The National Association of REALTORS produces fantastic articles on every topic imaginable. Below is one article reprinted from REALTOR® Magazine Online 1/1/2005 with permission of the NATIONAL ASSOCIATION OF REALTORS®. Copyright 2005 . All rights reserved.
How you deal with the unpredictability of getting paid in real estate—and how you spend that money—can determine your success.
BY HALEY M. HWANG
Remember in your old job where you just had to show up and you would get a paycheck every other week or every month? All your taxes were taken out for you and what you had left was what you could spend?
Ahh, those were the days. But now, you’re in real estate sales—and getting paid is an imprecise concept with no guarantees. There are no regular paychecks, tax withholdings, or automatic retirement savings. Yet, no one tells you when you get into the business how to effectively budget and manage your money so that you optimize your chances for success. And ultimately, how you make these budgeting decisions will impact your success in real estate, according to some real estate trainers who teach practitioners about budgeting.
Following are some of their secrets to effectively budgeting and managing your commission income—so that it catapults you to financial stability and success.
- Start immediately on a debt-reduction plan. Strive to have your debt be as close to zero as possible, says Terry Watson, ABR®, CRS®, president of Watson World Inc., a real estate and leadership training company in Chicago. Watson says that if you are overly burdened with debt, you will not make smart business decisions in real estate because you’ll feel a tremendous pressure to make money.
- Build up a safety cushion. You should be able to cover your monthly expenses for three to six months without making a paycheck, says Robert Morris, ABR®, CRS®, a broker with Prudential Rowland Real Estate Inc. in Murfreesboro, Tenn. Morris—who teaches budgeting, business plan development, and cost plan analysis as part of the Council of Residential Specialists’ Business Planning and Marketing for the Residential Specialist course—believes that you should have an additional savings of 10 percent to 15 percent for personal marketing expenses, such as advertising, business cards, and website.
- Set aside a business reserve. In addition to the money for personal expenses, you also should set aside some money in reserves (it can be as little as $100 per month) for unexpected business expenses, says Chuck Bode, CRS®, GRI, broker-associate with N.P. Dodge Real Estate Co. in Omaha, Neb. “If something breaks down, you go into the reserves and you don’t borrow money on a credit card at 15 percent interest,” Bode says.
- Have a business line of credit. “Any good business should have a business line of credit,” Watson says. This will give you the financial buffer you need so that you don’t feel the pressure to push every deal through, regardless of whether it’s in the best interest of your clients.
- Spend 10 percent on personal marketing. Even when money is tight and you can barely pay your bills, you need to spend money on personal marketing so that you maintain an income pipeline. “You need to spend money to make money in real estate,” says Mark Nash, author of Original New Agent’s Guide to Starting & Succeeding in Real Estate and Reaching Out: The Financial Power of Niche Marketing. A broker associate with Coldwell Banker Residential, Central Street Office, in Evanston, Ill, Nash teaches a course through Coldwell Banker called “Next Level” for second-year salespeople. In addition to the 10 percent on personal marketing, Nash recommends spending 2 percent on technology, 1 percent to 2 percent on accountants and business professionals, and 1 percent on continuing education (including attending real estate conferences and getting additional training).
- Determine the biggest payback. Analyze where you’re spending money and how much you get back in terms of generated income over the course of a year, says Bode, who also teaches budgeting in the CRS course. “Some people find that certain things they do have a $15 to $20 per $1 spent payback, says Bode, “That’s a real revelation. Most practitioners don’t know what works and what doesn’t work, so they do it all.”
- Budget for education. “Most people go into real estate to make money,” Bode says. “They say that they can’t afford money to take education (attending state and national conventions or taking designation courses). But they can’t afford not to.”
Money Management Tips
- Track your expenses. Keep a detailed log of everything you spend for a month or so to see where your money goes, Watson says. You may not realize that you’re spending $400 on lattes.
- Anticipate your income and work backwards. If you want to make $50,000 this year based on what you think you need to live on, then figure out what you need to do to achieve that income, Morris says.
- Find creative ways to save money. Watson says that he has an unlimited plan on his cell phone; has always bought cars that are tan, white, or silver because the forgiving colors save him almost $1,000 in car washes each year; opted for higher deductibles on his car insurance; and buys wrinkle-free clothes that don’t require frequent cleaning.
- Spend more to last longer. Especially when it comes to buying technology, the cheapest thing may not be the best in the long run, Watson says. If you spend a little more and it lasts longer, it may save you money over the long-term.
- Take advantage of discounts. The REALTOR® VIP Program provides discounts to members of the NATIONAL ASSOCIATION OF REALTORS® for everything from cars and insurance to sales and marketing and technology tools.
U.S. Small Business Administration
Offers courses and workshops about business planning, financing, and operating your own business.
Reprinted from REALTOR® Magazine Online
1/1/2005 with permission of the NATIONAL ASSOCIATION OF REALTORS®. Copyright 2005. All rights reserved.