Profit First for Real Estate Investing: Automate It Property by Property

Mike Michalowicz's Profit First comes up on my calls with real estate investors, and the ones who've tried it tend to hit the same wall. The book splits every deposit from one account. A rental portfolio has a separate LLC, a separate mortgage and a separate set of bills for every property, and one split has to cover all of them.

In practice, that wall shows up in four places:

• The busy months fool you. A summer of Airbnb payouts looks like profit, so you pay yourself out of it, and in February a beach rental can't cover its own mortgage.

• The mortgage doesn't wait for the rent. Each property owes a fixed amount on its own date. A percentage of whatever came in knows neither, so the lender pulls before rent lands and you pay an insufficient-funds fee.

• Not all of it is rent. Cleaning fees, occupancy tax and security deposits land next to the rent and get split with it, so your profit number is wrong from the first deposit.

• You can't tell what you actually made. Look back at the year and you can't say whether what you took out was profit or money a property needed.

Each of those has a fix, and the fixes run in order: every property gets its own income source, the money that was never yours comes off the top, each property fills its own bills, and the Profit First split runs on what's left.

How NOT to run Profit First on a rental portfolio

Michalowicz's method runs every deposit through one income account and splits it four ways: profit, owner's pay, taxes and operating expenses. For a business with one storefront, that's a fine place to start. Here's what happens when you run it across two rentals.

Let's say you own a beach rental and a duplex, each in its own LLC. The beach house needs $3,460 a month to break even, and Airbnb pays out $7,215 in July and $1,930 in February. July looks flush, so you pull $2,500 out for yourself. Then February comes, the house is $1,530 short of its bills, and part of what you paid yourself in July was really February's mortgage. One beach-house owner we onboarded told us percentages would work fine on a steady income, but a beach property surges.

The duplex has the opposite problem. It rents steady at $2,650, but its $1,385 mortgage comes out on the 3rd, two days before the rent lands on the 5th, and it's due whether both units were rented or one sat empty.

Run that for a year and you end up where one of our short-term rental hosts did. They'd taken owner distributions all year, and when they looked back at the books, they couldn't tell whether that money had been profit or a loan against the business. In their words: "where are those distributions coming from?"

Start by giving every property its own income source

Picture each property with its own assistant, whose only job is to take every rent payment or Airbnb payout the day it arrives and split it up: this much to the mortgage, this much to the bills, the rest to you.

In Sequence, that assistant is a feature called an income source. It's an account with its own routing number, so you point the beach house's Airbnb payouts or the duplex's rent at it, and the rules you set move the money the moment it lands.

Why one per property? A rule knows how much money arrived and which account it landed in. It can't read the note on the payout that names the listing, so it can't tell which property the money is for. Put the beach house and the duplex on one account, and a $1,240 payout could belong to either.

One of our short-term rental hosts was stuck exactly there, with payouts for several listings in one account and someone sorting the transaction details by hand every week. Another owner, with two rentals and a day job, lost track of what each rental brought in.

Separate income sources fix that, and Airbnb lets you route each listing's payouts to its own payout method, so each listing can feed its own. Real estate is one of the industries most likely to split income by source: 53.5% of real estate businesses route money through two or more income streams, against 39% of businesses overall, based on Sequence's account data.

Say all your rent lands in one bank account today. You create one income source for the beach house and one for the duplex in a few clicks. Then you change who pays where: route the beach house listing's Airbnb payouts to the first, and give the duplex tenants, or your rent platform, the second one's details. From then on, each property's money arrives in its own place, and the rules know whose it is.

You keep your bank account either way, and the same works if you already have one for every property. Just have Airbnb and your tenants pay the income sources directly. If rent keeps landing at your bank and Sequence has to pull it in, it takes 2 to 3 business days to arrive.

Then take out the money that was never yours

Money that belongs to someone else comes off first. Michalowicz has a name for this step in the original book: Real Revenue, what's left after materials and subcontractors pass straight through. Rentals have their own version of pass-through money, and it shows up in almost every payout.

Let's say an Airbnb payout of $1,240 lands for one week at the beach house. Part of it is the cleaning fee the guest paid, and that's your cleaner's money. If you remit occupancy tax yourself, part of it belongs to the city or county. If a property manager runs the listing, their commission is in there too.

None of that is rent, so none of it should touch your profit or owner's pay. Each piece gets its own bucket instead, a separate account that holds money for one job and nothing else.

On occupancy tax, check before you build anything. Airbnb collects and pays occupancy tax for hosts in the places it lists and leaves it to you everywhere else. A vacation-rental manager we work with runs listings in two cities with two different rates, and sets aside at the higher rate on every booking so the lower-rate city ends up with a little extra.

A landlord we onboarded, who also keeps a trust account for a brokerage, put security deposits simply: "this is not our money, so we're not allowed to touch this money." They never enter the plan at all.

Fill each mortgage before Profit First touches a dollar

Fixed bills fill first, to the dollar. Percentages come later, on whatever is left.

Most Profit First guides for real estate run percentages on the whole deposit: a share to profit, a share to taxes, a share to owner's pay, and the rest to the property. That works when rent is steady, because the percentages are set so the property's share covers its bills in a normal month. A mortgage doesn't shrink in a slow month, though, and a percentage does. So I'd fill the mortgage first. A short mortgage month costs a lot more than a thin profit month. Real estate owners on Sequence already lean this way: 26.4% of real estate businesses on Sequence use rules that fill a bucket to a set amount, against 15.6% of businesses overall.

Right now your duplex probably works like a lot of the setups I see: rent lands in the property's checking account, the lender pulls $1,385 by autopay on the 3rd, and everything else just sits there. Instead, give the mortgage its own bucket and fill it up to the payment as rent comes in. Then a second rule pays the lender once a month, three or four business days before it's due, so the money has time to arrive.

The tool that makes this work is a top-up. A top-up moves only what's missing. If the mortgage bucket already holds $1,100 and the target is $1,385, the rule moves $285 and stops. A percentage would keep sending money whether the bucket needed it or not.

For each property, in this order:

1. Mortgage. Top up to the monthly payment.

2. Property tax and insurance. If they aren't escrowed, take the annual bills and divide by 12. One investor with dozens of rentals put it this way: "if my taxes were 50 bucks a month for that property, then I'm going to set aside 600 bucks a year."

3. Utilities and supplies. Top up to what the property spends in a normal month.

4. Reserves. Top up to a target with a limit on each transfer. A landlord with two investment properties wanted each property's checking at three months of mortgage, then vacancy and CapEx accounts filled to their own levels. Their mortgage was $1,000, so we set it as a top-up to $3,000 with a limit of $500 per transfer, so a single big deposit doesn't pour everything into the reserve. Then a second rule tops the mortgage, tax and bills buckets back up from the reserve a few days before the mortgage is due, so a slow month or an empty unit still gets covered.

5. Everything else, 100%, to your holding account.

This is the plan I built in a demo earlier this year with an investor who started out as a realtor and now owns rentals, with one LLC and one bank account per property. We set it up for one property first: the management fee off the top, fixed bills topped up, $2,000 kept for variable expenses, taxes, then the mortgage. Then we copied it onto every other property they own, each on its own income source with its own numbers.

One variation. The investor from the demo set taxes aside inside each property's plan, right before the mortgage. That works too, and your CPA can tell you which fits how your LLCs file. One tax bucket in the holding account is simpler to watch, so that's the version I'll use below.

Then run Profit First on what's left

In the holding account, once every property has covered itself. This is where Michalowicz's split finally does its job, on money that's actually yours.

The holding account runs its own rule on a schedule, such as the 10th and the 25th, the rhythm Michalowicz built into Profit First:

1. Income taxes. A share of every dollar. Ask your accountant what that share should be. On Sequence, real estate owners most often set 10% and the median is 15%, but your number depends on your properties and your other income.

2. Profit. A small share to start. The most common profit setting real estate owners use on Sequence is 5%.

3. Owner's pay. Whatever is left, or a fixed amount, sent to your own bank account every other Friday or on the 1st.

In a thin month, a property that can't cover its own bills sends $0 to the holding account. Its reserve covers the mortgage, and the other properties keep paying you.

It also ends the July pull that leaves February short. Your pay comes from one place, after every property has covered itself.

A lot of the investors I work with don't take much out of the rentals at all. One owner with three LLCs told us they don't typically take distributions on rentals, and that they've never touched the profits from one of their properties. If that's you, let the profit bucket build. For a lot of investors, it's where the next down payment comes from.

What does the whole plan look like for two properties?

This is the whole plan for your two properties, before any adjustments for short-term or long-term rentals. The numbers are made up to show how it moves, so don't do the math on your own rentals with them.

Let's say the beach house takes six bookings in July and two in February, with a $95 cleaning fee on each, and Airbnb collects the occupancy tax in its county. The duplex rents for $2,650 a month. Your accountant has you at 15% for income taxes, and you start profit at 5%.

In July the holding account gets $2,245 from both properties: $336.75 to income taxes, $112.25 to profit and $1,796 to you. In February it gets only the duplex's $560: $84 to taxes, $28 to profit and $448 to you. Every bill on both properties is covered in both months, and the beach house's slow month comes out of money its own busy month set aside.

How do Airbnb and short-term rental hosts adjust the plan?

Short-term rentals get paid per booking, so the plan runs a dozen times a month in summer and twice in February. Two things change for a host.

Number one, flat per-booking set-asides. Cleaning already comes off the top, and some hosts treat insurance the same way. A host we work with, who runs short-, mid- and long-term rentals, takes $60 from every Airbnb, Vrbo and Booking.com deposit and puts it into an insurance bucket. That only works platform by platform if each platform pays into its own income source, because a rule sees the deposit and can't see who sent it.

Number two, peak season pays for the slow one. In July your beach house's buckets fill to the $3,460 it needs, the slow-season reserve takes its share, and everything after that goes to the holding account. You can also flip it: whenever the house's bucket climbs above $3,960, push the extra out. I set up exactly this for a beach-house owner whose break-even was about $3,500 and whose July ran close to $7,000, so the summer surplus could go straight to paying down their debt.

If you want to see this laid out for a few listings at once, we built a page on how short-term rental hosts run their payouts through Sequence.

How do long-term landlords adjust the plan?

Long-term rent is steady, so the swings that hurt a short-term rental aren't the problem. Timing is. Your duplex mortgage leaves on the 3rd and the rent lands on the 5th. One landlord we onboarded described the same thing with two of their rentals: "there are two trains crossing, but we hope that the one train arrives before the other one leaves."

That landlord had a fixed $1,200 transfer going out of the rental account every month. In a month with a vacancy, the $1,200 wasn't there, and they were paying an insufficient-funds charge every month or two.

So you might ask, "I already pay the mortgage on autopay. Why change it?" Because autopay pulls from whatever happens to be in the account. The bucket makes sure the money is there before the pull. This month's rent on the 5th tops the mortgage bucket up for next month's payment on the 3rd. The trains stop crossing, because the money for the 3rd arrived four weeks earlier. Fund the first month once by hand, and from then on each month's rent pays the next mortgage.

The rest of a long-term rental is the fill order from above. When a unit sits empty for a month, the reserve covers the mortgage, the same way it does for a slow Airbnb month.

What about multiple LLCs, partners and refinance checks?

Several LLCs. Set each LLC up as its own business in Sequence, with its own income source and its own buckets, so each entity's money stays in its own lane. Where money is allowed to move between entities, and whether a management company should collect everyone's rent, is a question for your CPA. The investor from the demo was waiting on their CPA for exactly that answer before building the rest, which is the right order.

A partner on one property. If you co-own a rental, its leftovers can split between an account for each of you before anything reaches your own holding account. You can also add a partner or your bookkeeper as a viewer, so they see the plan without moving money.

A refinance or sale check. A cash-out refinance or a sale is a lump sum, and you don't want it running through a plan built for rent. The investor with dozens of rentals asked me about this directly, since a cash-out refinance check was on the way. Deposit it into an account with no rule on it, and only rent and payouts flow through the income sources that split.

If you also earn commissions as an agent, keep that money in its own income source too. Commission income works differently from rent, and it gets its own article.

Start with one property

Once the plan runs, the number in each property's account finally means something. The mortgage money is already set aside, the bills are covered, and what's sitting in checking is actually spendable. That's usually the part owners notice first.

Don't build all of it on day one. Pick one property, give it an income source and a mortgage bucket, and watch one or two months of rent flow through. Then copy it to the next property and add the reserves. You set the plan, and you stay in charge of it: you can review or change any rule whenever you want.

If you'd like to see it before you build it, run your own beach house through a July and a February in the Playground, or start from the Profit First plan in the Maps Gallery.

FAQ

Should each rental property have its own bank account for Profit First?

Each property needs its own income source, so a rule knows which property the money belongs to. If you already keep a bank account per property, keep it and connect it.

What percentages do real estate investors use?

Fixed bills like the mortgage fill by the dollar. On the leftovers, real estate owners on Sequence most often set 10% to income taxes (median 15%) and 5% to profit. Ask your accountant what fits you.

Where does the mortgage go in Profit First?

In its own bucket for each property, topped up to the monthly payment as rent comes in, then paid a few business days before it's due.

Does Profit First work for Airbnb hosts?

Yes, if each property fills to its break-even first and a slow-season reserve fills in peak months to cover the slow ones.

Where do security deposits go?

Outside the plan, in whatever account your state's rules require. They're never rent.

Can I keep my current bank or landlord platform?

Yes. Sequence connects to the accounts you already have, and your owner's pay still lands at your bank. Have payouts and rent go to your income sources, though, because deposits pulled in from another bank take 2 to 3 business days.