Create a Clear and Organized Financial Strategy
One of the hardest things I see real estate agents struggle with is their finances. Financial woes are typically a big issue at the beginning of an agent’s career, but once a bad habit or big debt is acquired, it can be nearly impossible to get rid of. That’s why it’s important to set yourself up for success initially and understand that being a real estate agent is more than likely not going to lead to a huge financial windfall right away.
It takes some agents years to develop a consistent income, and even veteran agents go through rough patches. This can lead to stress and depression that can have a big impact on an agent’s career, which just manages to deepen the downward spiral. So the real question is, what can you do to avoid the pitfalls and how do you develop the financial habits necessary?
The answer is actually simpler than you may think, build a personal and business budget! Let’s get to work.
Create a Budget and a Plan
This may sound simple enough, but it is surprising how many new agents do not take budgeting their personal finances as seriously as they should. Building a budget as a new real estate agent maybe one of the most important things you do. I’ll often hear them say they have prepared or understood it may take a while for their first commission. Unfortunately, many times I don’t think they really grasp how serious they need to take this aspect of being a real estate agent.
Some of the most successful agents I have come across employ a 1/3, 1/3, 1/3 strategy when they receive a commission check. This is a simplified version of what could be a very complex budget, but sometimes the simpler the better. With this plan they put one-third of a commission check in their general checking to use for regular expenses, one-third in a savings account, and one-third in another account that will eventually pay their yeard end tax bill. This is just one example of many ways you can handle your finances.
Consider a Separate Legal Entity for Your Real Estate Business
Consult with your accountant or do your own independent research, but it may be a good idea to set up your real estate business in a separate entity such as an LLC. We will get to have your own E&O insurance later, but for now, let’s talk about the benefits of having a separate legal entity to run your business finances through.
Build Business Credit
While it’s obviously good to keep tabs on your personal credit. If you follow my advice on creating a separate LLC or S Corporation for your real estate business, you should then start building your business credit. You will need to begin by obtaining your unique EIN from the IRS. This will allow you to file your entity with Dun & Bradstreet and obtain your D&B number. After you have this, you can begin by starting small with some lines of credit through specific service providers and then moving on to business credit cards.
Open Separate Bank Accounts
Regardless of whether you decide to set up your business as an LLC or another entity, you should absolutely establish three banking accounts right away to help you stay organized and on budget. Especially if you like the idea of the 1/3, 1/3, 1/3 plan that I mentioned above.
- Spending Account (Checking)
- Taxable Funds Account (High Interest Savings)
- Investments and Fun Money (High Interest or Robinhood Cash Account)
Understand Your Specific Tax Situation
I cannot tell you how many real estate agents I have known that forgot to save enough of their commission payments to pay all of their taxes at the end of the year. It can seem wonderful to get a huge $10,000 commission check. However, what many agents often do not consider is that Uncle Sam is going to want his share at the end of the year. Believe me, you do not want to be in debt to the IRS.
As I mentioned above, use one of your bank accounts to set aside your taxes for the end of the year. Always overfund this account, it is never a bad thing to have too much money saved to pay taxes. Any extra funds can be used to invest or to get a head start on the next fiscal year.
Have a Basic Understanding of Tax Rates
Below are the 2020 Federal tax brackets and rates just to give you an idea of how much you will need to save.
Heads of Housolds
Remember that you will also need to save for state and local, which can vary quite a bit based on where you live. States like Florida and Texas have no state income tax, whereas New York and California are fairly high. Be sure to research the tax rates in your state. There is also the standard deduction and many other factors to be aware of. I would advise using software like Quicken or _________________ to keep track of your taxes in real time or consult with a professional CPA.
Track Your Expenses and Use Deductions
Speaking of taxes, don’t forget to begin tracking all of your business expenses right away. There are several programs out there that will help you track mileage, office supplies, software, business lunches, and a variety of other deductible expenses. It is important to keep receipts and deduct items that actually have to do with your business. As of now, you cannot deduct things like clothing or country clubs, but you can deduct business meals or trips.
Remember, if you are in real estate as an agent you are more than likely operating as an independent contractor. That means all of your business-related expenses can be deducted directly from what you make as an agent. Always consult with a CPA to ensure you are following the tax laws appropriately while also keeping every penny you are entitled to.
Make the Proper Investments
Invest in Yourself
Don’t forget to invest in your own professional development. I don’t just mean fancy cars and clothes. Many agents believe these are important steps to becoming a successful agent, and that really couldn’t be less true. Invest in yourself with proper marketing, coaching, and education to continue your professional development. These items are also deductible for your business and are incredibly important if you want to have a successful career.
Invest in a Real Future
Do not forget to invest in financial assets that will also begin to generate wealth for you in the future. Being a real estate agent is hard in the best of times, but when deals are scarce it is nice to have a few investments that can help cover your bills. There will also come a point where you want to work less. For agents that are just beginning their real estate career, you may want to consider investing in something like Fundrise. This allows you to invest your money in real estate with a lot lower starting capital than buying actual property, while also learning about different types of real estate investments.
Now for the Final Piece of Advice and Encouragement
After all of this talk of financial planning, I’m sure you could use a little bit of encouragement. Remember, you are much closer to being a millionaire than the likes of Jeff Bezos, Warren Buffet, and Bill Gates. Now that is saying something!