36: Real Estate Finances
You’re gonna get to six figures your first year. If you’re working, and you’re really applying the things you’re getting trained on, we want you making money, right?
About This Episode
Few things are more important to a business's success than closely managed finances, and yet most real estate agents would far rather spend their time drumming up new leads. Beyond tracking write-offs and paying taxes, this episode covers helpful financial apps, why you should pay yourself out of a business account, and how to achieve your financial goals.
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JON: Many people get into real estate because they’re good with people. Making the sale comes naturally to them, and chatting with a perfect stranger is no problem. Being an agent means being your own boss, and with that comes the limitless growth opportunities and income potential.
JON: But then there’s the other side of business, the less glamorous side. The side with numbers. You’re your own boss, but that also means that, at least starting out, you probably have no one to help with the dreaded f word: finances. The sooner you gain a grasp on your business finances, the easier taxes become and the quicker you can get back to doing what you do best: selling homes.
JON: Hello and welcome to Shop Talk: The Real Estate Show. I’m Jon Forisha and on this episode we pick apart key aspects of managing finances for your real estate business.
JON: Tracking finances isn’t most people’s favorite subject, but there are few things in business more vital than keeping accurate accounts of the money coming in and going out. Flubbing up the bookkeeping can quickly sink your business, regardless of how much your clients adore you.
JON: Jim Remley is ranked in the top 1% of REALTORS® nationwide and created the largest independent real estate company in Oregon. I asked him what’s the most important aspect of real estate finance. Here was his answer:
JIM: The most important aspects for personal finances, which I coach to a lot, is treating your business as a business. So as soon as possible, I always coach everybody. You know, you need to form a corporation and you need to have your brokerage paying the corporation, not you personally. When you form the corporation, you're going to go to your bank and you're going to have a bank account for your corporation and then the commission checks are going to get deposited there and then you're going to write yourself a check monthly out of that. Now, for new agents, you’re saying, Jim, I'm not making any money. What are you talking about? I get it. I mean this is crazy town. That's not the goal though. You got to remember that we're planning for the big, you're going to get to six figures first year out. If you're working and you're really applying the things that you're getting trained, we want you making money, right? Yes.
JIM: First few months, you may not be able to do this, but three or four months down the road, the goal is to start writing yourself a check for a wage. So maybe it's 3,000 a month, maybe it's 4,000 a month, maybe it's 5,000 a month. And here the goal is, I don't ever want my agents thinking they got a $10,000 check, so it's Merry Christmas. I get to go buy $10,000 worth of stuff today. No, you do not. That goes in your business checking account. You're writing yourself, your wage check three or four or 5,000 whatever your number, but the rest of that money starts to stack up in your account. Your goal is to get to six months of buffer so that you relieve yourself all the financial pressure that is on most agents and you just let that go. And now it's really about just focusing on my business. I have a set wage, end of the year comes, right now, December 31st I'm also going to have a bookkeeper. I'm going to have a tax person and I'm going to meet with the tax person before December 31st I'm gonna say, let's talk about tax strategy. I need to be writing out any expenses that you know, buying things, equipment, whatever, investing in things like coaching and whatnot, I'm starting to get some write offs, right?
JIM: But also at the end of the year, I might say, Hey, I've got some extra money stacked up. I can then take that as a dividend. The dividend is taxed differently than my wage. It's a lot less taxes. I'm going to pay on that dividend. And at the end of the year, I can also reassess. So at the end of the year, it might be like, you know what? I did pretty well. I think I'm gonna be okay. I think everything's going to go great for X year. I'm going to give myself a little wage bump instead of paying myself 5,000 guess what? I'm going to start paying myself 6,000 because I can afford it because you are your one and only employee. Right? So those are some tips that I give to all my agents. Um, I would also encourage you to have a business visa card for this. Everything goes on my visa card. You're accruing points, but more importantly, you're able to track everything easily.
JON: Now that winter’s underway and the gong has been struck on the new year, tax season isn’t far off. If you’ve never worked as an independent contractor before, you may not realize how complicated your taxes can get. One enormously important piece of advice is to make sure you pay estimated taxes to the IRS. Essentially, this is a sum paid four times a year to cover income taxes and self-employment taxes like Social Security and Medicare. Those are taxes that would ordinarily be taken out by an employer, but since you’re in business for yourself, you have to do the deducting.
JON: If you make the same mistake I did during my last year of freelancing, when I didn’t pay those estimated taxes, then you’ll get hit with a huge tax bill come April 15. As any new business owner can tell you, there’s nothing worse than having an unexpectedly massive IRS bill and no funds to pay it with.
JON: If you’re already working in real estate, you’re probably aware that there are certain expenses that are unavoidable for an agent - things like marketing, travel, and office supplies. We’ve outlined a lot of the key expenses in a blog post that’s linked to in our show notes.
JON: Controlling these kinds of expenses can drastically change how you run your businesses. For instance, some agents want a fancy car that announces themself and their business to the world while others are perfectly happy hanging on to that Camry they paid off 10 years ago. As long as the car is safe and clean, most clients won’t give your mode of transportation much thought, and cutting out a car payment is always a wonderful feeling.
JON: Foregoing an office can save a lot of overhead costs too, and while you might be thrilled about not having to pay salaries for anyone but yourself, that’s a bittersweet perk. If all goes well with your business, you’ll find that eventually you’ll have to hire extra help just to get some breathing room - and it just might be that controlling business finances is the perfect opportunity for your first hire.
JON: But until you get to that enviable point in the trajectory of your business’s growth, it’s just you and your finances. This is where technology can help ease the pain, and if you fear you’re already spending too much on technology, it might be worth it to do an audit of all of your tools. If something costs more than the time it saves, kick it to the curb and try something else.
JON: Stride is a free app that tracks mileage and travel expenses, and is great for keeping track of tax write-offs. The Quickbooks app is similar, and for only $8 a month it can keep track of everything from closing gifts to billboard costs. IXACT Contact is a CRM tool built for real estate agents, and features a long list of features that can simplify your life while tracking transactions and commissions. IXACT Contact is a paid sponsor of ours, and there’s a link in the show notes for a free 60-day trial of their platform.
JON: After the break, we dig into just how much money you should be setting aside in preparation for that inevitable rainy day.
JON: Is your CE deadline coming up? You’d be surprised how many working agents neglect their continuing education just as much as they neglect their finances, but with The CE Shop it doesn’t have to be a big production. Learn online at your own pace, and in most states your course completions are automatically reported to your state. To make it even easier, you can save 25% right now with promo code SHOPTALK. Start learning and stop fretting.
JON: Beyond the scope of working residential sales, many agents are curious about investing in real estate. Obviously this can complicate finances, particularly if you don’t heed the advice to keep your business expenses separate. Zach Beach is an author and real estate trainer with Smart Real Estate Coach, where he and his father-in-law Chris Prefontaine teach how to buy and sell on terms. When I asked Zach how he manages his finances while investing in properties, he had this to say:
ZACH: Yeah, so personally, I use a bucket system. And then as far as a business standpoint, so I dunno if anybody, if you follow T. Harv Eker, but he has this bucket system where it's like every dollar that comes in the door, you know where it's going. Is it going to like a financial freedom account? Is it going to your weekly or monthly expenses? Is it going towards a particular item you're looking to save? Really important that you have an established bucket system and a percentage, which can vary, but based upon your lifestyle, you should have the bucket that that sets aside there that way. Not only are you paying for your expenses, but you're also establishing wealth in the future as well. So wealth that could be reinvested into your business or that could be more or less for savings.
ZACH: And then from a business standpoint, we follow the profits for our system that way. Um, same type of scenario buckets come in. Mike McCale, if you haven't read the book Province First, it’s fantastic. A way to look at it, which is you take profits off the top. That way when you're budgeting and you're putting together your allocations for the year, you're already building in the profits. That way your business can be profitable from the beginning and that way at the end of the month or at the end of the year, you're not scrounging away trying to figure out how much money you can take out. You already know how much profit you have set aside. So, they'd be the two ways that from either a personal or business standpoint, you know, it doesn't matter what type of business you're in, that I would recommend.
JON: Real estate is a feast or famine business, and it’s important to give yourself enough runway to weather the storms when they hit. One month you’ll be riding high closing deals left and right, but the next month could bring a sudden halt if your leads go on vacation or the market dips. Especially if you’re used to a full-time paycheck settling into your bank account every two weeks, real estate’s highs and lows can be jarring.
JON: Common finance wisdom is to save 3-6 months of expenses in an emergency fund, but working in real estate isn’t the same as most jobs. You should at least double this advice and save 6-12 months of expenses in a fund that you don’t touch. That means it’s not there for a sudden gambling stint in Vegas or finally getting yourself that shiny new boat. If things go south, you’ll be glad you saved up.
JON: Once you’ve been in the business for a while, you’ll recognize the ebbs and flows for what they are. In fact, if you’re tracking expenses and income like you should be, it’ll become gradually easier to plan for the new year since you’ll have so much data to look back on. If August was slow in 2019, it will likely be slow again in 2020. If not, what a nice surprise that fatter commission will be!
JON: In most areas, the market heats up in the spring and stays hot until the kids go back to school. Once the holidays hit, things can really slow to a crawl. It’s important to be able to step back and look at these trends so that just because you don’t have any pending deals around Christmas, you know the sky isn’t falling and that things will pick up soon. Many agents accept the lulls and plan their vacations accordingly.
JON: The last episode of our show featured Stephen Wible, the Director of Business Development at Credit Suite. He spoke a lot about building business credit, which you can then use for practically every business expense. I recommend listening to that episode, as it had a lot of great advice for new business owners. Here’s some finance advice for both you and your clients from Stephen:
STEPHEN: Keep your utilization and inquiries as low as possible. To me, that's the key for many people. Wherever I look, we're inundated with you're approved, you're pre-approved. Yes. If you monitor your personal credit, I know I got them all. I've got every one of 'em from credit karma to identity IQ. I've got them all, and every day I get an email from somebody lending tree, you're preapproved for a credit card. Well, ignore it. Learn to ignore it because if, especially if you're gonna be buying a house, as a matter of fact, you know what? If you don't mind, I know it's quick. I lost everything. We talked about that during the podcast. Yeah. I just bought my first personal house in 10 years. Now, I will tell you two years ago, I made a conscious decision to buy a house. This year. I said two years from the, from this day, October 18th, I'm going to buy a house.
STEPHEN: And I had to look at my personal credit, make a decision on how to increase it. I went from high fives to a 750 in those two years based on a plan. Wow. No increase. Uh, if I got credit, I paid it off early. Uh, all those things. And two years to the day of me telling my wife I was going to buy a house. We closed on our house. Wow. Two years to the day. Um, so to me it's just keep that utilization low. Stop the equity, stop applying for credit. Just don't, if you can't afford it, don't buy it.
JON: In real estate, you’re in a unique situation to be intimately familiar with your clients’ financial statements, and through the course of your career you’ll likely encounter a lot of expertly-managed finances as well as some real trainwrecks. Regardless of what system works for you and your personal and business finances, staying consistent is paramount. As Wesley Snipes, Ja Rule, and Lauryn Hill can attest to, taxes are not something that just go away if you ignore them. Staying on top of the money can set your mind at ease for thinking bigger picture, tackling ever bigger deals and conquering your market and beyond.
JON: That’s it for this episode of Shop Talk, thanks for listening! If you enjoyed the talk, subscribe to us or leave a review on your podcast player of choice. Join us next time for a discussion with Zach Beach from Smart Real Estate Coach. Shop Talk is a production of The CE Shop.