Financial Problems Kill Real Estate Careers
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 and agents 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 at the beginning, 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?
Create a Budget and a Plan
This may sound simple enough, but it is surprising how many agents do not take this as seriously as they should. I’ll often hear them say they have prepared or understand 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.
Consider a Separate Entity
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.
Build Business Credit
Open Separate Bank Accounts
Regardless of whether you decide to set up your business as an LLC or other entity, you should absolutely establish three banking accounts right away to help you stay organized and on budget.
- Spending Account (Checking)
2. Rainy Day Funds Account (High Interest Savings)
3. Taxable Funds Account (High Interest Savings)
Saving for Taxes
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.
Below are the 2020 Federal tax brackets and rates just to give you an idea of how much you will need to save.
|2020 Rate||Individuals||Married/Joint||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 deductable expenses.
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.
Invest in Yourself
More Importantly Please Remember
After all of this talk of financial planning, I’m sure you could use a little bit of encouragement:
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