That’s a sexy title, huh? Well, one of the top reasons many real estate agents fail in their first few years is because they don’t have enough money to pay their expenses while building their business. It takes a lot of time to get to the point where leads come to you, and you’ve got a systematized approach to handle all the business that comes your way. Until then, you still need to support yourself, and perhaps others, as well as handle business expenses. I’m not going to tell you how to improve your revenue or increase your client pipeline…finding a real estate mentor is your best bet for that. However, as a financial planner, I can tell you things you need to consider in order to effectively manage your cash flow as you’re starting out.
Money Tip #1: Budget twice before you start. Budget for your business, and for yourself.
It’s not enough to have enough money set aside for start-up expenses, like getting your license, realtor association fees, printing cards, and getting a business phone. Before you even start working for a broker, you need to have that broker (or several) give you a list of ALL expenses they expect their agents to account for in their first year—things like a computer, advertising expenses, gas, etc. A good broker should have such a list readily available.
Also, you need to account for your personal situation. Whether you’ve got a family and a house or you’re living in a one bedroom apartment, you’re going to have to keep paying the bills, even when you’re not receiving a check.
A rule of thumb I’ve seen is 6-12 months of combined living and business expenses. In the financial planning industry, the rule is more like, “Three years and a working spouse.” Keep that in mind if you’re taking a huge financial risk to become a real estate agent.
Money Tip #2: Determine your personal net worth and cash flow before you start.
If you’re a career-changer, hopefully you have some built up assets or an emergency savings account you can tap into. If you’ve been a stay-at-home spouse and you’re entering (or re-entering) the workforce, you may have that other spouse’s income to rely upon. If you’re just out of college, you might not have a family that depends on you, so you can afford to cut back on your expenses. Whatever it is that you can rely upon to keep you afloat during your start-up, you need to quantify & document it. This isn’t a case where you can just estimate your numbers. In most cases, you’ll probably end up under-stating your budget and over-stating your available resources, so you need to be conservative
Money Tip #3: Ask yourself whether your personal net worth can support your two budgets.
If they can’t, don’t start. Postpone until you can either cut back on your personal expenses or save more. Just remember, cutting back on your business expenses means you’ll either spend a LOT more time hustling, or you won’t grow as you expect to. You cannot expect to cut expenses, not hustle, and still grow your business. Keep in mind you probably won’t be able to over-save for starting your real estate career.
Money Tip #4: Hire an accountant or a financial planner who specializes in tax planning.
This is one of those expenses that can pay for itself with one brilliant observation. All it takes is for that professional to find something in your records that you weren’t accounting for, or to ask you a question to properly frame a situation, and you can save thousands of dollars. Moreover, when you hire someone at the beginning, you’re going to start your real estate career with sound financial advice and tax planning that can save you tens of thousands in over the years. Not to mention a networking opportunity…financial planners often work with people looking to sell their home and need to refer to a good real estate agent.
Money Tip #5: Have an expert or mentor look over your budget.
You might have thought of ALMOST everything, but a smart trained eye will be able to help you catch and adjust for an expense you might not have considered. As a real estate agent, you’re going to share as much as you can with your clients…when starting off, don’t be afraid to share with your mentors as well.
Money Tip #6: Determine your cash flow needs and adjust as you go.
This sounds repetitive, but it’s not. Once you’ve established your budget, and you’ve projected what Month 1, Month 2, etc. will look like, then you’re going to start executing. You’re going to make adjustments based upon the changes you encounter. Like Mike Tyson once said, “Everyone has a plan until they get punched in the mouth.” Don’t be afraid to stick to your numbers when you see a lot of distracting, nice-to-have items (like duplicate memberships). However, be prepared to make adjustments when someone you respect gives you a recommendation (like pay for THIS membership because it’s worth the expense). Ideally, this would happen before you start, but in your first couple of months you’ll often find things that weren’t accounted for, but should have been.
Money Tip #7: Celebrate your commissions. Then pay your bills.
You’re going to celebrate milestones, like your first commission, your first $5,000 commission, your first $10,000 commission, and so on. You should do so. But you also need to pay your bills, because you don’t know when your next commission will come in. If you must, buy yourself something modest to celebrate each new milestone (no more than $50, and no celebrating the same milestone twice). Buy a decent bottle of wine, get a pedicure or massage, or whatever doesn’t cost more than $50. Then get back to work. Don’t even think about replacing that 5-year old laptop or upgrading your phone. If that laptop or phone is what you started with, and you didn’t budget for a new one, now is not the time to replace it. You can replace it when cash flow is no longer your top concern.
Money Tip #8: Estimated taxes
If you’re not a W-2 employee, you are responsible for paying estimated taxes. In fact, you should treat them like your first bill. For every commission you receive, you need to calculate estimated taxes, and set them aside for the IRS. If you’re not familiar with the concept of estimated taxes, you need to learn. The IRS rule is that unless you have sufficient employer withholdings throughout the year, you need to make estimated payments. If you do not, you can owe a penalty for underpayment of the estimated tax. Estimated tax payments are due by the 15th (or following working day) of each month according to the following schedule:
|Jan. 1 – March 31||April|
|April 1 – May 31||June|
|June 1 – Aug. 31||Sept.|
|Sept. 1 – Dec. 31||Jan. next year|
Money Tip #9: Don’t forget self-employment tax.
If you’re not an employee, you’re responsible for self-employment tax. Don’t know what that is? Self-employment tax is the other half of the Medicare & Social Security tax, also known as Federal Insurance Contributions Act (FICA) tax. When you’re a W-2 employee, you’ll see Social Security and Medicare withholdings under FICA, which are set at 6.2% for Social Security (up to $118,500 for 2016), and 1.45% for Medicare (no limit), for a total of 7.65%. Your employer pays a matching amount, which never shows up on your W-2 statement or your pay stubs. However, as a self-employed individual, you pay both ends of this, or 15.3%. Additionally, as the employee, you’ll pay an additional 0.9% Medicare tax on any income above $200,000 (no employer contribution).
Note: It doesn’t matter if you’re a sole proprietor, LLC, or S-corporation…the IRS treats single-member LLCs and S-corporations as disregarded entities for tax purposes. There are some things you can do as an S-corporation to shelter some of your income, but when you’re first starting out, you need to just budget for estimated taxes and self-employment tax. The good news is that the employer portion of your self-employment tax is tax deductible.
Money Tip #10: Your good times should support your bad times.
You might have that month where three commissions come in. Then you’ll have three months in a row without a sale. Make sure that any additional income gets set aside for budgeted expenses and for estimated taxes. Until you get to the point where you have to hire people to help you handling client transactions, you should keep budgeting as if your next commission isn’t coming for a while.
Money Tip #11: Establish an emergency fund
You might have already had an emergency fund set up for your personal expenses and expected startup costs. However, this emergency fund is strictly for your business expenses. Just like the recommendation for a personal fund (generally 3-6 months’ living expenses), you should keep setting aside money until you have a business account with 3-6 months’ business expenses. You might not get there for a while, but you need to keep in the habit of putting money aside until you do.
Money Tip #12: Don’t celebrate your business success too early.
Like my last point, people think they’re over the hump, then hit a really long dry spell. You should keep budgeting and saving until you’re at the point where you:
- Have emergency funds for both your business and personal accounts
- Have sufficient cash flow to adequately pay business expenses and a regular (modest) salary
- Have an established client pipeline and a systematized process that ensures a steady flow of commissions over the next 6-9 months
Once you’ve gotten to this point, congratulations! Doesn’t mean that you should run right out and buy that celebration Mercedes just yet. It means that you’ve graduated to the point where generating income is not your primary concern. At this point, you should set your eye on managing your business and putting your cash flow where it can best work for you. One of the best ways to do that is to look into establishing your own retirement plan, which you can learn more about here.
As always, please feel free to follow this blog or contact me at: firstname.lastname@example.org, if you like this blog, have concerns or questions, or have a topic that you would like for me to address. Until next time, take charge of your life!