Hi. I first learned about profit first from the podcast while running my previous business and once i implemented it, it completely changed my stress level around money. Now I’m setting up my land flipping business and i have a question about how other land flippers using profit first make their allocations. Do you take the purchase cost out of the sales to reinvest and then make your allocations with what’s left or do you have and additional allocation for acquisitions and put all the gross sales through the allocations? Or does the money for land purchases just come out of operating expense? Thanks everyone !
There is probably more than one way to do it. At first, all the cash needed to buy land comes from your startup capital, whatever money you injected into the LLC bank account when you started operating.
After you start making money that exceeds your upfront marketing and purchase capital, that’s when you can start making decisions on how big of a check to write yourself, if any, and how much to plug back into the business. If you want it to grow, then you’ll probably want to keep most if not all of it working in the company, because the bigger check you write to yourself, the more it will slow down the growth of your company.
There’s always something you should be setting aside for taxes, so you’ll want to do that part too.
I’m not sure if I’m answering your question, but also, I’m not sure if I fully understoodd your original question.
I’ve been using the Profit First methodology for a couple years now. We have our distribution accounts setup with Relay Financial, which makes it a breeze. You can setup your CAPS in relay and they’ll automatically run your distributions without you having to think about it.
There are a couple things you’ll need to change or be aware of regarding your distribution accounts for Land Investing. The Profit First for Real Estate Investors is primary tailored towards house flippers and wholesalers and most of these folks are using hard money or transactional funding to close their deals.
If you’re like a lot of land investors you may be funding most or all of your deals. This is our model as well, it works for our asset class. Although, this presents a problem if you stick with the recommended Profit First distribution accounts. You’ll quickly run out of in investment funds because there’s no account distribution for it. So, be aware that’ll you’ll need to include that for the system to work for a Land Investor
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@tmiski makes a god point about cash flow management as a land flipper. If you are self funding your own deals, it definitely changes some of the norms in how to divert your income profits. Don’t be afraid to adjust your model until you find what works.
I can also vouch for Relay. It’s a great way to implement Profit First. I use it for one of my businesses and am about to open a second account for a different company. It’s very similar to Mercury and Bluevine, but between those three, Relay has been my favorite.
More on that here, if you’re curious about how it works:
Thank you @donyost @tmiski and @retipsterseth ! It’s amazing to sit down to work and see that y’all took the time to help me out.
I’m imagining CAPs of:
5% Profit
20% Owner Comp
15% Owner Tax
30% Operating expenses
30% Investment Funds
Does this seem ballpark enough to get started ? I tried to find the podcast episode but no luck so far. And perfect time to get the push toward Relay.
Thanks!
@Shea, that could work as a starting point. Of course, it depends on what tax bracket you fall into, and whether you plan to use all your own funds to buy properties or rely on funders to any extent. For instance, if you used funders 100% of the time, you wouldn’t need any investment funds (not saying you should, but just making the illustration).
If you’re looking Profit First content we’ve published in the past, these may be helpful:
Thanks @retipsterseth ! I had found that blog post but not the podcast episode. That’s the exact one i was remembering. I’m relistening to it now.
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My Investment Fund account is set to 50%. I started at 30% and that didn’t work for our business. If you’re just starting out you have some time to find what CAPs distributions work best for you. Have fun with it.
Thanks @tmiski That is very helpful!