a tight ship, that you don't have waste in the business. Quite frankly, I think being very, you know, taking a critical eye to the strategy, right? I mean, I know a lot of investors who, you know, have been operating a certain strategy. They've been hitting, you know, buying property that they are going to sell kind of in a certain price band, for lack of a better word, easy for a long time. Some of those segments in certain geographic markets are not doing nearly as well. Counter to what I think a lot of just, you know, random people on the street would think, some of the lower price product is actually struggling the most. And, you know, a lot of people go, how could that be? We need more affordable housing. How are the lower price properties not selling as much or as well? Interest rates, people at that level are heavily dependent on interest rates. People at that level probably don't have a huge stock portfolio that they can lean on if they need to, right? And there's a tremendous amount of competition. And home buyers, I think right now, are able to be pretty selective. I keep hearing it over and over in different conversations. Homebuyers, especially at the lower end, are not in a huge hurry. You know, they think rates might come down. Great, not as much pressure. There's a lot in some markets, there's a lot of inventory in these lower price points that is allowing buyers to take their time because they're not concerned about. I mean, when I bought my house and I do live in Austin, Texas. Which is the poster child for, you know, a little bit of this most recent real estate bubble, if you will. But, you know, when I bought this house, I, you know, I was putting in offers significantly over asking and getting laughed at, you know, on other, on other homes, right? I mean, the competition for for homes in general was incredibly, incredibly stiff. That's not the case. And so a lot of people who are who have had that strategy that's been rinse and repeat and they've been just milking it. If you're still doing that stuff and you're not asking those difficult questions about is this the right strategy? Is this accompany helping me accomplish some of these financial goals that I need for the health of my business? I think you're doing it wrong. And I've heard a lot of people moving to a little bit higher price point because, you know, there's those homes are moving faster. And if you're putting out a good product, you're probably able to sell pretty quickly and you're taking a little bit less risk up front in terms of you know the exit. There's other considerations, right? I mean, I'm oversimplifying, but I think this is a really good time to be doing those kinds of things. And I think that's kind of what I'm hearing from you.

SPEAKER_02

Yeah, and no, you're exactly right. You know, it's interesting. I always go back to a presentation, it's probably 2018, 2019 at Collective Genius. And this gentleman, I don't, I don't remember his name, or I would give him his due, but he was talking about the difference from taking a property to be a, you know, and you know, there's only so much you can do with a property, but taking a property and adding some of those minimum upgrades that really don't cost you much, but also sell the property significantly more. And I just remember this story. He talked about, well, one of the things we actually do is we take out lower cabinet areas out that's usually cost us 250 bucks for that cabinet piece, and we actually replace it with a hundred and fifty dollar wine fridge. And that $150 wine fridge saves us money and it looks higher end, and the house sells faster because guess what? Mama has her own wine fridge in her own in her in her you know newly built-out kitchen, and nobody else has that wine fridge. And so I I always talk about that story when when we're in times like this. What's the wine fridge? What right? What's that upgrade that you can make your house look a little bit nicer, and you find out, whoa, hold on, that's actually even cheaper for for me to do it that way. And yet the buyer, the end consumer is the one that you know they love it. And so it goes back to and and maybe should have always been, but what does your consumer want? All right, what is it who's out there? What's what are they buying? What are they looking at? What do they need? Who's got the money, right? That's kind of what you're saying. Hey, the the people that have the most amount of money, they still have money, right? They're still buying nice houses, they're still buying nice things. A couple hundred dollars a month in a mortgage payment isn't the difference from whether they can afford the house or not, right? Like that's not, but at a smaller house, right, a lower priced house, that couple hundred dollars is the difference between whether they're gonna get groceries or not for the week, right? And so it's just a massive difference, and I think that's an interesting strategy, and we've seen that too. I was talking to a gentleman out of South Carolina, and that's exactly what he was saying. He was he's a real estate broker, actually, and he's like, Hey, if it's if it's above like the $750,000 price point, it's off the market. It's sold, it's getting out of there pretty quickly. If it's below $350, it's sitting there waiting. And and you know, it's hard to really distinguish those properties because there's a lot of them, there's a lot of them on the market, and you know, interest rates just are not down low enough to affect the payments to incentivize those those buyers into those numbers. So it is interesting, but I I like I like what you said there. And I think that's a I think that's a really smart thing to be thinking about is just how do you make your property different? How do you focus on the in buyer? And as long as you do that, focus on the customer, your customers are in buyer, you should be good, right? Don't overcomplicate it. Focus on what your in buyer wants and and you'll have a buyer.

SPEAKER_01

Yeah, I think that's right. I mean, I uh I like the term, you know, be a student of the game, right? And and if you're always kind of looking at it from an academic standpoint, like sounds simple, but shop your competition, you know, go to open houses. What is everybody else doing? What's the house down the block doing? How can I differentiate? And then I think you said something really smart about knowing your buyer, like really studying your buyer. What are the challenges? What helps unlock value? And I do think you've got a lot of people on the lower end, you know, that are that are you know, looking at these lower price properties, maybe a first-time home buyer, that, you know, rates are remain elevated. I I don't, you know, yes, I think we're gonna see some some more Fed rate cuts. Depending on what else happens in the world, that may or may not really impact the ultimate, you know, mortgage rate that the buyer is paying. But what are those levels that unlock affordability for, you know, this subset of people? And if that's the market that you're going after, you're gonna have to get creative. And I think that only comes when you're taking a critical look at all of these inputs and variables. If you're just on autopilot, you are likely to miss these things. And then you let to your point from earlier, you notice them when it starts hitting the bottom line. And, you know, your hold times are longer, so your debt costs are up. Um, you know, you're you're having to lower pricing to attract a buyer and it and it all crushes your margin. And then before you know it, you did a whole lot of work and you don't have a whole lot of money in the bank to show for it, right? Let's circle back a little bit to you know some of the financial stuff. Obviously, your expertise. You mentioned a couple of ratios there at the beginning. I'm curious, you know, what are some of the main financial ratios that you look for when you're trying to assess the health of a business? I'm sure some of them will be pretty obvious that that most people have heard of. There may be some others that are not. And I think you mentioned you're gonna hire somebody, you need three times their monthly salary in reserve, you know, to cover that overhead until they start, you know, generating enough revenue to pay for themselves. That one I thought was super interesting. Do you have, you know, what are the other kind of ratios that you kind of keep keep a close eye on?

SPEAKER_02

Let's start on the PL, right? And so first go back. If you're a if you're a business owner right now, you really shouldn't be diving into PLs unless you find an issue with your ratios. You should start with ratios and then go into your PL. Your your ratios are like the 30,000 foot view, that right, it's like your dashboard and your car. Okay, I'm not checking my oil unless we're at three to five thousand miles of driven, or if something's blinking and says, hey, check your oil. That's kind of what we want to run our business off of. And so it's important to have KPIs, and a lot of people, you know, say that terminology, KPIs, ratios, dashboards, those are all sexy terms. But at the end of the day, what you're looking for is an alert, an alert that says, Hey, this business is running off track. We need to do some sort of adjustment, dig into this alert and make a decision, right? And so, a couple things that we look at on the on the PL. First off, for real estate entrepreneurs, we do not look at revenue, we look at gross profit. Okay, so if you're flipping properties, right, that's going to be your net profit from the flip. You bought a house, you rehabbed it, you had holding cost, you had you know financing costs, and then you profited from that. There's a whole calculation and a gross margin calculation that we want to kind of keep an eye on. But for these specific formulas, I want you to, I would just want you to stick with me with gross profit. And so when we look at gross profit, which is kind of our top line on a PL, underneath that, there's three distinct expense categories. And this is generally for any business. There's advertising and marketing, there's human capital, and then there's general and administrative. Everything falls into one of those three buckets. And if you're a real estate entrepreneur, if you're a business owner, what you want, at least at a minimum from your PL, is to know what your ratio to for each one of those expense accounts are to gross profit. So for instance, if human capital is 30% of gross profit, that means you spent 30% of your income on payroll, on people cost, on benefits, on all those things. If 30% of your cost went to advertising, that was 30% of your expenses went to generating the revenue that was up there. And so what we do is we kind of set, hey, what are those percentages? Should it be 30? Should it be 40? Should it be 20? Should it be 10? And that's how you're basing your numbers off of, hey, wait a minute. I expect human capital to be 30. It's 45%. Alert, alert, alert. Let's dive in and figure out what happened. Could be a million different things that don't matter, right? A lot in just like in life, when we're driving down the road and you know, some sort of flash on your car says, Hey, you need to check something, you go to the the guy, he runs something, he's like, I just cleared it, it's good to go, right? That happens in in business too. I looked at it. Oh, we paid out bonuses to a couple key team members. That's why it was up for the month. No big deal, right? And so we like to say, and a lot of real estate entrepreneur businesses are different, but here's some here's some simple numbers. If you spend 30% on advertising, finding your deals, 30% on your people to service your deals, and 10% on GNA, everything else, that's how you run a 30 margin business, a 30% net profit margin business, which is what we believe a good healthy real estate business looks like, right? And so you can adjust that, right? Maybe your marketing is 25 and your human capital is 35, right? But you can kind of play with those ratios a little bit to get you where you need to be. But that's where we start with. And then we look at the balance sheet. There's a couple of ratios I look at the balance sheet. The first one's gonna be the current ratio. This is probably one of your favorite ratios that we look at because we're looking at how much current debt that you owe against the amount of current assets that you have. And do you have enough assets to pay for the debt that you actually owe? Right. And so that's critically important. If you look at your balance sheet and you've got, let's say, a million dollars worth of assets on your balance sheet, but you've got a million two worth of debt coming up due on your balance sheet. We got a problem. Alert, alert, alert. We need to solve it. I don't know what we got to do yet. We'll figure that out, but we got that alert that's coming in to solve that problem. And then the last one is gonna be working capital. So that's gonna be another balance sheet one that's gonna tell you similar formula, current assets minus current liability. So this is gonna tell you how much cash or how much capital you have available that is available to you, right? So it could be stuck in inventory, it could be cash, it could be, you know, other current assets that are on your books, but you take that current assets minus your current liabilities and gives you your working capital number. And that tells you pretty much how long of runway that you have to keep operating your business without it really being a problem.

SPEAKER_01

That's fantastic. You mentioned timing earlier. I feel like timing when you know, timing inflows of cash versus the outflows can be one of the big ones that gets people stuck because they're like, I know I have all this money coming in. And they, I think it's very easy as an entrepreneur to sort of you're already counting it. It's coming. I know I've got this house, it's under contract, whatever it might be. You're sort of assuming that that money is, and then you're but you're making plans with your expenditures kind of with that in mind, like you've got it, but you don't. And then something happens, it doesn't come in when you thought or whatever. But if you mistime that, it can be fatal, really, but it certainly can be very, very painful. Talk to me about that and how you work with your clients on on matching up that timing and trying to avoid some of these pitfalls.

SPEAKER_02

Yeah, totally. So, first off, a good forecast is critical in the real estate industry, right? And updated on a regular basis, a minimum weekly, but certainly monthly, almost a necessity. So that you and and what is a forecast? People get scared of that terminology, but a forecast is simply just saying, hey, here's the revenue I expect, here's the expenses I expect, which by the way, guys, I'm gonna give you a little secret. 80% of your expenses are the same expenses every single month. So it's not that complicated to forecast this out. We know what they are, it's the same subscription payment you paid last month, right? So you're most of your expenses are already squared away. And so a good forecast will tell you. But the other thing is this industry is just that way. It's a industry of cash in, cash out, and large lump sums, and it moves around quickly, especially when you go from doing one to two properties to two to three properties, the three to six properties, and so on and so forth. And you get to a spot where you have all of this money. Just a perfect example. I deal with this every day. Hey, we paid $50,000 for construction on this property and we need a construction draw. That process to do that is very easy when you have one property, right? You're on top of it, you know it. But when you have 20 and you're like, I gotta ask for basically a draw request every day per property because I got a different property that's at hit a different stage that I can get my draws. But yet your money's going out first, and then you're replenishing it with those draw requests. And so you have to have reserves. This is that 10% debt reserve account that I talk about. Because if you don't have the reserves in place, you're always going to get yourself into a spot where cash flow is an issue. And it doesn't matter how big you are, like it doesn't cash flow. I was talking to a gentleman two weeks prior to that. They had a million dollars in their bank account, million bucks. They thought life was good. Two weeks later, they had 200 grand in their bank account and they had a lender pulling 250 a 250,000 line of credit from them. They were in trouble. They had to go solve that problem. And it wasn't that big of an issue. They just had a bunch of money setting in deals that they needed to free up from those deals. And we did that and solved it and moved on. But when you take your eye off the ball and you don't have the reserves lined up, you can find out very quickly that that reserves, even if you do, they can get washed up very quickly if you take your eye off the ball. So it's very, very important that you have that forecast, you have the reserves in line, but you also make sure that you have a dialed-in process for if you're going to be flipping that many properties, if you're going to be running that large of a construction budget, that you're able to ensure that, hey, as soon as something's done and you're available, that draw request is available to be requested, or that draw is available to be requested, you do it and you have a process so that you can get that money back in and replenish it because most of us are using operating capital to fund these construction loans until we get our draws, right? And then so we need that drawback to fund our operations, to do our expenses, to fund our human capital, our GNA, our advertising and marketing, all that good stuff.

SPEAKER_01

I think those are all really great comments. Number one, I think those ratios are super helpful. But yes, I love the concept of the reserves. And I agree. I I think the the timing of of some of these things, and if you get off just a little bit, man, it can put you in that crisis mode. And most to you, and you pointed this out earlier, most people get into this business so that they can relieve themselves of those types of things. And so you don't want to put yourself in a cycle where you're constantly in survival mode, and then, oh, everything's great. And then boom, you're back into survival mode and back out. That can be incredibly taxing, and I think it makes it a lot less fun for sure. I mentioned, I said taxes in a different context, but I think it's really important and I would be remiss if we finish this conversation without touching on taxes. I know there's been some changes with some of the new tax laws that have gone into effect. How is that, if at all, impacting your clients and anything that you think you know folks should know regarding kind of the taxes, which I imagine is can be a pretty significant component of the overall expenses if not handled correctly?

SPEAKER_02

Yeah, I mean, well, here's the thing you get to this process, you go through the process, right? Hustle, secure, expand, invest. And you get to that, usually it's that expansion phase where taxes really start to nip at your at your side, right? And sure, when you're in the hustle and secure phase, you are making some money, but your tax rate is relatively low. Um, generally, if you're making less than a couple hundred grand a year, you're paying in the teens as far as your taxes. And in the grand scheme of thing, when the highest tax rate is 37%, you know, paying 15% in in taxes is a very, very manageable amount. And why that matters is because the more money you make, it is important that you focus more on paying less in taxes because we live in a system that is marginal tax rates, right? Which means the last dollar you make is your most taxed dollar. But it also means the tax strategy that you employ attacks the most tax dollar first. It's kind of a win-loss ratio there. And so what we talk about, one big beautiful bill. This is the one that that Trump put in play. This is what most people have probably heard about. There's a lot of intricacies, but for real estate entrepreneurs, everybody loves what's called bonus depreciation and a hundred or a hundred percent bonus depreciation and cost segregation. And and where why I mention that we're in a world of marginal tax rates, well, what that means when you buy a property, and let's just for simplicity say that that property can give you a $10,000 deduction for buying that property, and that would be a low deduction for most properties. But let's just do it because the math is easy. Well, if you're at the 15% tax bracket rate, that saves you $1,500 in taxes. But you just bought this massive house and you had all the risk and you had all this issue that you know, you got all the things that come along with buying a rental property, but yet you're only saving $1,500 in taxes. Well, let's take that at the 37% tax bracket. When you're in the 37% tax bracket, now you can take that $10,000 deduction, same deduction, same everything, same house, same wall, same color, nothing changes, but you save $3,700 in taxes, right? Because it's you're at the 37% tax bracket. And so the more you make, the more important it is for you to focus on tax strategy because the bang for your buck gets to be significantly higher. And that's why you see so many people that are real estate entrepreneurs and they're looking to get, okay, how do I get a hundred thousand dollar deduction off of buying this $400,000 piece of real estate? We see people all the time where their tax savings literally is more than they have cash invested in the property because their tax rate is so high. So, you know, it saves them $37,000 in taxes, but because they were able to fix the property up and they were able to burr the property, they only ended up with $20,000 in cash in the property. Well, guess what? You just netted $30,000 or $17,000 in your pocket by owning the real estate versus selling it. And I think that's one of the things that the one big beautiful bill and bonus depreciation and combining that with cost segregation, which is probably above this conversation at this point in time. That's the magic of real estate right now, is that you can buy these investment properties and the the wealthier you are, the more money that you make, the more bang for your buck you get, and the better the tax returns are on that. And then you get all the other returns, principal pay down, appreciation, you know, maybe a little cash flow, although cash flow is at a premium right now, those kind of things. So yeah, we see that. And there's oh my gosh, there's we could do another two hours on just tax strategies with real estate entrepreneurs, and we wouldn't even cover the surface. There's there's so much you can do with these assets and timing of the depreciation and timing of the expenses, and it it that's it gets me fired up to be in this industry. It's one of the things I love about it.

SPEAKER_01

Being that fired up on taxes and things like that, that's not your normal person. So, you know, I think you're in the right, you're you're in the right seat. And at the end of the day, and I agree with you, I mean, there is so much, and my, you know, listen, I think most people probably like me, my eyes start to glaze over when you start getting into the weeds on taxes. But that's why, again, I think you need a professional. And and that's why I think you know, people should really consider, you know, bringing in someone like yourself who, you know can can do that for them and and they don't have to necessarily sit there and learn it all because it's it's a lot and and most people have many other things to do with their time. Um we uh this has been an an amazing conversation I think we're we're kind of getting to to the point of wrapping it up but I thought maybe it would be a good opportunity if you have any you know stories or anecdotes of some things that you've done for some of your clients that have made a an outsized impact on their ability to to grow and maintain the strength of their business. I'm I'm sure you have a thousand of these that you can think of but I you know I'd love for you to share you know a real world example of something you've been able to do with with one of your clients that that turned out to be really impactful.

SPEAKER_02

Talk to you about this one so we've got we've got a client that's you know they typically make between a million and two million a year just to kind of depending on where they're at but their goal this year was to establish establish another level of liquidity right and and you know again as you've heard us talk we talk about as you're increasing your expenses increase your reserves and so they're looking to grow their business and they want to increase their reserves but taxes are a big part of that right and when you make a couple million dollars a year the tax guy wants about seven eight hundred grand of it right and so you know it's it's our job to make sure they stay as liquid as possible and they could have gone out and bought a bunch of real estate and that would have worked out for them except for they wouldn't have been super liquid. They would have had all their money trapped in real estate and and maybe would not have been the best thing. So we spent I don't know three or four months looking for different options for them and and found an investment for them to where they were able to actually save more money by making that investment in taxes than the investment actually cost them. And it was by about two and a half times. So they saved let's just say $2500 on a hundred thousand dollar investment that they were super super excited about. And so that's a really really good win for us and those numbers were a little bit bigger than that but just for simplicity purposes and they were really excited about that. And what that does is it allows them to do what they're doing now, which is the most important part because we say that tax strategy and tax savings is supposed to fund your wealth not your lifestyle. So like we don't want you to go take that savings and buy a Ferrari. That's not what it's for we want you to take that savings and reinvest. And now he's hiring an another person he's looking at buying a couple additional properties he's got himself into a spot where he's got the liquidity so that he can continue to grow his business and you know that's just one of the many stories that we see on a daily basis right like that's that's kind of where we get to and where we get to support people is where are they at in their life? What do they want to do? And then how do we combine those custom strategies you know with where they're at so that we can we can get them that direction because everybody's different right somebody may want to be worth a hundred million dollars next person wants to be worth two million dollars and they their path to get there is two very very different things. And so to employ the same strategies for everybody, we would be doing a disservice. So we certainly certainly take that custom approach and and that's a good example of it.

SPEAKER_01

I think we did a good job of laying it out kind of what what it is you do, the value you can bring to your clients and and how important it is. So I I appreciate you sharing those thoughts with me and with our audience. And I guess the last thing would just be you know how do people get in touch with you and we'll make sure that we include all this in the show notes and certainly happy to to make any connections that we can but how do people get in touch with you if they want to you know learn a little bit more about what you're doing and see if there's a fit.

SPEAKER_02

Yeah totally uh BeckCFO.com B E cf ocom is is our website you can follow me on social media I'm on Facebook all the time trying to give as much free advice as I possibly can but if you go to BeckCFO there's a ton of resources on there at a minimum check those out if you'd like to schedule a call with us there's a a let's talk button in the top right hand corner of the website and you can fill out the form, give us a little bit more information about you and we'll we'll get a meeting scheduled and see if we can help you.

SPEAKER_01

Awesome. Awesome well listen I think it's amazing I know a lot of people that work with you that have been incredibly happy and I know you've been super valuable to their businesses. So really appreciate you sharing some of your expertise with us today and look forward to seeing you at the next collective genius event here soon.

SPEAKER_00

Sounds great. Thanks for listening to Strength in numbers if you're ready to take control of your finances and start building real wealth in your business be sure to schedule your free discovery call with markets at BECTFO.com to get started. Thanks for listening and we'll see you on the next episode.