By: Alex Craig
Lead generation might be the lifeblood of your business, but money is the oxygen. Without it—and a keen understanding of how your money is working—your business can’t breathe. Cash flow allows us to pay off debt, earn a living and build a scalable real estate business. When managed properly, that same cash makes vacations a reality, gives us the flexibility to choose when and how we work and so much more.
Therefore, it’s imperative to know precisely what your money is doing and where it’s always going. It’s easy to talk about gross commission income and production volume, but we need to go further than that if we want to survive in this industry.
We’ll take a look at finances, accounting and taxes, though we won’t get into the weeds. Too many real estate agents fear money numbers because of the technical details. Instead, my goal is to help you simplify these numbers.
#1: Cash Inflow
The first and most important number is cash inflow, especially for new real estate agents. As agents, it seems like a lot of money is leaving our bank accounts — from marketing spend to desk fees, brokerage fees and so on. But before we get into what cash inflow looks like, it’s important that when looking at your numbers, you consider the fact that you are a business, not merely an agent. Yes, you work under a brokerage, but as an agent, you run your own business. Understanding these financial figures is necessary to understand the health of your real estate business.
Cash inflow is a simple number for how much money comes into our business. Some familiar streams of revenue include:
- Commission Checks
- Debt (using credit cards to pay for business expenses)
- Personal funds (savings accounts, etc.)
In a healthy real estate business, income comes from commission checks. Agents often get in trouble when the cash inflow comes from debt or personal funds. This usually looks like real estate agents paying for expenses with a credit card or transferring money from personal funds into the real estate business bank account.
In essence, business losses—anything paid for to run the business, like marketing materials or desk space—are being funded with debt or money from personal savings. As an agent, you want to understand where your cash is coming from because it is directly related to the health of your real estate business. Ideally, you want all of your business income from business sources, which is generally commission checks.
Profit is generated when we earn more money than we spend. It’s that simple. Many real estate professionals think that profit is synonymous with commission, but that’s false because a business has expenses, and expenses are paid through income. For a real estate business to thrive, it has to generate a profit.
It’s much harder to keep and generate profit because we’re constantly being bombarded with the latest and greatest lead-generating strategy that promises to revolutionize our business. In addition, some markets are facing lower home values or pressure to decrease commission percentages. These trends are pushing agent revenues down while inflation is pushing costs up.
Though profit and cash inflows are related, they are not one in the same. When an agent generates a profit, it turns into cash for the business. At that point, there are a few actions agents can take:
- Pay taxes
- Pay off debt
- Save the money
- Take distributions to pay themselves
You can guarantee yourself a profit by following the profit first method, which entrepreneur Mike Michalowicz developed. This method is geared toward small business owners whose income might vary from one month to the next. It designates the business owner’s compensation and then determines expenses from the remainder of the income. This approach is the opposite of what business owners are commonly taught, but it helps to limit expenses so that a business can turn a profit.
Are you generating a profit? Make sure you know where you stand every month. Don’t wait until the end of the year to figure this out.
#3: ROI On Marketing
If you want to generate a profit, you need to ensure your business falls within some very specific margins. Marketing and lead generation are categories where agents can quickly lose themselves and blow past their budget. Getting swept up into a lead generation strategy that promises us more closings is easy, but you want to make sure that your marketing efforts are paying off. Here’s an easy way to look at whether or not the dollars you’re putting into marketing make sense:
Overall, marketing should produce a 10x rate of return or consist of about 10 percent of our gross commission income.
Look at all of your marketing spend and revenue. Is it within 10 percent? If it’s over 10 percent, then you need to find better lead generation strategies or improve the current results you’re getting without increasing spend.
Whether you’re earning a profit or not, taxes are non-negotiable.
If you’re earning a profit, you must set aside some of that profit to pay the IRS. Nothing is worse than getting surprised by a tax bill that coincides with the slowest time of the year for real estate agents.
And if you’re spending more in your real estate business than you’re earning, it’s possible for you to be overpaying your taxes. This is why having a razor-sharp understanding of your business and whether or not you’re making a profit is essential.
Do you know how much you currently owe the IRS? Have you made estimated quarterly payments? If not, now is the time to look into this. See if your brokerage offers support in this area; if not, consulting with a financial professional might be useful.
Unlike traditional pathways, real estate agents are responsible for their own retirement. As an agent, you have some unique advantages that you can leverage, so long as you know what they are. Saving for retirement and/or investing ensures that your future is secure. This is one way that you pay yourself first. After all, you are your business’s most significant asset. It’s important to make sure that no matter where you are on your real estate path, you have a place to take care of your future.
Before you get started on retirement, you need to know what your retirement number is. How much cash flow or net worth do you need in order to build a comfortable and safe retirement? How long do you have to reach that goal? Knowing these figures and timeframes will help you understand how much you need to contribute to a retirement plan or investment portfolio to make sure you meet your goals.
Now, let’s talk about retirement accounts. It is possible for you to set up your own, and it’s well worth the consideration. A Simplified Employee Pension (SEP) IRA is a retirement account set up for self-employed people like real estate agents. You can set up this on your own and start contributing to. The benefit of this kind of account is the contribution amount. For traditional and Roth IRAs, the contribution limit is $6000 annually. With a SEP IRA, however, the contribution limit is $66,000 annually or up to 25% of your income, which makes it an attractive option for retirement planning. As with all wealth management and financial planning, you’ll want to consult with a financial planner or tax advisor to ensure you’re eligible and determine the best way to set up and contribute to the account.
No one knows it better than you: real estate is a great tool to reach your retirement goals. As an agent, you have the ability, leverage and knowledge to use real estate to your advantage. You know how to acquire rental properties or commercial real estate, and there’s no one better than you to determine the return on investment. Using real estate as a retirement vehicle is another great way to secure your future.
Most real estate agents want to avoid conversations about money, but it is the oxygen that keeps your business alive. Every successful business has a tracker on the dollars. They know when and how the dollars come in and where all those dollars are going. You cannot run an efficient business without this knowledge. What are the biggest money or finance challenges in your business? What do you think about money?
Let me know in the comments below.
Alex Craig, a real estate professional with Century 21 Looking Glass in Lansing, Mich., helps homeowners sell their homes for maximum cash in their pocket by taking a data-driven approach and executing a systematic marketing plan that uses current digital marketing strategies. Craig also runs the Dolinski Group (www.dolinskigroup.com), a company focused on helping real estate agents get more from their careers and earn more without the heartache.