Be The Bank
Be The Bank
017 - Neglecting Financials
We also dive headfirst into the importance of accounting and financials for entrepreneurs, especially those in the real estate sector. Justin helps us understand the complexities of accounting, the pitfalls of neglecting it and why having a controller or CFO could be a game-changer for your business. We also discuss the impact of automation on the job market in the Midwest and the rising importance of retraining for those who lose jobs due to automation. Tune in to find out why leveling up the education game might be the key to staying competitive in a rapidly changing world.
About the Host:
Justin Bogard – Note Investor specializing in performing Residential Real Estate Debt. He finds deals and acquires them for his own portfolio as well as educates investors while walking them through the process of owning a Real Estate Note!
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American Note Buyers - https://anbfunds.com/
Monthly Broadcast - https://youtube.com/playlist?list=PLzc944w1xydt5aLDrrEPHJhdJeDkBjjD4
Interested in real estate. How about wealth? Well, they go hand in hand, and here you'll learn all about it. Welcome to Be the Bank, a podcast where we discuss and debate the topics centered around real estate investing. Your host, justin Bogart, shares insights into investing in real estate to create real wealth and passive income for you and your family. He'll share stories of real estate investments done right, walk you through the process of owning a real estate note and, most importantly, educate you so you can Be the Bank. This is Be the Bank, brought to you by American Notepad. Now here's your host, justin Bogart.
Justin Bogard:Welcome back to another episode of Be the Bank podcast. This is season number five, episode number 17. Today we are going to be discussing Midwest job automation and also investors and their books, so stay tuned, hello Richard.
Richard Thornton:Justin, it's a nice summer day.
Justin Bogard:It is. I don't consider it summer right now because the girls are in school, so I don't. I know it's not fall, but I just don't consider it summer because it's like when school is out and then when school begins, that's like my summer time clock for me.
Richard Thornton:Yeah, so do you guys have it all year round school we?
Justin Bogard:do not. Okay, that was talked about where we live here, close to Fisher's Indiana, and I guess I don't mind it. If that was the case You'd have longer breaks throughout the year, but this isn't too bad Now that my girls are older. My girls are both in intermediate and junior high right now, so they actually go to the same school building. They're just separated within the building. So the breaks that we have, I think we get four or five days. On Thanksgiving break we get two weeks, almost two and a half weeks I think. For Christmas break, fall break we get a week and a day, and spring break we get a week and a day, and then summer is usually right about eight weeks. So the other way around, we would get like basically two weeks during fall break and spring break and extending. I think Christmas and Thanksgiving and stuff will be a little bit longer.
Richard Thornton:But yeah, from a learning point of view, I actually think the year round is better, because I've had a number of teacher friends that tell me that they spend the first month of being back in school helping the students all remember what they forgot when they left Right.
Justin Bogard:I can definitely see that happening. Yeah, we try to do a little bit of reading over the summer just to help, you know, keep their mind a little bit sharp, but that didn't happen as much as I wanted to because I didn't press the issue too much. But, yeah, yeah, the kids are doing good. We already had a Meet the Teacher night last night and today as we recorded in this.
Justin Bogard:We're doing another Meet the Teacher with my youngest one. Good deal, that's always interesting. I got to actually walk the school for the eight periods for the older one yesterday, last night, and they sat us down in each of her learning periods for about six to seven minutes and the bell would ring. Then we would have five minutes to walk to their next class and my daughter's schedule. She goes, she's on one side of the building for the first period, the second and third period are on the opposite side of the building, and then the fourth period she comes back to the other wing and you know, and so she's bouncing back and forth. I'm like, my goodness, no wonder why you don't use your locker, because you don't have time to open your locker by the time you get over there.
Richard Thornton:Yeah, I remember those days and I actually remember that being kind of fun. And in California the school layout is quite different. In other words, it's a big, flat one-story building with open air hallways, as opposed to what you guys are used to there, and so same thing, you're kind of running from one class to the next in a lot of cases.
Justin Bogard:So yeah, fun. I'll be interested to see what the high school is like, because the high school is like four times bigger than where they're at now. So I heard other parents talk about it's so confusing that if they didn't have a map they would get completely lost. So I can imagine the students are struggling. At least the freshmen do the first year.
Richard Thornton:Yeah Well, my high school had 2,500 kids. So I you know, a couple of days before school I would hop on my bike and I would ride the hallways and ride from class to class to class. So I didn't get confused the first day. That seemed to help.
Justin Bogard:That's awesome. We did not have that in Indiana. We are all covered of buildings all indoors so we cannot even ride our bikes to school. Really there's no place to park them. We had to get dropped off with the bus, or actually I don't even know if they offered a car rider situation when I was in elementary and middle school. I think it was bus only, unless you're able to drive yourself in high school, that was the only way we could arrive. For somebody in high school, the only way you can get to school Now is the days. That's different. You can car rider up to whatever age.
Justin Bogard:I understand Anywho. So one of the things that I brought up, richard, during the opening little package there was about investors in the books. I bring this up because I had the luxury of diving into somebody's a sample of somebody's books recently. That's a real estate investor. They do really well with what they do. They buy homes, they fix and flip them, they wholesale houses and they also do a little bit of seller financing too. And so one of the neat things I get to do is ask them hey, show me some of the deals that you've done so I can value them for you. Because they actually hired me to look at some of their deals and say, hey, what do you think this is worth? How does this transaction work, et cetera, et cetera, because they've only hold on to their paper. They've actually sold the paper before I get into it and I ask them for some basic things.
Justin Bogard:So we're looking at how much did they pay for it? Did they get any debt to buy this property? And then, when they turned around and resold it to a deserving buyer, how much down payment did they get? What were the terms, and things like that? So I gather information and I look at the first deal and I see they get so much money and debt. So for round numbers purposes, richard will just say they got $50,000, excuse me, I'll say $100,000 in debt. They borrowed $100,000. The investor did so they could buy this property and they turned around, fixed it up and they resold it. And let's say they resold it for a little bit more than that.
Justin Bogard:And so by the time the borrower puts down the down payment and they start paying on their principal interest balance, let's say over like seven or eight years, I noticed that the unpaid balance was about, let's just say, you know, $65,000, $70,000, but yet they borrowed $100,000. So I'm looking at this going okay what's going on? And I figure out that the debt they borrowed was not an amatrized loan. It was just a straight up interest only loan. So if you think of it like, because you're very knowledgeable in the hard money world, when you get the hard money loan, it's traditionally interest only, but it's also short term. This is more in a longer term interest only money loan.
Justin Bogard:And so, richard, as you know and for our audiences benefit, if you get an interest only loan, that's great in the short term, but if you're getting that loan to buy something, that's amatrising. Meaning the principal balance is coming down every single time a payment's made we're assuming it's monthly. Eventually, richard, that balance gets below what you owe and then you start. You start becoming in the red on your books, right, meaning a negative value. So if they owe 100 to their investor for this property but yet their buyer only owes them $70,000, there's a negative $30,000 equity problem there, right, richard? Right, so I was noting that, noticing this on several other of the deals that they've done like this as well. So it occurred to me, richard, that it's apparent that they're probably not the only ones that do this. I think it's possibly an educational problem as far as understanding the financials of a business in general and how to make one-to-one relationships work as far as in your accounting as it pertains to real estate investing.
Justin Bogard:So you and I have done a lot of work on our books to try to make them right, to understand them, because, like I was saying, with you offline, I could show you one of our loans and I can say, richard, here's the profit and loss statement, here is the statement of cash flows, here's the balance sheet for the actual loan, the one loan that we're talking about.
Justin Bogard:You can see to the penny exactly how much money we have in the deal or how much money we made on the deal, or how much money we have left to owe an investor on the deal, and you have all that information to the penny.
Justin Bogard:Now, what it would appear in the scenario that I'm talking about with the real estate investor that they probably have enough money in other parts of their business to pay off this debt. So it's not really a problem to them. But as you look at the books, it doesn't make sense, right? The books are off balance and you can't really see and look into the books and say, ok, how much cash do I really need? How much cash am I getting? How much is going out? Because everything is just kind of weaving in and out like a big traffic jam and it doesn't make a lot of sense. So if they were to sell their business or they want to have somebody buy their business, it would be very confusing. I would think, right, if they were to buy a business like that that doesn't have their accounting all squared way.
Richard Thornton:It would be almost impossible to price it correctly.
Justin Bogard:yes, yeah, yeah. So it also occurs to me, richard, that since we have been so heavily vested for a while now in our books as far as making things look correct and having the proper accounting, having a proper chart of accounts within our accounting and then monitoring all of our expenses and our income and itemizing them properly in our books, that I don't see a lot of other businesses taking that as a priority. And I would venture to say, richard, that it's the most neglected part of probably anybody's business, especially real estate investors is it's got to be their accounting.
Richard Thornton:Yeah, which doesn't surprise me at all. I think there's a lot of entrepreneurs out there who are very good with a hammer, very good at finding deals and saying okay, fine, I'm paying 100, I'm financing 50, I'm putting 25 into it, I sell it for 150. Now I've made money, but that's the extent of their accounting ability.
Justin Bogard:Yeah, yeah, it's kind of rudimentary, I hate to say it. I don't mean in a negative way, because we're all good at something in the business and there's some things we're not good at, but I think if more people recognize the fact that you're more than likely not, your strong suit is probably not going to be financials and we all can do math right, we can run a calculator but I'm talking about like actual accounting financials. It's different to run cash flows and stuff.
Richard Thornton:Right, and it makes me, though, that it's fine if you just got one project going, but if you're, say, a note investor and you're doing that, or a note seller and you're doing that or anything of that sort, and you're basically carrying a negative on your book that doesn't exist. It enables you no, it disables you from being able to do correct cash forecasts and actually know what you owe your investors and everything else. So I'm a little bit surprised that they're letting that happen.
Justin Bogard:Yeah, and, like I said, perhaps it's not a big deal because they're like okay, I've made this much money over here, so I could easily offset that. And maybe they're thinking in their mind, you know, oh, I got it over here, I can offset it over there, no big deal. But when someone's like you know, a fractional CFO or a controller, and they're looking at me and they're going, oh no, oh no, this is not going to work, because when they're running the report and they want it to be clean, they want it to be dead in credits, as one of my accountants used to say.
Justin Bogard:You know, and it makes sense, though, when you're trying to run a company, you want to look at your financials and really understand. You know to the penny, like, what's going on? How much do I really have cash on hand today? I can go to a bank and figure that out right to our bank account, but really we don't see what else are the expenses that are out there that have been paid yet because money hasn't been withdrawn. But yeah, so it's pretty interesting.
Richard Thornton:So what your message to the audience is beware of your books.
Justin Bogard:I would say if you don't feel comfortable, like you know what you're doing, then you definitely should raise your hand and ask for help. I wouldn't necessarily go to your tax CPA that does your tax accounting and have them run it, but that would actually use a different person in our different company to go through and do your business financial accounting because, as one of our partners would say, that helps us out with our accounting. You know there's tax accounting and there's business accounting and they're two totally separate things. So if you have a tax accountant go through and do your books, you're not going to like what you see because it's not going to make any sense at all. Everything's not going to make sense.
Justin Bogard:If you have somebody does your business accounting, that's more like a controller or a CFO. So they're really going to make sure that it understands to the business owner like, okay, you bought your widget for this price, you resold it for this. You know your net profit is this minus whatever else is going on. It makes a world of difference. So we've had a change of books, I think three times. Yeah, since we've been doing this. Right, but I tell you what. It makes it a lot easier now with the fund, especially setting up a fund. It's really easy to go there and do the same thing. We can pull a loan that we have in the fund and we can show you to the penny exactly what's going on with it.
Richard Thornton:Yeah, yeah. Well, you're very good at setting all that up to. I mean why?
Justin Bogard:I've had a lot of help it wasn't me with an epiphany that said, hey, this is how you do it. No, it was. It was a lot of learning, yeah yeah.
Richard Thornton:So I was gonna say that I, when I first started American note capital, I quite realized, quite quickly realized that I had to have an accountant do just that for me and I'm same way I can look at every deal I own. That here's my basis. Here's where I am Blah, blah, blah, blah, because there's no way I could keep track of it. Hey, and you know what you shouldn't? I mean because you should be out Making money. You should be out finding deals and buying notes and doing whatever. Yes, I'm probably spending three or four thousand dollars a year in accounting fees, but that is minimal compared to I mean I can do one deal and make more than that. So exactly.
Richard Thornton:Plus I probably screwed up, that's right.
Justin Bogard:Yeah yeah, a business owner can't be 100% perfect in every category. That need to be perfect to run the whole business. So you got you got to outsource the things that you're not good at or the things that are just time wasters, that aren't making you money, and that's what you have to realize. So luckily, there's two of us in the business so we can divide things up a little, a little more easily than Then. We can't otherwise, if we were is by ourselves.
Justin Bogard:But right right so Richard, middle America and Jobs we mentioned this in the opener as well so you had brought some light to some information before we even got on here, started recording and I thought it was a good subject matter just to talk about and, and so you want to go ahead and talk about some of these articles or stuff that you've been reading about.
Richard Thornton:Yeah, well, overall it's. It's sort of this this the long-term state of the job market, especially in the Midwest. It's affecting everywhere, but In the mess, where you in a lot of cases may not have quite so many job opportunities, a lot of people. I think the common thought has been oh gee, offshoring has been the big boogeyman in terms of the reason we have sort of a slumping job market or job opportunities throughout the Midwest, right, but they're doing a couple studies now and they've shown that that's not actually the case. What is really causing a lot of that is automation.
Richard Thornton:And they interviewed a bunch of people. They, for instance, they went to a fellow in Saginaw, michigan, and General Motors has a very successful plant there and they their, their productivity has actually increased over the last five years. But what he said very clearly was he said look, we used to have 7,500 people assembling those cars the same amount of cars 10 years ago. He said now we have 500 and you know, they show you a picture of what the robots are doing and you're kind of I have no robotic background I was amazed to see what these, these robots are picking up whole cars and turning them upside down and spray painting them and all Different ways that you know we wouldn't even think about and would not be humanly possible.
Richard Thornton:Yeah and they spit out a canoe car, brand new car every 90 seconds. No office office line. That's just one example. No, I think you and I talked about the last time you went to Mickey D's. How did you order your food?
Justin Bogard:Right, I was using the touchscreen right, so it's picking up for Gary. Out and go through the menu. Exactly what you want right.
Richard Thornton:And so what does that mean? That means that that Mickey D's now has four or six you know fewer people that they have to have as cashiers, that they're not paying well one of those cashiers jobs, a lot of those attendant jobs, are Exactly what our borrowers are doing. That's how they're staying, of staying afloat, and we have to remember that the median income For the US within the last couple years is only 33 thousand dollars. That's not a lot by our standards, but there's a lot of people making that. So where does that go? What does that all all say?
Richard Thornton:It's just a little bit sobering. I don't think it's a red alarm or alert or anything like that, but it's. It's to say that if you're buying notes in specific areas, your antenna might be just a little bit higher in terms of Finding out what the job market is like, trying to determine can a lot of those jobs be automated or not? Because if they haven't been, they are going to be and, as we talked about a little bit on the show earlier, ai is just going to speed that along. It's gonna make it a lot faster. So anyway, it's just interesting to think about the overall job market, I think throughout the Midwest.
Justin Bogard:You brought up some pretty interesting points there and the Mickey D scenario. I like how you posed that scenario because I can imagine it because I was there recently with the girls and I just like using the kiosk because, quite honestly, it takes so long for me to go through all the menus and the sub menus and then you're trying to look for deals and nothing really makes sense. So I think it's harder for the user at first to do that until they get used to exactly where to go through the prompts. Now there still are cashiers there. I'm not sure how often you've been to McDonald's, but there's still like one or two cashier stations and somebody can jump in there and do it. But you're right, there is no dedicated cashier that's sitting there that's taking your order. They can do it, but they just don't have it.
Justin Bogard:I think, richard, they've gotten smart to where they might be down maybe a couple of employees but I don't think they've gotten rid of everyone, because now the new trend is delivery service. So now they have order runners that are taking the orders and bringing it out to the customers that are at the tables, or bringing them out to the drive-through people, or bringing them out to the people that are like DoorDash or the other services that do that. So they have balanced the fact that, yes, there is a little bit of job loss but there's also new ways that they've made jobs because of these other things that we're talking about with automation and then with order accuracy. Now, even though I'll say every time I go to McDonald's they still screwed up. I told them exactly what to do. I was thinking of Joe Pesci going through the drive-through and Letho Weapon and he said they beep you in the drive-through.
Justin Bogard:I just can't get that out of my head. It's so funny. But yeah, so I see a little bit of job loss, but I also see job regeneration as well from those businesses. Knowing that there's skilled labor and then there's what I call kind of unskilled labor, they haven't really been pushed to drive themselves to get specialized education, maybe in a certain skill. I don't mean to generalize that, but that's what I'm thinking, richard, is that and I think you even mentioned this offline I don't mean to jump into your rebuttal on that, but you had brought up a good point to me offline and said the retraining for somebody after they lose a job that they were accustomed to for many years let's say 10, 15 plus.
Justin Bogard:Maybe they're an assembly line worker at the certain factory and they know exactly how to do a certain thing on a car that you and I don't know how to do, but that's what they did for all that time, and so now they have to retrain themselves to learn to get into a different industry or a different type of assembly line if that's what they wanna do, and there is a time period where it takes them a while to get up to speed for that. So there is a I think you said two to four year time drag of when they can actually get up to what industry standard is for that certain position.
Richard Thornton:Right cause I mean and so it's not just straight mechanics like auto manufacturing or tractors.
Justin Bogard:That's just the easiest thing to think of right.
Richard Thornton:You know we think about, I mean when was the last time you called a bank or you called for you know any company? That's a good point and you got a good life body. I mean, no, you probably called, you talked to a computer. It says do you want option one, two, three or four, depending on what you're calling for? Those jobs are gone, those jobs are not coming back and a lot of our borrowers were in those jobs. So what it all points to and I think you had this point is a very good point, which is that Americans can have to step up and get more educated. A lot more people are going to have to go back to school and or stay in school longer or take school more seriously or whatever, but the overall education level is going to have the increase to stay ahead of the game.
Justin Bogard:Yeah, I mean we look at other countries. I mean you visit other countries way more often than I have, because I visit them zero, at least one more than that. But I think you even pointed out in the in, like the Asian culture, they take their schooling very seriously and they are, you know, at younger ages doing more complex you know mathematics and language skills and scientific skills than we are in our country at those ages as well, and it just shows that you know they're able to go leap some bounds in certain fields of science and mathematics more than the United States, because they started a younger age and really ingrained in them, like some more what we would call advanced academic skills, at a way younger age.
Richard Thornton:Right, right, right, yeah. So it's just interesting to see where it's going. I mean, that's where I mean. I think that's where government really does need to step in. I'm I'd like the government to this is my personal bias to step out of some things like, you know, telling us what we should do with our bodies medically and things like that. Right, but step more into saying, all right, we see that there's this gap here. We're going to provide some funding to reeducate people. We're going to do it on a you know, and, honestly, we're going to do it on a you know, whether you're red or blue, I don't think that should matter. That should go. Oh gee, we've got constituents here who need some help. Yeah, let's help them out.
Justin Bogard:I like that. You know, don't just give someone fish. You know, teach them how to fish.
Richard Thornton:Yeah, exactly exactly. That's where it needs to go, and so hopefully Congress and the government will get around to doing just that.
Justin Bogard:All right, everyone. That was episode number 17 on season five of Be the Bank broadcast. Don't forget to check out our video feed of this on our YouTube channel, the American Notepbuyer's YouTube channel, as long as and we also have the broadcasts that we do monthly videotaped and recorded on there as well, along with a other myriad of different videos and training, educational type of stuff for you. So I'm Justin Bogart. This is my friend and co-founder of American Outdoors, richard Thornton, and we will see you guys on the next episode. See you, sounds good.
Richard Thornton:Bye-bye everybody.
Narrator:Thanks for listening to Be the Bank. We hope you learned something from today's show. If you enjoyed this episode, please rate and review us. Plus, check out our channel on YouTube and follow us on Facebook and Twitter at Be the Bank, and on Instagram at Be the Bank podcast. Be the Bank is sponsored by American Notepbuyers. Thanks again for listening.
