The Real Estate Money Trap: Avoiding Common Pitfalls Growing Your Business

In this episode, Chris is joined by real estate consultant and money expert Michael Kilner. They delve into the critical aspects of being a successful real estate agent, managing a real estate team effectively, and the intricacies of real estate commissions. 

The conversation also covers strategies for building wealth through real estate, highlighting the importance of actually having financial literacy and the dangers of outsourcing your money goals. They also deep dive into efficient real estate marketing strategies and processes to maximize profits. Spoiler alert: it's more than just showing pretty houses and planting 'For Sale' signs!

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Transcript

[00:00:00] Chris Craddock: Welcome to another episode of the uncommon real estate podcast. I'm your host, Chris Craddock. And I am here today with a special guest, Michael Kilner. I am super pumped about what we're going to talk about. But before we dive in, I just want to remind everybody that purpose of the podcast wealth is when your money works harder than you work.

[00:00:18] Chris Craddock: We can stay on the hamster wheel and sell more houses. Flip more houses, wholesale more, do all the different things that we do to make money where we're trading our time for dollars. Or we can learn how to how to get better at what we're doing and buy assets that will actually work harder than you're working.

[00:00:37] Chris Craddock: So that is when wealth happens. So with that said, We need to be really good at what we do. And then on top of that, we need to make sure that we're turning that into assets. And I will say finally, last thing is the biggest problem with real estate agents, they don't buy their own product. There are so many tax benefits.

[00:00:55] Chris Craddock: If you are a real estate agent and you buy assets if you don't understand that read the book tax free wealth reach out to me, send a DM, send a message. I would be happy to put you in touch with the right people, but win by building wealth, being good at what you do, and then turn that into wealth building opportunities.

[00:01:13] Chris Craddock: So today we get the opportunity to chat with Michael Killer, Michael runs all the books for us at the Redux Group. But on top of that it's we're able to have conversations about on just different things?

[00:01:26] Chris Craddock: Essentially working almost as a fractional CEO or CFO which is really a cool cool little niche that he's guided out for himself. And a lot of that comes from the millionaire real estate agent book, right? It's laid out But the reality is most real estate agents are too busy to look at where they're spending their money and so today we're going to talk through what that looks like and what Michael does and and all of that now last thing i'm gonna say is this I just had a conversation with somebody the other day who spends he, he said that his marketing wasn't working.

[00:01:59] Chris Craddock: He spent $10,000 and through some of the deals that he did, he made just over $100,000 through the spend. I was like, why do you say your marketing's not working? You just spent 10 grand and you got a 10 X return. And he's because only a couple of people called me and I'm like.

[00:02:16] Chris Craddock: A 10 X return is a 10 X return. And so anyway, understanding the numbers absolutely will help dictate where you're going. So with that said, that's the intro. I know I left big shoes for you to fill. So we're on it for today. So Michael, tell us about how you got into what you're, what you got into. You're in a very special niche with what we do, but tell us how you got into that and like how you see the world and then let's dive in.

[00:02:39] Michael Kilner: Yeah, I got into it because I started working for my brother's real estate team. So I didn't come at this from, hey, I have an accounting background and real estate agents are an easy target. I really came at it from helping to operate a highly functional real estate team.

[00:02:59] Michael Kilner: And I grew my experience that way, right? So I very much look at this from the perspective of real estate agents, real estate director of operations. And I have I have a ton of empathy for how the business is done. I think a lot of folks outside of the industry don't realize just

[00:03:16] Michael Kilner: how difficult the job can be, how complex it can be. There's a lot of, there's a lot of stuff in ether about real estate agents and their commissions and do they deserve it and that kind of stuff and the great teams certainly deserve it, right? Cause they're providing outsized value.

[00:03:30] Michael Kilner: And most of what I've, most of what I've built in terms of my consulting business with real estate teams has just come by doing, it's very much experiential. I've layered on an enrolled agent status with the IRS so I can help with tax conversations because that's such a, it's a, one of the biggest expenses you'll ever have.

[00:03:48] Michael Kilner: So it touches every single conversation we have about spending in the books and Now I work with about 60 real estate teams all over the country. And I would say the big ones, are KW, EXP some real, some compass. So I have experience with all of the major brokerages and brands.

[00:04:07] Michael Kilner: And most of what you alluded to it, Chris, most of what we're talking about is very much the models that were true 20 years ago with the millionaire real estate agent. And a lot of it still holds up, right? When that netbook first came out, those models that in many ways, they still hold up.

[00:04:25] Michael Kilner: There's some slight changes, right? And there are nuances to how we do business now. Fundamentals are very much the same. /

[00:04:29] Chris Craddock: So do you mind just speaking to I think this was one of the biggest eye openers for me was when I realized there was a path. The path is in the math, right? There was a path to building the right team.

[00:04:43] Chris Craddock: And I still remember I was being coached by Craig Proctor and he, like one of the things they said was. Hey, the kw model says you should spend 11% of whatever you make on marketing. We think you should spend 16% of whatever you make on marketing, all of that. Do you mind just walking?

[00:05:00] Chris Craddock: And I was like, whoa. I didn't know that the KW model said that. I've read the red book a number of times, but I didn't realize that was in there. Yeah, and then we started looking at. At that each piece of your business has some there, whether you're a solo agent or whether you're a team, it still makes sense to allocate your, what you make like that.

[00:05:20] Chris Craddock: So do you mind actually just going through what they recommend? /

[00:05:23] Michael Kilner: Yeah, we can talk about it. So I think the first place you have to start is with your cost of sale, and you have to define that first. So cost of sale includes things like your commission split with your brokerage your royalty split with your brokerage if you have one, or the franchisee that you're with.

[00:05:43] Michael Kilner: It's going to be things like referral fees paid. Yeah, go ahead, Chris. I 

[00:05:47] Chris Craddock: hate asking like going back so far, but do you mind, like we see business owners talk about cogs or cost of goods, cost of sale. So you're saying all of these different pieces, but do you mind just giving a straight definition so that people can understand what that is and then jump into 

[00:06:05] Michael Kilner: all the different pieces.

[00:06:06] Michael Kilner: So in real estate, it is all of the direct costs associated with your commission check, essentially. And they will be variable based on how big that commission check is. That's, there are different definitions for other industries. I think An easy one to understand would be your cost of sale if you were a contractor building houses would be materials costs and your subcontractors, right?

[00:06:34] Michael Kilner: It's none of your overhead. It's not your office rent. It's not your truck, right? It's not your insurance, right? It's only, it's things that are directly tied into actually selling. And so it follows, it follows every time you close a deal, you're going to have that cost of sale associated with it, or that cost of goods sold.

[00:06:54] Michael Kilner: So I'll go through quickly, it'll be commission splits. It'll be royalties. It'll be referral fees. It will be splits with other agents on your team, right? So if you're the rainmaker on your team and you have other agents doing deals with 50 percent of a commission or 25 percent of a commission, that is a cost of sale.

[00:07:10] Michael Kilner: And I think a big mistake that people run into at this point is that they don't actually know what their cost of sale is, right? They, they just treat the cash that comes into their bank account as their top line revenue. And that's wrong. Because there is so much, there's a massive difference that can happen between two teams doing essentially the same amount of GCI, gross commission income, they're going to have very different gross profit, which is, your GCI less your cost of sales.

[00:07:38] Michael Kilner: And the factors would be, what are your splits with your team members? Which brokerage do you choose to do business with? Like it follows that in many cases, if you're with a capped brokerage, like a KW or eXp or a real if you're doing a lot of business, you're going to have a lower effective cost of sale, right?

[00:07:56] Michael Kilner: Because that's a capped number rather than a straight percentage that follows you on every single deal. A lot of folks are just not really cognizant of that. They're looking at, Hey, what is the split that I'm being offered? And they're not thinking about is that split then capped? So there can be huge differences in your gross profit between two teams that are doing the same amount of GCI based on the decision of who they're with as a brokerage and how their splits are with their team.

[00:08:24] Michael Kilner: So the first thing I would say is, yeah, go ahead, Chris. Yeah. I thought,  I 

[00:08:27] Chris Craddock: thought it was really interesting. I was with a friend of mine who has probably one of the biggest organizations in America. he was saying that one of the things that people don't realize everybody's oh, I don't want to be on the team.

[00:08:38] Chris Craddock: I don't want to be on the team because because of the splits. And he was like, here's one of the biggest problems, team leaders. Just say, Hey, how much does it cost you to put out signs? How much do business cards cost? How much does a website cost? Okay. It costs you this much per year. And he said, the reality is if you start breaking it down into percentages, what is your cost of goods sold?

[00:09:02] Chris Craddock: Based on signs, based on, just like all the different things. He's like most people, individual agents that think they're at a hundred percent are actually at only 80 percent before they even touch any other good, like marketing or anything. And he said that most people aren't thinking about it like that because they just say, oh, I pay X dollars for my sign or, this much for a lock box or whatever, but they don't realize that when you start looking at it as a percentage.

[00:09:29] Michael Kilner: Yeah, the percentage actually is a bigger split than most people actually recognize./ And I think the big team leaders rainmakers need to do a better job of mapping out the differences in net that someone joining their team will be able to accomplish on their team.

[00:09:44] Michael Kilner: Like teams are actually tremendously efficient at a certain size. And that efficiency then passes on to the agents on the team. So if all you're doing is focusing on splits, like you said, you are missing huge parts of the puzzle, right? And I think it's, you do a disservice to agents who you're trying to attract to your team by not sitting down with them, looking at their goals, right?

[00:10:08] Michael Kilner: And breaking down how their net can increase. And their lives can be improved by being a part of the team, right? Because they're, they are effectively outsourcing all sorts of things to the team. And that's why they have a split with the team, right? Cause they've got this outsourced and they can just focus on revenue and sales.

[00:10:26] Chris Craddock: I had a conversation years ago with an agent and we had somebody on our team. He'd been an agent for just over a year, his second year, or I guess just the second year he just finished, he made about $200,000 take home, right? Before taxes. And I had a conversation with another agent who'd been in the business for 15 years.

[00:10:46] Chris Craddock: And she was like what are you going to do for me split wise? And I said, what do you mean? I was like, this is our split. And she just was pushing back. And I said, what's the most you've ever made in real estate? She said 75, 000. And I'm like, wait, so this other person after their splits, who's been in the business only second year made about 200.

[00:11:06] Chris Craddock: The most you've ever made is 75, but you think you should get a bigger split than this other person. And she's I've been in the business for 15 years. And I'm like, And he made more than two times what you made last year with what we're doing. We'll get out of the idea of just saying, Hey, what's the split?

[00:11:21] Chris Craddock: And start thinking about what's the net. What am I taking home? What do all these other things cost me? Including there is a cost to not being around other, A players will make you think bigger. So anyway, super powerful and fits what you're saying. /

[00:11:37] Michael Kilner: Yeah, think about this the cost, the raw cost of getting a really good real estate coach versus just being part of a highly functional team where the rainmaker and the director of ops and, the sales leader, they're all being coached by people that you would never be coached by.

[00:11:57] Michael Kilner: So yeah, I think teams exist because they are efficient teams exist because they create. opportunities that otherwise wouldn't be there. I have this like a diatribe about it because I think that the last couple of years in real estate before 2023 especially you saw this fragmentation because of how easy it was to get deals done in 2021 and 2022, right?

[00:12:20] Michael Kilner: There were a lot of folks who just by having their real estate license, they were getting phone calls. And great. It's awesome to have some feast years, but then you move into a market like 2023, where I would say the average decline in revenues for most of my teams was about 25 to 30%. And you say.

[00:12:38] Michael Kilner: A consolidation needs to happen again, right? Went from fragmentation, now we need to consolidate because teams are already have the overhead covered for the most part, right? So join a team, offload your overhead, get very efficient about your business and hang out with high performers. And you will see your success grow, right?

[00:12:56] Michael Kilner: It's not because it's not easy right now for deals to come in./ 

[00:13:00] Chris Craddock: So I sidetracked you a little bit, and I'd love to go back to there's a couple things that I'm curious about. So marketing, let's say an agent made single agent or a team, let's just use simple math. Cause you know, that makes it easy for everybody.

[00:13:14] Chris Craddock: Let's say somebody made $100,000 last year. How much money should they, and 2024 spend on marketing? /

[00:13:22] Michael Kilner: So they should be looking for between a 10 and a 20 X return on their dollars. On the high end you use this example for 10 K on the low end, about 5k, and if they want to if their GCI needs to go up, if their goals are big and they need to three or four or five X, their GCI, all they need to do is hold their dollars accountable to a, basically a 10 to 20 X return. That's the target. And I think that's how you have to look at all of these things is as a return on the investment, right? Folks put money into the stock market and they're looking for a 12 percent return, whatever, over 40 years.

[00:14:02] Michael Kilner: And I'm saying, yeah, diversification is great. I'm not a financial planner. But then you look at. What your dollars can do for you in your own business, right? And if you look at it as an investment I'm investing this dollar expecting 10 or 20 back. That's super powerful and you're not going to get that from the stock market.

[00:14:22] Michael Kilner: That's not a, it's not a reality. You can put some of your savings there and let it grow. And buffer yourself. But if you're thinking of all of your expenses, your marketing expenses, just as a cost. Just as you losing dollars, then you're thinking about it the wrong way.

[00:14:38] Michael Kilner: And I think I would say the other part of this, the return on investment is one piece. The other thing that folks have to wrap their heads around if they want to be a good business owner is opportunity cost, right? You have to internalize this and for all of your conversations about your expenses and all of your thought process, think about opportunity costs.

[00:14:58] Michael Kilner: And so what is that? It's basically saying that if I spend a dollar on X, I cannot then spend the dollar on Y. So my opportunity cost is Y, right? So if I'm spending these dollars on mailers to a neighborhood, I don't then have those dollars to spend on internet lead gen or something else. Let me give you an example, right?

[00:15:18] Michael Kilner: Like how many times Chris have you been called by a vendor and the vendor says, just sell one house and it will pay for itself. It is the most obnoxious line in the industry, but it gets people all the time, right? But think about what they're saying. They're saying. Hey, this is no risk, right? All you have to do is sell one house and you'll get your dollars back.

[00:15:41] Michael Kilner: And I think your response should be, every agent's response should be like, That's great, but I'm not spending my dollars for a 1x return. I'm spending my dollars for a 10 to a 20x return. So explain to me, Mr. Vendor, right? How am I going to sell 20 houses on this system? If you can explain that to me, I will sign up right away.

[00:16:03] Michael Kilner: And I'll hold you accountable to that. I'm not gonna hold you accountable to one house and getting my dollars back six months or a year down the road. That is a terrible investment. And my dollars have been put into that and they could have been in an investment that had a 10 or 20x return.

[00:16:21] Michael Kilner: Actually, you've done me a massive disservice. So I think if we can think that way about how we spend money, doesn't make the lead gen any easier. It doesn't mean you don't have to put in the work, but it certainly helps to frame things in the correct light. So you can grow your business./ 

[00:16:39] Chris Craddock: Absolutely. So essentially percentage wise, if we're thinking Redbook, you should like, marketing percent of your income,/ if 

[00:16:49] Michael Kilner: you were to say, yeah, so it's between five and 10 percent of your GCI should be going to marketing. And so there are some teams who can achieve at 5 percent and there are some teams because of the, their model.

[00:17:04] Michael Kilner: If they're spending less than 10%, they're underspending, right? They're underinvesting in that particular area. And it really just, it depends on, on, depends on your market. It depends on how you do marketing. It's not gonna be the same for everybody. But I would say, yeah, if you're spending 20%, you got a problem, right?

[00:17:22] Michael Kilner: And you got to pull back on things because those things are not working at the level they need to be. And you need to pull back and you need to reevaluate.

[00:17:29] Chris Craddock: And the way you look at the way to look at marketing for anybody that's looking at it is this red light green light.

[00:17:35] Chris Craddock: Okay. So if you made a hundred grand and you should spend between five and 10%, that means in 2024, you need to spend $5,000-10,000 on marketing, right? And let's say you spent no money on marketing last year. Now you're going to spend $10,000 this year. If you are going to get a return on that, let's say, so the minimal return you should ever see is a three X.

[00:17:59] Chris Craddock: If you're not seeing a three X, then you probably are, should look at other marketing tools. Now, there are times where you just need to feed agents. If you're a team leader or whatever, and I get having less than that. If you're feeding agents while you're looking for the five and the 10 X returns, but.

[00:18:14] Chris Craddock: If you do it, let's say you spend 10, 000 and you get a 3x return, then next year you should make $130,000 by spending 10, 000, right? So then what are some of the other percentages that people should look at with their business? If they made 100, 000, like what are some other percentages they should be not spending over?

[00:18:34] Michael Kilner: Yeah. And I think the two biggest things. Let's say three. The three biggest things that will sink a team's profitability or solo agent's profitability are going to be your cost of sale, your lead generation, and your compensation, right? Your compensation to other people. So operational and administrative staff members.

[00:18:53] Michael Kilner: No one sinks their year by paying too much on Business travel. Maybe it happens, sure, but it's very hard to do, right? You have to look at what are the biggest factors in the business. And so those are the biggest factors. You can have bad gross profit margins because your cost sale is too high.

[00:19:09] Michael Kilner: You can spend too much on marketing for not enough return and you can be overstaffed for your production. And I think it, this is, this one is very variable because it really does depend on the size of the team and the needs of the team. But if you go back to sort of the principles of the millionaire real estate agent a highly functional agent, the first thing that they need to put in place is administrative assistance, right?

[00:19:37] Michael Kilner: They need to focus on the highest dollar activities that they can possibly find. Focus on sales. And let all of the administrative work go, flow to somebody else whose dollar per hour is lower than theirs. And this is why teams make a lot of sense. I'll go back to this. I'm going to sound like a total team cheerleader, and I am.

[00:19:58] Michael Kilner: Think about what a team, what has a team already done? A team has already vetted, hired, trained, And then systematized teams, like a team member for you. You don't have to go out and find your own administrative staff. The team has already done it for you, right? You don't have to go train them on new systems.

[00:20:15] Michael Kilner: The team already has that in place or good. I'll say a good team should have that in place. But I think, so if you're going to solo agent round and you're building your own team, you have to get to a point where you say, okay, I'm going to make an investment because it is an investment at that point into administrative help.

[00:20:30] Michael Kilner: And there are great low cost options, right? You could go out and hire a contract transaction coordinator. You just pay per deal on transaction coordination. You can go out and hire a virtual assistant, someone in the Philippines or Mexico or India who will work alongside you on your time zone, and we'll be able to do all sorts of administrative work for you at a really low cost, and you don't, you're not think about you contract with a company, a cyber backer.

[00:21:00] Michael Kilner: Or Brivity or MyOutDesk, right? One of those companies, they're taking on all the risk of the employment. You just have a contract, right? And you're not setting up. Payroll for this person and giving them ancillary benefits and paying their payroll taxes and all that kind of stuff. So I think for folks who are getting started, great place to start contract TC work, virtual assistant.

[00:21:26] Michael Kilner: And then as you get as you get higher up that ladder of production, you're going to want to hire US-based people. Who are incredibly good at what they do, right? And who will give you even more of that leverage./ 

[00:21:40] Chris Craddock: So let me stop you real quick. Cause I want to go back to cause this was an area that it was really difficult for me.

[00:21:46] Chris Craddock: I still remember the first year I was this was a big thing. One of my buddies and I were, we're partnering on some stuff and he I asked him if he could go deliver a lock box. And he's it's, that's not worth my time. And I was like, and I came from a ministry background where I was making no money whatsoever.

[00:22:02] Chris Craddock: I was like, what are you saying? It's not worth your time. Are you like too good to go deliver boxes? And I had this idea that it was just like, I just thought it was like a prideful thing where he's 

[00:22:12] Michael Kilner: lack of 

[00:22:12] Chris Craddock: humility. And the reality was when you looked at it, it was, it would have been $20 for a runner to go deliver the lock box.

[00:22:22] Chris Craddock: And at that time you literally, if literally we were making calls, like that would take away from some of the calls we were making. And so at that time, like our dollar per hour was way above that, right? Yeah. Way above that. And so I didn't realize, okay, this is how you level up as a as a business owner, and whether you're a solo agent or whether you have a team, you're a business owner and you just happen to be the CEO of, Chris Craddock limited, whatever it is. But but that was super powerful for me to start like actually learning what that meant versus thinking, Oh yeah, I can do it.

[00:22:58] Chris Craddock: And I've got a friend that he was like, Oh, I'd rather not pay for a TC TC help because I could just do it myself and keep the money. And I'm like, I was like, if you make phone calls for that hour of the TC work, you will probably, you will make way more money than paperwork. So yes./ 

[00:23:18] Michael Kilner: So they get, you think about leveraged, right? Just that agents need to be focused almost exclusively on revenue generating activities and that's either sales or recruiting, right? Recruiting other agents. And so if you're not doing those things. Then you are wasting your time because those are the highest dollar activities that you can be doing.

[00:23:40] Michael Kilner: Yeah. 

[00:23:40] Chris Craddock: This week is a prospecting week for our team. Every week we have a theme of the week for our training and it's prospecting, and it's just so funny because as you talk about prospecting, which is the highest dollar producing activity an agent can do. Everybody we're like, okay, what are the different things that come up

[00:23:58] Chris Craddock: that keep us from that? And it's like email cleaning the fridge, you know, like all these other things that make money and that's it. So anyway, let's get back. I know we're Oh man, we're right at the top of the hour. How about this? What's something I should have asked you that I didn't 

[00:24:12] Michael Kilner: ask you./ I think that people need to be much more so agents need to be much more choosy about the advisors that they work with, right?

[00:24:22] Michael Kilner: So you should have asked me how do I build my financial team? And I think that's, that is something that, we could talk about maybe in a future podcast is think about yourself. You are the quarterback of your financial life and your wealth building journey because no one else will ever care as much as you do.

[00:24:39] Michael Kilner: And if you abdicate those decisions to advisors, bookkeepers, CPAs, financial advisors, and you're like, I don't know how to do it. I just put it on them. You will get bad results, right? So you are the quarterback. You need people to throw the ball to, and they need to help you win. You can't win on your own.

[00:24:58] Michael Kilner: But if you just lie down and here, take the ball, run with it somewhere, there's gonna be no direction. You are not going to win. You're gonna have bad results.  That's awesome. 

[00:25:07] Chris Craddock: So Michael, if somebody is interested, they'd like to have to just have a consult with you to see whether you'd be a fit for them.

[00:25:16] Chris Craddock: What's the best way for them to 

[00:25:18] Michael Kilner: reach out to you?/ Yeah. So go to the, my website, it's kilneradvantage. com. And you can, there's a scheduling link there. You can book some time on my calendar. My email is there as well. But yeah, and I think if you if you're somebody who's thinking about outsourcing your bookkeeping or you need fractional CFO advice and consulting Just mention Chris or the podcast and we'll work something out 

[00:25:43] Chris Craddock: and I'll tell you I only really refer that things that I like a lot and I've really enjoyed as you've gotten to know Michael and been able to take deep dives into our numbers. It's been really helpful for us to be able to

[00:25:57] Chris Craddock: to really dissect the business and look at it as a business person. And I think that's one of our big problems as real estate agents is we don't realize that we are business people running a business, whether you are just yourself or whether you have 75 people in your organization. And so you just got to be able to start looking at things with wisdom.

[00:26:16] Chris Craddock: And that's how you can really multiply what you're doing. So Michael, thank you so much for being on here. And Yeah, people, please reach out to Michael. He's very good. And it really will open your eyes to what you're spending and how you should be spending it and how you should readjust your assets.