JAMES R. CARTER

The greatest wealth is to live content with little.

Plato

Chapter 71 - Invest or Work

Riches: they are a blessing to those who know how to use them, and curses to those who do not. 

Terence

"There’s no better person qualified to deliver this message - funny, insightful and useful.”
Dominic Nicoli,  Inaugural Member of the Intero Real Estate Services Hall of Fame

​​​"Inspirational and entertaining while literally providing a pathway to success."
Adam Eyre, Top 100 Lender at PrimeLending and previously Top 100 at Wells Fargo Bank

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​​​​A SUCCESS GUIDE 

for real estate lenders, real estate agents and those who would like to learn about the professions.

Everyone I know was slightly wounded (financially) by the great recession in the late 2000s. Some sustained a paper cut, some a black eye, several pulled hamstrings, a broken arm here and there, and some had more serious injuries requiring long-term therapy. It was a broad range, but everyone I know was affected.

Some of the sharpest business personalities in the world learn lessons the hard way. Except, when you are a business person dealing with numbers and money, the hard way usually means losing money. I am no different, and all my successful business friends are no different either. This chapter is about financial strength: expenses, cash, and debt. All these areas affect us in real estate, both on a business and personal level.

If my great-great-grandchild asked me, “Great-Great-Grandpa, how do I become financially strong?” my reply would be, “Cash in the bank, expenses under control, and little to no debt. Maintain that posture your whole life and countless opportunities will surface.”

Think back to 2008, 2009, and 2010. Imagine if you had some cash in the bank, your expenses were low, and you had no debt. Think about that for a minute. Now—what if you lost your job; or what if the profit of your real estate business went from $400K to $25K? That would have been certainly painful, but not catastrophic. You would likely make it through with just a black eye. That’s how the rich mostly get richer. Over a period of years and usually decades, they have worked their way into that position of no/low debt, cash in the bank, and low fixed expenses, and they are prepared for the next opportunity.

In real estate, there are four pieces to finance: the financial skills to serve the customer; the financial skills to run our small business; the financial skills to run our personal life; and the financial skills to build wealth and invest. Cash, debt, and expenses are (collectively) a core principle of those four areas of finance. Cash in the bank, little to no debt, moderate expenses. That posture creates strength—deep, long-lasting, and mature strength.

Philanthropy. Financial strength also puts you in a position to help others. If you are cruising into an economic slowdown with big debt, big expenses, and little cash, I’m nearly guaranteeing that personal survival will be the primary thing on your mind. On the other hand, if you have cash, no debt, and low expenses, you will be in a position to help someone. You’ll have the time, money, or both to reach out.

Try this on for size. Why didn’t the commercial market in many name-brand metropolitan areas of America come crashing down to the ground in the recession of the early 2000s or again in the late 2000s? I could drive up and down the freeway and see block after block of new and old commercial buildings sitting empty for months and sometimes years at a time. The answer: A large portion of that product was concentrated in very strong hands. It was mostly owned by people and/or companies that had no or little debt, cash in the bank, and manageable expenses. Their backs were not against the wall; they could breathe, take their time, and make prudent decisions on their own terms. They could do so only by having no debt, cash in the bank, and moderate expenses.

Consider all the above. You never want to be “forced” into a making a business decision. Benjamin Franklin said, “Necessity never made a good bargain.” You want to do things on your terms within your own time frame. You want to stay firmly in control of your own financial life so when the next economic hurricane hits town or the next opportunity surfaces, you are ready! No debt, cash in the bank, and moderate expenses allow that to happen.

Go get ’em!

Chapter 74 - Financial Strength

Measure what is measurable and make measurable what is not so.

Galileo

I am writing this chapter to stimulate thought. We’ll define working as using your time and effort to produce income; investing as giving your money to other people and hoping it grows; and saving as putting cash in the bank.

In real estate, there is no gold watch, stock option, or pension at the end of the rainbow. We need to amass wealth with our own blood, sweat, and tears. We must build a nest egg large enough to produce monthly income in the event we don’t want to work any longer or our health prohibits us from working. How much is needed—$500K, $1 million, $3 million, $10 million, or $20 million? It will be different for everyone. But we need to begin the building process regardless of the goal and regardless of our current financial status at the moment.

Here is the question. Over a thirty-year time frame, are you better off focusing on your work and saving excess funds or working and investing excess funds? For instance, Vince and Dan are both real estate agents. Vince decides to focus on his business for eight hours per day for thirty years and put excess money in the bank. Dan decides to work eight hours daily for thirty years and invest excess money in stocks, bonds, mutual funds, etc. Which one has more money after thirty years? Dan? Are you sure? Are you really sure? “It is the mark of an educated mind to be able to entertain a thought without accepting it”—Aristotle. Dan would certainly be the easy and obvious answer based on common sense and compounding interest. Here are some things to consider, however.

Building a business. So your profit this year is $20,000. Fine, but who’s to say that you can’t build up your business to produce profits of $2 million in ten years? Should you spend your time monitoring, managing, thinking about, worrying about, dreaming about, and hoping that your investment account grows—or should you spend that time growing your own business? Which one do you have control of?

Study. Study self-made, successful businesspeople. The vast majority did it by building a business. And then, they became rich from the profits of that business, selling all or part of that business, or a combination of those two. How big can you build your real estate business? How big do you want to build it?

Additionally, how many name-brand successful businesspeople became successful by putting $100 or even $10,000 monthly into a mutual fund? Don’t get excited—it’s just a question. I don’t know of any, but you may.

Focus. Dan is focusing at least some of his attention on his investment account. Vince is focused solely on building his business. All things remaining equal, who has a bigger business after ten, twenty, or thirty years? Yes, Vince has a bigger business (more profits). Will Vince’s larger business offset the compounding nature of Dan’s investment account? Yes or no? And, if the answer is yes, by what margin?

I’m encouraging you to think about this topic because, every once in a while, I have seen colleagues literally waste four hours of an eight-hour day doodling on the Internet with their investment account. It takes tremendous mental discipline to be all in all the time. But is it in our best interest to focus on building our business rather than hoping that our investment account is growing? If you like the former option, remember, you are still saving money; you have a nice, healthy cash account at the bank.

I’m sure you’ll make a good decision on how to handle this. Here is what I’ll leave you with: nearly every successful businessperson that I know made the lion’s share of that fortune by helping to build a business—by working. I literally don’t know anyone that built their fortune by investing. What is your craft? What is the skill that you are offering the world? You can build a fortune by simply providing the world your service.

Go get ’em!

Chapter 66 - Profit-and-Loss Statement

Three of the twenty chapters included in the section called FINANCE.

About half way through my master’s program, the professor assigned an interesting project. He said we needed to meet with a CEO, CFO, or both of a local company and talk with him or her about how he or she managed his or her finances. I called a college friend and he knew a CEO that was willing to meet with me. This company was privately held, and I didn’t have the nerve to ask too many detailed questions, but I’m guessing they were doing roughly $20 million yearly in sales. We set the date to meet.

We met in his office and he asked his CFO to join us. They were both generous with their time and enthusiastic to help me complete my project. The meeting was going great, and then all of a sudden the CEO turned on a dime, red faced and noticeably irritated with me. I definitely had hit a nerve. I was knee deep in my studies at the time, and I had all these slick terms on the top of my head, such as commercial paper, treasury management, current ratio, etc., and I was young and lacked real-world business experience. Whatever I said, he didn’t like it. He said, “Bulls&$*&#t. I’m running a business, and those terms don’t mean squat to me. Money in, money out, cash in, cash out, and at the end of the day there better be some left over.” I said thank you, moved on to another topic, and we continued.

          I never forgot the lesson I learned from my CEO interviewee that day: money in and money out.

          I’ll make it sound complex and then I’ll make it sound simple.

Complex: Profit-and-loss statements are accountants’ way of calculating profits using a complex set of rules (Generally Accepted Accounting Principles) that mostly apportion income and expenses among accounting periods. While such statements are helpful to financial analysts and others who want to be able to compare financial information among many entities knowing they were prepared using common standards, such financial statements are not very helpful in managing the day-to-day financial affairs of most businesses. For those businesses, including real estate brokerages, “money in and money out” statements are more useful.

Simple: As lenders and real estate agents, we rarely deal with business assets or long-term debt, so we can simplify all of it. How much did I take in? How much did I spend? What is left over? That’s all we are doing here. We are counting. The below worksheet is the summary of that counting process.

A friend of mine that runs a vast real estate business defines this principle as “what’s left is mine!” Every month, money comes in from different ventures: commissions, sales, referral fees, rents, etc. The money hits the table and stacks up. Next, he starts paying the bills, mortgages, salaries, taxes, and any other expense that hits the company that month. When he is all done, he says, “What’s left is mine.” What’s important is the tracking, the counting, and the management of income and expenses. The closer you look, the more you will find, so keep a close eye on what comes in and how it goes out.

Yes, you can get fancy on your expense categories if you want. I don’t. My CPA tells me there are few exact requirements (there are some, however) on the names or number of expense categories. My rule is to use, at minimum, the categories required by the tax authorities and then add categories that may be meaningful to me to manage the business. I keep it simple. I mostly focus on money in and money out. You are accounting for money received and expenses paid, and as such it is relatively simple provided you keep your records current. By the way, if you are not a good record keeper—become a good record keeper.

The profit-and-loss statement should serve two primary purposes: 1) it will help you run your small business and 2) it can serve as one of your “source documents” for your tax preparer. For specific tax advice, naturally consult your tax professional.

Running the business. Personally, I would like to rename this document “Money In and Money Out.” Why? Because I use this simple document as a cash management tool as well; how much money came in and where did I spend it? I want to see every last penny that was spent, regardless of how my tax person handles that line item. “Jim, what do you mean?” For instance, let’s say I need to purchase a chair for my office that costs me $200. The tax person may or may not be able to “fully expense” that $200 chair within the calendar year that I spent the money. Fine. But how much cash did it take out of my business account to purchase that chair nonetheless? Yes, you are correct, $200. So, I want to see that $200 on this document. Money in and money out.

As lenders and real estate agents, we are not running a multinational asset-heavy business that is doing $200 million in revenue. Keep it simple.

Taxes. Your tax person will largely use the information contained in the profit-and-loss statement to compute your taxable income and prepare your tax returns. Yes, he or she will likely reference your general ledger and balance sheet; but again, let’s keep it simple. All those conversations are between you and your tax person and possibly your bookkeeper.

The profit-and-loss statement may look somewhat familiar to your budget, which is located in the chapter called “Managing Business Expenses.” There will be some similarities and some differences. For instance, income and net income are not included in the budget. In addition, the expense categories may or may not be similar. Why? Because life is life; unexpected things can and will happen over a 365-day time frame. You may need to adjust categories here and there.

My bookkeeper prepares the profit-and-loss statement for me because he or she is qualified to tie down all the pennies. I am not a tax person or a bookkeeper or a CPA; I am not qualified to do any of that. I am business person. I rely on those professionals to help me.

I have intentionally avoided a complex discussion of financial accounting in this chapter. In my experience, there is little to no correlation between understanding all the complexities of accrual basis and tax rules accounting, such as depreciation, amortization, allocation of car expenses, expansible percentage of meals, etc., and being a successful real estate professional. Keep it simple. Money in, money out.

I am encouraging you to think of your profit-and-loss statement with a renewed, positive energy. Think of it as a competitive weapon, something that can and will help you win. It is an asset; a useful tool. A surgeon has a menu of tools to get the job done, depending on the surgery. This is a tool to help us be successful in real estate. Embrace it as such.

Go get ’em!