September 25, 2022

JF2943: Common Financial Pitfalls Investors Overlook ft. David Richter

David Richter has 10 years of real estate experience with a background in acquisitions, disposition, property management, transaction coordination, marketing, and CFO. Through that experience, he realized he wanted to help real estate investors learn how to take control of their finances. After reading Profit First by Mike Michalowicz, he knew he had the perfect framework to help real estate entrepreneurs manage the cash in their businesses. 


Today, David is the owner and founder of Simple CFO Solutions, which matches real estate investors with a fractional CFO to grow their bottom line profit and decrease financial stress. He is also the author of Profit First for Real Estate Investing.


In this episode, he discusses common financial pitfalls he sees real estate investors experience, why he recommends entrepreneurs set up at least four bank accounts to manage their finances, and the services he offers real estate professionals through Simple CFO Solutions and the Profit First System. 


David Richter | Real Estate Background

  • Owner and founder of Simple CFO Solutions, which matches real estate investors with a fractional CFO to grow their bottom line profit and decrease financial stress.
  • 10 years of real estate experience, including acquisitions, dispositions, property management, transaction coordination, marketing, and CFO.
  • Author of Profit First for Real Estate Investing
  • Based in: St. Cloud, FL
  • Say hi to him at:
  • Greatest Lesson: Make sure to make profit a habit in your business and pay yourself first.



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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I'm Joe Fairless. This is the world's longest running daily real estate investing podcast, where we only talk about the best advice ever, we don't get into any of that fluffy stuff. We don't like that fluffy stuff, so we don't do it. Today we've got David Richter. How are you doing, David?

David Richter: Doing great. Thanks for having me on.

Joe Fairless: My pleasure, and looking forward to it. I'm glad you're doing great. David is the owner and founder of Simple CFO Solutions, which matches real estate investors with a fractional CFO to grow their bottom line profit and decrease financial stress. That's no fun, financial stress. 10 years of real estate experience, including acquisitions, dispositions, property management, transaction coordination, marketing, and of course, being a CFO. He's the author of Profit First For Real Estate Investing. Based in St. Cloud, Florida. With that being said, David, you want to get the Best ever listeners a little bit more about your background and your current focus?

David Richter: Yeah, so I've been in real estate for a while. I spent about seven years in it heavy, and read Rich Dad, Poor Dad in college from a good friend; that totally changed my mindset. And from there, I got hooked up with some investors and we grew that company into about 30 deals a month. So I got to be a part of about 850 deals with that company. So I've seen a lot of different exit strategies, and also the pain that real estate investors go through of doing a lot of deals... Because we were doing 30 deals a month, but spending like we were doing 31 deals. So it was like, you know, just the crazy rat race that real estate investors can get into... So that's kind of what started me on the path of "I don't want to just be doing a lot of deals, I want to actually be making money."
From there, a string of events - I moved across the country to the Richmond, Virginia area, started working with an investor, helped him with his finances first, because I saw how important that was... Like, I can't be doing 30 deals a month, but spending 31 deals... So I went in there, helped him get clarity on the numbers, helped him refinance his portfolio, because that's where all his money was tied up, but he didn't even know, because his numbers weren't telling a story... So after all that, he was able to get a bunch of cash in, and he said, "This has been life-changing. I know what I'm making, I know what I'm spending, I've got cash back in my accounts..." And that's where it sparked Simple CFO, because I'm like, "I bet you there's a lot of other investors that would love to just know where they stand and what could that unlock for them."

That's also when I got a call from a mentor who heard that I was going to start the business and he said "Have you read the book Profit First by Mike Michalowicz?" and I said, "No, I've never read that." So I read that book that night, took 10 pages of notes, said "This is a great framework for the real estate entrepreneur of how to manage the cash in their business, no matter what." So that's what got me turned on to Profit First, and through a series of events, spoke with Mike Michalowicz and got the rights to Profit First for Real Estate Investing, and then launch that book last year. And it's been a wild ride, just helping a ton of real estate investors actually keep more of that money in their bank accounts and not feeling like they're broke all the time.

Joe Fairless: It's illuminating to hear about how in this example the company you were at was doing so many deals, but yet you weren't quite sure what the actual numbers were... So you probably saw all this income coming in, like "Wow, this is a lot of money. I can also feel free to spend a decent amount of money, because all this income." But that tricky part about expenses, and also taxes probably being a large expense in that, perhaps not being accounted for...

So what are some common pitfalls, tactically speaking, when you speak to a new client or prospective client and you're like, "Listen, you might think you've got it all handled, or maybe you're admitting you don't have any of it handled, but regardless of your situation, you're probably making or overlooking these things."

David Richter: Yep. So like you said, a lot of people come and they know there's a problem... But the first thing that we look at - and this is going for newbies, or people making millions of dollars; I've seen this on both sides. One of the biggest mistakes I see is having one big bank account, where all money goes in, all money goes out, and they're just tossing a cash salad. Like you just said, we're doing 30 deals a month, so it's like, boom, we've got a bunch of income coming in, so we can spend it, right? We've got more to spend. But just having that one account, you just say, "Okay, I've got $100,000 today. I'm gonna spend what I have in the bank account", and you're not accounting for "What should I pay myself? What is for the IRS? What do I need to invest in in the different areas of the business? Can I hire someone, like a key hire at this point?"

So a lot of people when they first get started out that one account, and it just doesn't give them any clarity, because let's face it too, most entrepreneurs are not the numbers people, so they're not going to dive into QuickBooks and say, "I've got this one account, and here's where all the money should be going to", and they've got it all sectioned off properly. So most people are going to run it from the bank balance anyway; they just see, "Do I have money to spend on this thing that just came up?"

So we tell people, that's one of the biggest things that can help you right away, is to section off bank accounts specifically for you, and for your business, for what matters to you. So that's why Profit First is a bank balance accounting method; it's making sure that you have bank accounts open that even if you have a horrible set of books, the typical receipt giver to the CPA at the end of the year type person, then you still have to manage the cash that flows through your business. So like let's set it up in a way that can at least help you know, "I've got this for profit, this to pay myself, this for the taxes, this to pay all the expenses, or investing in the business..."

So that's one of the first things we tell people, is "You're probably making this mistake now. Let's at least help you with this, because this will help you at least know from your entrepreneurial mind and brain where the money should be going."

Joe Fairless: [unintelligible 00:07:13.29] I guess that's different. You said bank account for profit, pay myself, bank account for taxes, bank account for investing in the business... That's four bank accounts right there.

David Richter: Yeah.

Joe Fairless: That's a lot to keep track of. So how do you help an entrepreneur simplify that accounting, and all the different entities? Are they separate entities, too? How do you make sense of it for the investor?

David Richter: So a lot of investors come to us with multiple entities. So in Profit First, the whole mindset behind it is we have to make sure the owner is healthy. There's three accounts that we set up with everyone - the profit, owner's compensation, and the owner's taxes. Let's set up accounts that they've never had before, but why they started the business; they started the business to make it profitable, to use for their benefit of whatever it was - to give away a bunch of money, or to just buy things, or whatever; their specific things. To buy more time... So we set up those three; I call it the Golden Trio of accounts, because everyone in real estate - they're going to pass on either their real estate one day, or sell everything... It's like, this is their epic saga. Just like Star Wars or Harry Potter. You've got [unintelligible 00:08:26.29] you need the three main heroes of your business - profit, owner's comp, owner's tax - filling those buckets.

So if they have multiple entities, that are different exit strategies, like a flipping company versus a rental company, then it's like we set up the core accounts for those two entities, so we know how well is that company doing, how much profitability there that's actual cash. It's not just some random fictitious number that some CPA is telling them at the end of the year, like "Yeah, you made $100,000", and then they look in their one bank account and they've got $10 in there. So we're setting up these core accounts so that they're really creating that habit.

So from every deal that closes, they're funding those accounts by percentages, to make sure that they have profit and that there's profit there, they're paying themselves, they're actually fulfilling the Robert Kiyosaki mantra of "Pay yourself first", doing the things that we've heard as real estate investors our whole lives, but getting them in a system. And to make it simple, it's just a couple of bank accounts, and you fund them just anytime a deal closes. Or if you have rentals, funding it once a week as rental checks come in. So it's very simple on the transfer side. And your bookkeeping team - all they have to mark on the backend side is that it's a transfer. It's like, there's no crazy "Oh, I'm going to set up all the recurring payments from all of these 15 different accounts." No. The profit is for profit, the owner's pay is to pay yourself a salary, the owner's taxes is the once a quarter payment out of those, or once a year payment of the tax.

I was just at dinner last night with someone who's a very successful real estate investor and educator as well too, and they're like, "I have no idea what's going on. Like, we're making money hand over fist, but I don't know what I'm making, what I'm spending", and I've seen that so many times, over and over and over again. That's why we've put this system in place first, because you've got to have a handle on what's coming in and what's going out. And it's not a huge burden on the backend systems of people. We work with a lot of the bookkeeping teams that people have, or our own bookkeepers, and we can help them on the backend; it's really easy, it's just a transfer. But on the frontend, you're literally taking money from when a closing happens and then transferring it right then, and then you don't have to think about it. Then you get to see the accounts grow, because what you focus on expands; and not enough business owners are actually focused on the bottom line, the profitability of the business.

We were stuck in that... We were stuck in the 30 deals a month, like you said, looking at the top line. But the timeline sucked if the bottom line is more than the top line. So this helps people think the way that a business owner should, and honestly, create a habit that wealthy people do. They make sure that they're not spending every single dollar that comes in. So I could go on a lot of rabbit trails here, because a lot of people have personal habits in their personal life. I get a dollar, I spend a dollar. Well that translates to business now, too. So they need someone to make sure "Let's separate this out, so we know - hey, $1 comes in; you need to save a portion of that dollar for the IRS, you need some for yourself, and we need some for profitability, so you feel like it's all worth it." The 80-hour weeks that you've worked in the past are now worth it, because I've got profit that's separate from what I pay myself regularly. And this is the icing on the cake. Why did I start my business?'

Break: [00:11:46.08] to [00:13:44.02]

Joe Fairless: One thing you said just at the very end, that I wrote down, in addition to other things that you were talking about, is the habits of the individual will bleed over into the business.

David Richter: Yeah.

Joe Fairless: And you got me thinking about, as a passive investor, when I invest with other operators, I have not invested with them before and I'm considering it; then looking at how they carry themselves, and perhaps learn as much as possible how they approach their personal expenses and their personal lifestyle, and then how could that be applied to how they'll take that approach to their business.

David Richter: Yeah. In the book Profit First for Real Estate Investing, I give that as one of the ancillary benefits of the system. If you're working with a lender, tell them that you run the finances -- because in the book too, I also tell about another account, for real estate investors specifically, and I call it OPM. Other People's Money. If you're taking money from someone else and you're not holding it in escrow at a title company, set up a different bank account at your bank, call it OPM, and don't mingle it in with your profit, with your operational expense account, all the different things to run your business. That should be for the specific use of why they gave the money, whether it's for a project, a rehab, a rental, or whatever it might be, so that way you have that separated, and then you can tell them, "This is where your money is going to go. I use this account to run the rehab projects, and if I go over budget, I'm pulling it from my OpEx, and funding that." And I've talked with a lot of private lenders that love Profit First, because they know if someone's running off that, they feel better that they're taking care of their finances with that, too.

Joe Fairless: And going back to the company you were at before, with 30 deals a month, with this system you're talking about getting a percent of each deal to go to these different buckets. Is it typical for a bank to be able to help you with some automated systems? I mean, 30 deals a month, doing that 30 separate times a month, sending "3% goes here, 4% goes here" - that's a lot of time associated to that. So is there an automated system, typically, with banks? Or is that something that you've just got to have someone manually do it?

David Richter: I'll give two answers to that. Number one, we tell people "Get into the rhythm that works for you." So if you have to do it manually through your bank, like someone on the team, once a week might be good; maybe you sell five properties during that week, but you've got a process for paying -- if you're doing 30 deals in a month, and over 300 deals in a year, you should have systems for paying vendors, paying contractors. So maybe you do everything on Friday; you put all the money in that came into the business that week, and then you separate it out on Fridays.

So that's one thing. It's like, what rhythm works for you, or do you need to do it every time. If you do, there are certain banks -- like, North One is a bank that's all online. They've actually partnered with Profit First, where you can set up a main bank account, and then sub-bank accounts underneath of it, and then assign the percentages to the account, so when it goes into the top deposit account or the income account, it separates out the money automatically.

There's some banks that already are catching on, that a lot of these small business owners or entrepreneurs are starting to use this system, because I think more than 500,000 businesses use this now, across different industries, like the Profit First methodology... So now, there's some banks that are already like that; they have a system to where you put the money in and it already separates it out. I've heard a couple people as well too that I've interviewed on the Profit First REI Podcast, that they've actually pushed it. They've got other ones that push it as well too, not just North One.

So there's several online banks out there that are catching on. So I would look for a bank like North One, if you don't want to use that one, or something like that. So there are banks like that. Otherwise, it's manual, but then you get into the rhythm, and that habit, that works for your company.

Joe Fairless: Let's say I heard this interview, I like what you're saying, and I want to hire you.

David Richter: Yeah

Joe Fairless: What do I get after you work with me? What is in place? And then how much does it cost?

David Richter: So we're full-service, meaning we have bookkeeping, and we have CPA services, but those are kind of our auxilary; our core service is our fractional CFO service, which - I wanted to create this because I feel it was the missing piece for a lot of the businesses I saw. It was the piece where someone to manage the bookkeeper and the CPA relationship that knows what the heck that they're doing, and can tell them where to put the money, and all the transactional stuff that the owner does not want to touch, does not want to even think about... So they're there to manage the yuck parts. But then they're also there at a high level to meet with the owner and talk about what the owner wants to talk about. It's like, how do I grow the business? Or like we do marketing returns with people. What are the different channels you're using now? What are the marketing returns? We do cashflow projections, we help them run and hold them accountable to the Profit First system... Did you move money there? It's the end of the quarter - did you take some money out of the profit account? You need to reward yourself this quarter.

So it's like, we do those types of things. We build a CFO dashboard for them, which is basically KPIs from the profitability standpoint. And if they've got multiple entities, it pulls all the numbers together, so that way you can see "What am I making in this company, this company? What's profitable, what's not? This one's sucking us dry. We've got to make sure we're cutting something off here." So that's what we do and what we set up.

And then we've got different tiers. So there's an upfront investment to start working with us, but then from there, it's "Do you want to meet with the CFO once a month, twice a month, or customized?" If you're running EOS, like a level 10 meeting with your leadership team, do you need them to be a part of that?" So we have different tiers, depending on the need of those people. The first here's a $1,000, the 2nd tier is $1,500, and then the third tier, or the executive package, that customized one, starts at $3,000, or a percent of revenue, whatever, wherever that business is at.

But that's where we start, because no matter what package you get, you always get the clarity of we'll help you get the numbers in place, we'll manage the bookkeeping, the CPA, that team will implement Profit First and will give you the dashboard. So no matter what level you choose, you get those core services from us.

Joe Fairless: With the upfront investment?

David Richter: Yeah, for the upfront investment.

Joe Fairless: Awesome. And how much is upfront investment?

David Richter: $7,500 to get started with us.

Joe Fairless: Cool. And what would you say is a way that your approach has evolved from when you first started offering these services?

David Richter: Well, now I've got a team of about 30 CFOs. so now it's more --

Joe Fairless: So there's that...

David Richter: Right, so there's that... Because we saw that it was such a big need, and there were so many people reaching out, it just grew very organically. But from there as well too, I've had team members come on the team and help refine our process. In the real estate community, if we go in deeper, we actually set up some other accounts for real estate investors specifically; we call it pass-through revenue. Basically, if you're selling a deal, and you have commission you're paying to someone, or like PI/TI accounts on the rental side would be a different type of account... So we've set up some more specific ones for real estate investors that we've seen have been very beneficial for them to see where that money is going and how much they're spending on different areas before it becomes what the Profit First terminology of real revenue, like "What do I actually have to spend on myself in the business after I've paid the commissions or those top-line things that happen before I pay actual salaries, or the softwares and all that type of stuff?" So that's evolved.

Also, our services, too. We've found that some people hate meeting with the financial person. Go figure, right? So that's why we have the different tiers, too. So it's like, maybe you just need us to manage those other people, and then we come in and do a profit and loss analysis and we say, "What do we need to do? Okay, we were in the red then. What do we need to either cut or what do we need to invest in in marketing to make sure that we're bringing enough in now that you're managing the backend?"

So that's the types of things that have evolved over time - the size of the team, the different accounts specifically for real estate investors, and we've refined our dashboard, have made it super-simple as well too, of "This is what a real estate investor needs to see." They need to see where their cash is at all times, they need to know what they're making, what they're keeping... The thing -- like I said, what we heard last night again, why she was stressed out was because she didn't have control over the money. She knew she was making money, she knows she's spending money, but she has no idea what is actually going on and what those numbers really are. Can I hire people? Can I not? Do I need to let someone go? I just know I'm making money, but what about these other key decisions? That's been refined as well too over these last few years, just helping people know how to use the numbers in order to make and keep more money. That's why they started their business.

Joe Fairless: David, how can the Best Ever listeners learn more about what you're doing?

David Richter: Sure. So So here we go - if you're watching, simplecfo. It's on my shirt. So If you go there, it's the one-stop shop. You can book a call with us. It's a no-obligation. We're not going to sell you hard. It's going to be more on what's your situation. Do you just need bookkeeping, a CPA, or do you need that financial leader on the team? We also have the book there, the podcast, all the things. If you're looking for more information on how to make sure you're managing and getting that financial freedom from the cashflow of your business, the is where to go.

Joe Fairless: David, thank you for sharing your business model that solves a need in the marketplace, and talking about it. It's clear that you have a passion for this business, and it's clear that you're in your sweet spot professionally, because this is something that is needed. And also, you enjoy doing; it just comes through in the conversation. Thanks for being on the show. I hope you have a best ever day, and talk to you again soon.

David Richter: Thank you very much.


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