Strength in Numbers with Marcus Crigler

Episode 76: The Wealth-Building Framework Every Real Estate Investor Needs - Brandon Bateman

• Marcus Crigler • Episode 76

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0:00 | 42:16

Most real estate investors focus on finding more deals, scaling faster, and growing revenue. But according to CPA and CFO Marcus Crigler, many entrepreneurs skip the financial foundation needed to build lasting wealth.

In this episode, Marcus joins Brandon Bateman to break down the common mistakes investors make when scaling, the importance of having a clear wealth-building strategy, and why cash reserves matter.

If you are a real estate entrepreneur looking to strengthen your finances, improve cash flow, and build long-term wealth, this episode offers practical advice you can apply immediately. Listen and enjoy the show!


You'll Learn How To:

  • Build a strong financial foundation before scaling your business
  • Create a wealth-building strategy
  • Manage cash flow more effectively
  • Avoid common scaling mistakes that hurt profitability


What You'll Learn in This Episode:

(01:15) Marcus’ background in real estate accounting

(03:58) The financial foundation most investors overlook

(04:40) First part of financial foundation: Cash

(05:14) Second part of financial foundation: Debt

(06:19) Good debt vs bad debt

(07:19) Four phases of entrepreneurship

(09:10) Wealth-building strategy investors should follow

(10:28) The three-times fixed expense rule

(13:35) What counts as a fixed expense

(16:14) Paying yourself consistently as a business owner

(19:20) Industry profitability trends

(27:25) The key reasons real estate businesses struggle with cash flow

(30:23) Why fix-and-flip businesses need a financing arm

(34:09) Running wholesaling and flipping as separate businesses

(36:27) The most underrated investment for business owners

(38:41) The three expense categories every entrepreneur should track


Who This Episode is For:

  • Real estate investors looking to improve cash flow
  • Entrepreneurs preparing to scale their business
  • Business owners who are looking to build a stronger financial foundation


Why You Should Listen:

This episode provides a practical framework for managing cash, reducing risk, and building a business that supports long-term financial freedom. Marcus shares real-world lessons from working with hundreds of real estate entrepreneurs and offers strategies that can help you grow without sacrificing stability.


Connect with Marcus Crigler:

SPEAKER_02

Here's the secret, right? If you get to three times fixed expenses business-wise, three times fixed expenses personal, you now have six months worth of your $20,000 salary ready to go if there is a hiccup and you have to make a big adjustment. And that's at a minimum. That's where we're saying you're at minimum-wise.

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

Hello and welcome back to another episode of the Collective Clicks Podcast. This is your host, Brandon Bateman, and today I'm joined by Marcus Krigler. I've known Marcus for years. He works with a bunch of our clients from a CFO and accounting standpoint. And he has a lot of insights on what's happening in the industry and how real estate investors can better manage their tax. Marcus, how are you doing today?

SPEAKER_02

I'm good.

SPEAKER_01

I'm good, Brandon.

SPEAKER_02

Good to see you.

SPEAKER_01

Yeah, likewise, good to see you as well. For people who don't know you, what you're about, what you've been doing in the real estate space, what's the summary?

SPEAKER_02

Yeah. So uh first off, I am a CPA. So if you don't know what a CPA is, we are a certified public accountant. We took a test that we could never pass again, right? And that's the joke in the CPA world. But basically, we are a CPA firm and we work with uh real estate entrepreneurs across the country on bookkeeping, accounting, tax strategy, CFO business strategy. So we have a kind of a full encompassing business specifically focused on real estate investors, and we've been doing it for the last decade or so. And so that's what we do. We do it every single day. We've got a pretty large team that's entirely dedicated to just serving that client base.

SPEAKER_01

Very cool, Marcus. Yeah, well, you started out saying that you're a CPA. I had this picture in my brain, and it was a picture of somebody who's not you at all. That's uh that's funny. You're you're a special kind of CPA. Are you a CPA technically? Yes, but yes, I think anybody that knows you would say you don't fit the mold.

SPEAKER_02

That's fair enough. That's fair enough. Yeah, I don't usually jump on it with a suit and tie. I'm I'm a little bit more casual for our clients. That's what they endure. So that's why I love the real estate industry. It's a little bit more of a laid-back industry at times, and so it allows me to be me. And I think that's one of the great things about what we do.

SPEAKER_01

Yeah. How many, how many real estate investing companies do you guys work with now?

SPEAKER_02

Oh, that's a trick question. Real estate investors. So they all have multiple different companies, multiple different entities. We'll do in excess of 500 tax returns this year, and that will be encompassed of maybe a hundred to a hundred and fifty client groups, is what we call them. So we're don't we're not huge as far as a number of clients that we deal with. We're pretty middle of the road as far as number of clients we deal with, but we certainly have a great great staff to do it.

SPEAKER_01

Yeah, and the reason I ask is something I respect the most about the position that you're coming from, coming into this call, is everybody comes into every conversation, usually with one data point, right? That data point is I know what's happening in my business. Sure. The gift that you have is that you get to see behind the curtain, not just what people say, but what actually is happening behind the curtain in a lot of different real estate investing businesses, which I think, even if you were a really dumb person, which I don't think you are, gives you quite an advantage in understanding what's happening in the industry, that you're actually a pretty intelligent person on top of that. And now we have this wealth of information that's available there. And that's what I'm excited to tap into today. And based on that like view that you have on the industry, one of the things that I keep on hearing from you, for lack of a better word, like financial hot takes about real estate investors, is this idea of a financial foundation.

SPEAKER_02

Sure.

SPEAKER_01

And it seems like you believe that most investors don't get that figured out enough before they start scaling. And I want to talk about like what that means and what we should be doing.

SPEAKER_02

Yeah. I think when it comes to a financial foundation, first of all, there's a lot of opinions on how to create a financial foundation. And most of them are correct. As an investor, you need to get a strategy in place that you follow. And you know, whether you're somebody that is a you believe in profit first, you believe in Dave Ramsey, you believe in Grant Cardone's methodology, no matter what your strategy is, number one, you got to stick to a strategy. And so that's the biggest issue that I see first off is that we've struggled to get a foundation because we love this person's strategy and then we love this person's strategy. And so what happens is we're never consistent on one single financial foundational system because there's multiple out there. And so what I think is important that you understand when you're building your financial foundation is number one, it's got to be centered around cash. And I know cash sometimes is a dirty word in real estate, but cash is what allows your business to breathe. It's oxygen, right? And so you're going in and out, and your business is gonna have months where it's gonna be great, deep breath, great business. And then you're gonna have months or maybe even a quarter where you're like, oh, that was painful. And so when you have cash that allows that business to breathe, and so that's a big part of the foundation. But the second part of the foundation is debt, right? These are the two pieces that usually hurt people the most cash and debt. What our belief is is if you don't have a financial foundation until you only have debt on assets that are paying themselves off. Now, I will use the exception of a personal residence with that, because a personal residence doesn't necessarily pay itself off. However, you do have to have a place to live. But when we think about debt that's not paying itself off, what are we really talking about? We're talking about bad credit cards. We're talking about home equity loans that you've put out there. Maybe you've got some unsecured lines of credit that you've taken out from investors. If you're still setting with that debt on your books and it's not paying itself off, it's probably a bad foundational start. You need to focus on debt payment and cash position before you start thinking about growing and adding more deals to your portfolio. Okay, that's interesting.

SPEAKER_01

So if I were to take what I took out of that, basically you see a lot of investors with a lot of debt that's dragging them down. Yeah, it's it's bad debt, right?

SPEAKER_02

I think we know, and most people can agree, especially if you're a real estate investor, that there is good debt out there and there's a way to utilize debt to compound your wealth, right? But used incorrectly, that's the two sides of that sword. It's sharp on both sides. Used incorrectly, you cut yourself and you end up getting hurt using debt. And a lot of us, let's just be honest, right? When we're growing our business, we're in it. We're just going, I we don't care if we rack up credit cards, we don't care if we do this, that, or the other. We just want to grow. But at some point, you got to make the decision to say, okay, I got to slow down for a second. I got to take all this bad debt that I've accumulated, however, I've accumulated it, and I got to get it rid of it. Because at the next level, at the next phase of your business, you can't have it for longevity. It can't be there. And it can't be how you run your business. You can't run your business based on bad debt. And so that's why we talk about foundations so much, because I think you're like this process. Every entrepreneur goes through the same process. They go through a hustle phase, they go through a security phase, they go through an expansion phase, and ultimately they go through an exit phase. And those four phases each have distinct things that you should be doing in each phase with your business, right? So in the beginning hustle phase, yeah, you're gonna take, you're gonna get some credit, you're gonna get some bad debts, you're gonna make some bad moves because you're hustling, you're a new entrepreneur, you're in the business. But before you expand, you got to secure, right? And that's that foundation of making sure that you secure your business, you've got the right things, you got all the right legal paperwork, you got everything before you go through expansion. Otherwise, you end up back hustle. And that is the phase where you don't want to go back to, right? Be in hustle for a short a period of time as possible, get to secure and then never go back again. And that's how we believe at Beck CFO, you should run your business, is just get through those phases. And if you do it right, if you don't have to go backwards, you can do it in a decade. You can, it'd see. As long as you go forward, it's the two, three, four decades is when you go backwards. You have an unexpected tax bill that costs you hundreds of thousands of dollars. You have, you know, a deal that went bad that cost you hundreds of thousands of dollars. Any of those things, that's what takes you back to the hustle phase and kills your wealth building strategies.

SPEAKER_01

So when when we talk about wealth building strategies, you mentioned that it seemed like what you were saying was basically almost even more important than the strategy itself is being consistent with whatever strategy you have. So putting that aside for a second, I'm curious. Like when you didn't see well wealth building strategies, like I can't like name five wealth building strategies that people are following off the top of my head. I I want to know, in your opinion, like what are some examples of these strategies? And I specifically want to know which ones do you feel are under or overrated?

SPEAKER_02

Yeah, so let's talk about what I mean by wealth building strategies in general. And so I wish I had a whiteboard, I'd draw a picture for you, but you got you guys are gonna have to just envision it with me a little bit. You have your cash cow business, man. Jason Medley, I'll I'll give him credit for the coining that term cash cow, at least from where I heard it from. But the cash cow business is your everyday business. And by the way, if you are not an entrepreneur and you're a W-2 person, that's your cash cow, right? This works the same either way. But we're probably more specifically talking to entrepreneurs here. The goal is to get that cash cow to where it has enough cash into it where you do not have to worry about bad months ever. You are getting paid the same every single month, no matter what. If it's a great month, you get paid the same. If it's a bad month, you get paid the same. And you get the benefits, you get the riches of the profits if you want them. However, if you get to a spot and where this is where I love, this is where people will really start their wealth building process, is once you get your business to the spot, and this is the strategy, that's where you start taking money off the table and then putting it into the investment. Hey, I've got my business to where I want it to be. It's self-sustaining, it grows itself, right? My cash position is growing as my expenses are growing. By the way, we always recommend at a minimum keep three times cash in fixed expenses. So if your fixed expenses are $150,000, a minimum need $450,000 in your account at any given time. And so you keep that in there, but once you start getting above that and you're consistently above it, now you start pulling that money out for investing. Or you start taking a couple deals down inside your own portfolio, but you don't do it until you're ready. And that's the strategy. Now, what you invest in is a completely different conversation. I know enough background in I've seen them all. I've seen residential, I've seen self-storage, I've seen multifamily, I've seen you know townhome, everything. Mobile home parks, car washes, laundromats, all it doesn't matter what you invest in. Stocks, bonds, all of it. It doesn't matter. The secret is it doesn't matter. The secret is you have to know it, you have to understand it, and you got to be consistent with it. Okay. Because over time, they all work. And with the right strategy, they can all be successful. With the wrong strategy, they can all be massive failures. And I've seen them on both sides. And so it's it's less about what you want to invest in, it's more about getting the knowledge and comfortability of that asset class and then making that investment. And by the way, investing is a definition. Investing is something that you are taking your capital and you are putting it into, right? And so you're not necessarily looking for 30%, 40% returns on these things. You are preserving capital and putting it in there for it to multiply over time, right? It's not a short-term play when you're investing. And so I think that's something that a lot of people get confused about is some people have our real estate investors, but they never actually invest their own money into real estate, right? And so we're not investing yet. We're not creating or pulling our money out of our business and putting it into real estate, which makes me concerned that we don't have a strong enough business to be doing that yet. That's where I see from a wealth-building strategy, get the business, get the cash cow going, get the cash position, and then start peeling the money off there and putting it in the real estate because you have to, as a real estate investor, as a real estate entrepreneur, you have to invest in real estate. It's an absolute must.

SPEAKER_01

Okay. So if I understand you, the key difference between what you're saying and what you feel a lot of people are doing is how much cash you keep in the business. I think in general, people are keeping a little bit too lean in the business. They don't have that three times their fixed expenses on a monthly basis. And because of that, the business doesn't have that oxygen, right? So if everything goes well, sure, we're fine. But if it doesn't go well, then we're forced to be put in this position where we end up making decisions that are probably a little bit more short-sighted than they should be based on the constraint that we have.

SPEAKER_02

Yep.

SPEAKER_01

Yeah, I think that's a per that's a perfect summary. Okay, that makes sense. So your recommendation is three times your fixed expenses. And what do you consider a fixed expense?

SPEAKER_02

To start with. So anything that is gonna cost you a dollar on the first of the month. So if you know that cost is going to hit your expense account on the first of the month, that's a fixed expense. I actually have a little calculator. Um, I'll peel it out and I'd love to give it to your audience. I'll get it to them. But I have a little calculator and it's basically your fixed expenses. So what you know is gonna happen every single month. Now, what typically is not a fixed expense is gonna be your commissions. That's the biggest thing that's not a fixed expense. Now, it is an expense to your business, but if you don't make a dime, you don't pay out the commission. So as long as it's not associated with revenue, it's considered a fixed expense. Marketing, for instance, fixed expense. A lot of people consider it on other sides to be a variable expense, but you spend the marketing money and then you generate revenue. So it's actually fixed. Now you may philosophically treat it variably, and you may say, hey, if I only generate $100,000 in revenue, I'm only contributing $30,000 to my marketing spend, but it's still a fixed expense because does that make sense? So marketing is a fixed expense, staffing, salaries are a fixed expense, your general and administrative costs are a fixed expense. That's your dues and subscriptions, maybe your auto, maybe your anything that is in software, all that stuff, right? That's all fixed. We throw in debt payments there as a fixed expense. So if you have any monthly debt payments, that's part of money going out the business. Now I know some of you guys that are accountants, you're like, hey, Marcus, that's not an expense. It's principal reduction. I understand. I understand, but it's money going out the door. And so for entrepreneurs, it's an expense, right? That's how we look at it. And also additional payments to owners. So let's say you're on a your accountant has you on a $50,000 salary because you're an S-corp. And you know, if none of this makes sense, just ignore it. But let's just say your accountant does, but you're taking out $100,000 from your business. That fixed expense is not $50,000, it's a hundred, even though only $50 hits your PL. And I know that's goofy accountant garbage, but I just want to make it clear if that's how we're looking at it. Because an owner, by the way, that's something important. An owner is a fixed expense of the organization and should be included in that as we're managing our cash.

SPEAKER_01

Yeah, that makes sense. When it comes to accounting for the owner as a fixed expense, how exactly do you work that in? And how do you see most people do it? Yeah. I love this question. Gosh, we're getting into some good stuff.

SPEAKER_02

Here's my belief. My belief is as an owner, you should have your personal budget. You have your business budget, you have a personal budget. Let's say that personal budget is to live, you need to generate 15 grand a month to your yourself. That's gonna cover all your expenses. And maybe you want to have $5,000 additional in excess, maybe savings, whatever. So I'm gonna structure my business to where it's going to pay me $20,000 a month every single month, guaranteed. And that's why I have to have the cash position. That's why I have to build the cash position where I want to be. Because here's the secret, right? If you get to three times fixed expenses business wise, three times fixed expenses personal, you now have six months worth of your $20,000 salary ready to go if there is a hiccup and you have to make a big adjustment. And that's at a minimum. That's where we're saying you're at minimum-wise. And so what will typically happen, what we find is if anybody has a hiccup, what is the first thing that they're gonna do? They're gonna start cutting expenses. So that three months actually can turn into four months, five months, six months, 10 months in some instances, right? Just depending on how you manage your capital and how fast that revenue turns off. But that's how we really recommend you do it is get your salary. And then once your business is like we talked about, once your business is making a whole bunch of extra profits, what do you need those extra profits for? It's just for investment because you're paying your bills. Now, maybe you're like, hey, I got a hundred grand here. The wife and I are going to take 25 and go on a great vacation, and I'm gonna invest 75. Good, do that. But you've already paid all your bills, you've already got some savings over here, and your business is now capitalized appropriately. And once you have additional profits and you've got you feel like you can take them out, go use them. But that's where you start really accelerating your wealth building. Because we know that our real estate investors are going to buy discounted properties. Buy a $150,000 property for $100,000 and then you go pay cash for that property. So you buy $150,000 for $100,000 and you own it outright and it's written out for $1,500, $1,700 a month. It's good, that's a good, that's not a bad investment, especially in a good appreciating area. That's what I'm talking about investing, right? Taking your cash now you're dumping it into an asset that really secures yourself. And there's a lot of investors right now I'm talking to that are really loving the idea of debt-free real estate for longevity, right? It's just an annuity, it becomes an annuity that way.

SPEAKER_01

Sooner or later, we're all like Dave Ramsey, right?

SPEAKER_02

That's right.

SPEAKER_01

We just we just got to give you a hundred years. Yes. That's right. We have a report we've been working on at Bateman Collective. I know you're aware of this. We basically started surveying lots of real estate investors, asking a bunch of different information about their business, about this cash cow part of their business. Sure. We're not talking about like the wealth pulley and all that kind of stuff. And I've got some numbers that were a little bit shocking to me. I want to share them with you and I want to see what you feel about these numbers. Let's get the Robert Marcus Krigler reaction here. So, what I have here is of the people who completed the surveys, some of these are our clients, more of them than not are just people in the industry, not necessarily clients of Bateman Collective. And I have them grouped by essentially how many deals they're doing per year and the median of the net profit for each of those groups. Now keep in mind here, the way we're measuring net profit here is not necessarily defined as clearly as you might define it. You might look in these people's books and be like, that's not your net profit. Your net profit's different than I'm sure that's especially true as we get to the smaller end of it, where these people are reporting. One thing I did here is I looked at what's the correlation between number of deals per year and net profit. And I saw that it was like, obviously, we do more deals per year and we're gonna have a lower net profit. And then I added in, what if everybody had to pay their owner 250 grand a year, which is probably in a lot of cases what you're like the value of the work that the owners put into the business, and suddenly those really small companies no longer are the most profitable. So I think the reality is that that owner impact is not accounted for super well there. So as you expect, it starts out on the low end, we are at the highest net profit, starting at about 60%.

SPEAKER_02

So explain that to me so that I understand that clearly. Well, on the low end, what's the low end mean? The low number of deals.

SPEAKER_01

And I can't remember exactly where the cutoff is between this first one and this second one. I do know for the third one. But yeah, we start out low number of deals, we're at 60 uh percent net margins as people are reporting them. You take that one step up, we're at 30. Seems reasonable enough. You take that one step up, and this last step takes us to 100 plus deals per year. So we take all the companies that filled out this form that were doing over 100 deals per year. The median net profit that they reported, 5.59% for 2024, which to me feels really low. Now, to their credit, the average was like 14%. The median comes in a little bit lower, right? So different ways of of measuring this give us different outcomes. There's more than a couple zeros in there, and that's dragging it down a little bit. But help me understand, Marcus. This is extreme, right? We're seeing as people are doing more deals, their net margins are whittling away a lot, at least for 2024. What do you see going on in the industry? Do you think that's accurate? I think it is accurate.

SPEAKER_02

Absolutely. So here's what happened. And the smaller companies didn't have to deal with this. The bigger companies, all the bigger companies that I've dealt with are didn't have struggles. Because here's what happened. As when we were in 2020 through 2022, we inflated our expenses because of an inflated economy that really was giving us deal. That it wasn't that our skill set was there, it was that the market was there. And so what has happened is over 23 and 24, and I bet you find the same data in 23 or fair similar, is that in 23 and 24, those bigger companies, they were bloated. And even though that those are bigger companies from our perspective, you and I both know that those are small business owners, don't come in like Corox does, or maybe that I shouldn't have thrown them out there because I don't know this for sure. But from a corporate standpoint, they're not going to come in and just do mass layoffs as soon as they see a hiccup in the market, right? Small business owners generally are going to come in. They're a little bit more empathetic. They're going to try and work through it. They're going to put their own money into the deal, right? They're going to come up with every excuse in the book of why I'm going to keep these people. It's going to work again. It worked in the past, but the reality is they're realizing that they don't have as good a system as they actually did. Because a hundred deals is a lot, right? There's a lot to break in that system. So the system's not as good. The salespeople aren't as trained. Everything along the path is a little bit harder to get done. And when you multiply that across a hundred deals, it's massive. Here's the other thing. Almost exclusively, and I don't want to say 100%, but the majority of the clients that I know their data off the top of my head, their cost or their revenue per deal is down drastically. If you're used to a revenue per deal of 25,000 and you're down to 20,000, but you've got the same number of people, your overhead's so much higher. Your number of subscriptions for every single one of your people, your Adobe subscription might be more than some people's entire software subscription for a year of these smaller businesses, right? And so that's where it becomes difficult. Then, of course, these smaller businesses don't take owner salary into place. These bigger businesses, a lot of times they have a C-suite person on staff, right? Whether it's a COO or a CMO or maybe multiple of them, those are six-figure positions, right? Those are expensive to keep and have. And smaller businesses, there's that one C level person, and that's the business owner. And they're actually a B level person, right? So it's just they're a business owner. And so that's what the situation, in my opinion, is. What was your take on it?

SPEAKER_01

My take was exactly the same. We've seen contract fallout go up across our clients and deal spreads go down. And I think you get disproportionately squeezed. That's the reality of the situation. Is like you said, you go from 20 to 25%. Well, a normal business operating with I don't know what you call a healthy margin. I don't know, 20-30%. A lot of people would say it's like pretty normal, like healthy margins for a business. Maybe it's going to be different depending on the industry and that kind of thing.

SPEAKER_02

Certainly a service-based business. This is a service-based business, right? So a service-based business is generally going to be a 30%, 20, 30% margin, as high as 40, even uh, in some instances at scale.

SPEAKER_01

Sure. And this industry is a little bit interesting though, because it's got it's got this boom robust aspect that doesn't exist in most service businesses. Or you could you could end up making way more or way less money on a client than you expect, versus you and I we charge whatever money we charge. Like it's pretty realistic that we're going to get that amount. Yeah, but if you really think about that, like people can look at it like, oh, what's the big deal? I went from 25 grand to 20 grand. The big deal in my average fee, the big deal is that five grand was your entire margin.

unknown

Yeah.

SPEAKER_01

And now it's gone, right?

SPEAKER_02

That's what went to the bottom line.

SPEAKER_01

Yeah, if it's true that most of your expenses are fixed and much fewer of your expenses are variable. And that's I think you would agree pretty true that like in this business most expenses are going to be fixed. Now, when you go from 25 to 20 grand on your average spread, are are you going to pay 20% less sales commission? Yes. Okay. So that expense goes down a little bit. But like it does your marketing get cheaper because of it? Not necessarily short term. Now, the thing that'll happen is there's an invisible hand that kind of makes sure that marketing's not too expensive long term because saturation is what makes marketing expensive. And as your competitors deal with the same problems, naturally they're going to pull back, they're going to go out of business, whatever the case is. And then now suddenly your marketing works better, right? So the your cost per deal is going to adjust over time, but it's always going to lag compared to the market, which means if the market's getting better, then you're going to have a great time. And if the market's getting worse, then you're going to have a harder time. And overall, it's going to average out. So, anyways, that's my opinion. But it is wild how much of a boom or bust this industry is. I just think like the reality is every business got squeezed. It's just for the ones that had had more, they have the owner doing less and they had more to overhead than all other places. That part's less flexible.

SPEAKER_02

Totally. Yeah. You're exactly right. We'll see. It'll be interesting 2025 because those owners of those big businesses are they didn't get there on accident, right? They're intelligent people. Most of them that I know, they were capitalized appropriately, or at least in a lot of ways were capitalized appropriately. And it'll be interesting to see what 2025 looks like. Because I think that a lot of the things that were exposed, which happens, right? A lot of the things that were exposed are now being fixed and got fixed and are looking forward to a better 2025. And let's just be honest, some of them are gonna, that's a requirement. It's got 2025's gonna have to be better, or there's gonna have to be some big adjustments.

SPEAKER_01

Sure, that makes sense. Let's talk a little bit deeper about cash flow. Basically, if I'm summarizing my mind, what do I hear about the most from Marcus? The two things are cash flow and cash, which are pretty dang similar things, but they're pretty different in their own way. How do you approach managing cash flow for a real estate investing business? Which I would argue is seems pretty dang difficult. I can tell you, like I hear so much about cash flow, and I try to take some of those learnings to my own business. I'm just like, this business is so simple from a cash standpoint compared to what our clients are dealing with, which is significantly more complicated. So we're in an industry where that's probably the number one, like even more than net profit. I'd say most industries probably struggle with net profit more than cash flow.

unknown

Sure.

SPEAKER_01

In this industry, we're starting struggling with cash flow more than we do net profit. What does that look like?

SPEAKER_02

Absolutely. So there's a lot of different reasons that you can go down the road why cash flow is an issue and how to fix it. If you are a wholesaler and you struggle with cash flow, it is because you have not figured out the marketing to sales conundrum. And so if you're not taking title to property and you're not, you know, fixing and flipping, generally it's a you haven't figured out the marketing to sales conundrum because that's what's driving your revenue. And so if you're not driving consistent revenue, but you're spending consistent marketing, then you're gonna always struggle, right? And so you've got to be able to generate consistent revenue for a wholesale business. Now, once you've done that on a wholesale business, if you're not consistently cash flowing, then it's probably the business owner's fault. And what I mean by that is they're overspending on things that they're not ready to spend on, and it's an expense, right? Maybe they joined a $50,000 mastermind that the business is just not profitable for the first time. Is it time to join a $50,000 mastermind? Is there a $5,000 mastermind that we could go to, right? Is there, do they go and invest into some trial marketing for the first time that they've now that they've been profitable? Those are the things that start to eat into uh wholesale profits. So if you're a wholesaler and you're struggling with cash flow, what I would highly recommend you do is just figure out that marketing to sales conundrum, and that's where your focus needs to be. Make sure you don't take any expenses on, reduce all expenses that you possibly can until you figure that solution out, and then you can start thinking about other expenses, right? Where most of the cash flow starts to come in is fix and play, right? Because now we're taking title to a property, we're putting not only are we taking title to a property, but we got to get a loan for that property or we got to put our own cash into it, then we got to rehab it, and then we got to sell it. And all of those have so many variables in each different level, right? And so how we recommend that you run a flipping company or, and when I say flipping, I use this interchangeably with wholetailing, anything you take title to. If you own it, this is what I'm talking here. This is who I'm talking to. You need to run that like a car dealership. What does that mean? That means that you need to establish a floor plan for your fix and flip entity inventory so that you are never using operating capital for your fix and flip inventory. So you have to create a financing arm of your organization. This is where a lot of people miss it, is because they don't focus enough on the financing arm. It is now an arm of your business that has to be managed successfully in order to manage the cash flow of your business. Because what we generally is, I'm not saying a finance arm, a financing arm, right? Those are two that finances, accounting, and all that stuff. I'm saying financing, which is how are we taking the deal down? Do we have appropriate capital to take the deal down? Are we utilizing a specific formula? Not, hey, this is a profitable deal. It's hey, are we in position? Do we have the right lender? Is it the right cash? Is it the right area? Do we have the right capital? Do we have the right construction loan? Do we have the right contractors available? Do all of these things happen, not just, oh, we could go make $50,000 on this deal instead of $20,000 wholesaling it. No, that's the wrong answer. So when you get a you when you start thinking about a financing arm, you put that onus on, hey, how much money do we actually have and how much can we actually put into this property? And your operating capital is separate. You run your operations of the business no different than a wholesale company, right? You just have to ensure that your fix and flip operation, like getting the inventory to where it's sellable, that can't interfere with the expenses of your business. And when you separate those two completely, that's how you solve the cash flow problems inside of a real estate business.

SPEAKER_01

But those two have to be separate. Okay, fascinating. Yeah, I like the way that you approached that. I've given similar advice on the marketing side, where I feel like what people will do is they'll say, I would make $20,000 wholesaling this property, I'm gonna make $50,000 on a flip. And what I'm going to do then is take that $50,000 and say that's because of the marketing. The reality is, what did the marketing do? That's that helped you get the property under market value. Right. So really the $20,000 you can make on a wholesale, that's really what your marketing did for you. And then what did you make on the flip? That's the money you invested, the project management you invested, the risk you took. That's how you made that 30 grand.

SPEAKER_02

Yeah.

SPEAKER_01

And that took time. It was a totally different business, right? And if you really start to look at it like that, yeah, you does your marketing investment, return on investment look smaller? Yes. But also in the context of what it is, that's okay because it doesn't need to be super high. Because when you're just looking at it that way, really all you need is just enough to cover your marketing spend and your acquisitions manager's commission and some basic operational expenses, leads management, all that kind of stuff, which is not that high of a return on investment. But then the flipping side is the one that's making money. But I've had situations with like I had one client, for example, that flips and wholesales. When he wholesales, he makes about 10 grand. When he flips, he makes 50. So he was doing PPC, got a few flips, then started working with us, got a few deals, and he comes to us after six months saying, shoot, since I started working with you guys, my return on investment is horrible. So we look at it and we're trying to figure out what's going on. He wasn't like an 8X, now he's at lift three. Right. So what happened? Turns out he hasn't flipped any of the properties that he got under contract. So before he was doing some flips, now he's not doing flips, and the cost per deal is actually lower. They're just all wholesales. Well, why are you not flipping? Because my crews are busy and I can't take any more flips. So he's looking at that, and what he actually sees is a change in marketing return on investment. And really, what happened was a change in exit strategy. And the marketing itself actually worked better underneath that, which is wild.

SPEAKER_02

I it's fascinating. I'm glad you said that because we have the same conversation with our clients all the time, because you are absolutely correct. If you don't have a wholesaling division and you don't have the ability to exit your wholesale, this is not for you. But if you run a wholesaling and a flipping division, and you can do both, you in essence are wholesaling yourself a property every time you decide to flip. And so if you wouldn't have bought that from a wholesaler, should you buy it from yourself? And that's the fight, right? Because yes, you could make that extra $30,000, but if you would have bought it from a wholesaler at that price, you would have never flipped it, right? Because the wholesale fee's got to be built in there. And a lot of people, there's a lot of things we can get into here, but okay, you've got your wholesale fee, that maybe that $20,000 fee. I see clients all the time, they're paying their acquisition managers off of the flip profits. Hold on. The acquisition manager gets needs to get paid off of the discount they earned from the property. The project manager needs to get paid off of the profits they generated from flipping that property. Two different responsibilities. And so it's just something that we see all the time of they're different businesses, you got to run them differently, and you certainly need to finance them differently.

SPEAKER_01

Yeah, that makes sense. All right, I have one final question for you, Marcus. Let me tell you the like space in my mind that pretty much every CFO I've ever met occupies. Okay. And you occupy it to some extent. And then I want to challenge it, that you think about it. The CFO is the guy who looks at it and says we shouldn't be spending money on these things. We're not efficient enough. We should cut this expense, whatever. Because the CFO views it from the standpoint of like the business has to be efficient. We're spending too much money. Is it going to be better or worse for us to spend less money? It's always going to be better for us to spend less money. We also know there's that other side of business where the money we spend produces returns. So this is purely an opinion thing, right? This isn't going to be in like this wasn't on your CPA exam. But I'm curious from your standpoint, I know there's probably tons of expenses that can't exist in a business that you view as overrated. What are the underrated things that people don't invest enough in that you feel are the leverage of the business and are worth stretching to be able to afford?

SPEAKER_02

Oh, I think I got a good one for you. This is going to take you for a surprise, I bet. Maybe I'm wrong. I will say for a business owner, your best investment that you will not are not thinking about is an administrative assistant. That's your best investment you can make with the right and executive assistant, administrative assistant, somebody that is an assistant to the owner of the business that is managing the day-to-day issues that the owner does not need to be focused on. The owner in a lot of businesses needs to be focused on, especially small businesses, needs to be focused on revenue generation activities. That administrative assistant, while it could be a 60, 70, 80, even a hundred thousand dollar job for really good executive assistants, that money can come back to you in spades. You're just not going to be able to tie it to, I paid this person X and I made X. That's not how it works. And so a lot of accountants, CFOs probably aren't going to recommend that, right? They're going to cut expenses. But I personally know the value of an executive assistant. And I can't imagine not running a business without law.

SPEAKER_01

Yeah, fair enough. It's good. One way that I think about this is when I say one way I think about this, one as you said that one way that came to my mind to think about this. This isn't super fleshed out. If you think about it, it's like debt. And the reason it's like debt is because it functions like leverage, right? So why, if I'm buying this rental property, why might I finance a portion of it? Is it going to cost me more money and am I going to make less money from the property? Yes. The difference is, what do I have that's out of it that I can then invest into something else? Right. Just like you could take somebody's, it's it's simple, right? You could talk to somebody who's just starting a business and they say, I find I found this way to make $100 an hour doing this thing. You could say, why don't you hire someone else to do that? And then you'll make $50 an hour. And they say, Why would I do that? And I'll end up making less money. Well, because then you'll make $58 an hour, but now you'll have all your hours back. And then you can go find another thing you can do too. And then you can find another way to go that off. So I I totally, I totally see what you're saying. It's just like the principle of like leverage from people.

SPEAKER_02

Totally. And when we talk with our entrepreneurs, we talk about expenses and we break expenses down into three categories. We keep it, oh, let's try and keep it so simple. Advertising and marketing, human capital, general and administrative. So the top two, I'm always looking at ROI. Return on ad spend, return on human capital. Is it going up? Is it going down? Is it improving? Is it decreasing? Those two levers are always multiples, right? And so if you are getting a decreased return on human capital, that means your team is being less effective. You've got to solve that. If you're getting a decrease in return on ad spin, your team is being less effective. What's part of the team? You've got to figure that out as the owner. The onus is on you. But then the last one, the GNA side, that's everything else, right? So if you have marketing, you have advertising, you've got GNA, everything else. We look at GNA is if generally that category is going to be between five and 15%, depending on the size of your organization of a real estate company. If as long as you're within there, I don't touch those. I'm not playing with trying to save a dollar. I'm trying to make a business that works. And I know the two focuses has got to be on advertising human capital.

SPEAKER_01

And 5 to 15 spot, we're money. Okay. What exactly falls in the GNA?

SPEAKER_02

Everything else. So if it's not payroll, and by the way, I include independent contractors, it's not the IRS definition of employee. I use anybody, that's why I say human capital. So if it's not payroll, independent contractors, payroll taxes, benefits, all of that's in human capital. You've got your advertising costs. I include, and I'd love to get your thoughts on this, but I include both direct advertising cost and indirect advertising costs. So like software associated with advertising that you got to have. So I include that. Obviously, we include like the cost of not just Facebook ads, but obviously the cost to run the Facebook ads, all that stuff in the marketing category. And then everything else is literally everything else. It's ducent subscriptions of your Adobe sign, all that stuff. You're just stuff that you have to operate the business. Now, it is always good to keep an eye on those expenses because that's where you can find a little bit of savings. But when you think about it, if it's only 10% of the expenses in your business, is it really the major where you need to spend the majority of your time trying to cut expense? No, you need to spend the majority of your time trying to get the best return of advertising and human capital. Sometimes that might be cutting expenses to get a better return. Sometimes that's just diving deeper and getting better in those categories, training, being a better leader, figuring out what's wrong in the sales process, or it could just be you're not getting enough leads and you need a different marketing source. All of those things could be the case, but it's not just cut on those two categories. That's why we split them out differently. Those two categories, it's about return. And you might have to cut or you might have to increase even to get a better return.

SPEAKER_01

Yeah, fantastic. Love that perspective. Thank you, Marcus, for all the time you've invested into this today. For anybody listening that wants to get to know you better understand your offering and anything like that, what's the best way for them to get in contact?

SPEAKER_02

Yeah, sure. So you can go to VexCFO.com. That is my core accounting company. Cool. Thank you, Marcus.

SPEAKER_01

Appreciate the time you spent with us. And to everybody else listening, I will see you next week.

SPEAKER_00

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 Marcus at BECCFO.com to get started. Thanks for listening, and we'll see you on the next episode.