Managing Your Business for Financial Security by Establishing Goals, Plans for Saving, Spending

The first commission check represents a thrill, a challenge and a time for celebration for a Realtor®.

While it’s tempting to take that money and spend it on a gift to yourself for your hard work or to pay down the credit card bill you’ve racked up while waiting for your first transaction to close, you’re better off celebrating with a cappuccino rather than a bottle of Veuve Clicquot. Even better would be to know exactly how you will split that commission check so you can pay your bills, protect your future and continue to grow your business.
    
“Realtors® need to establish both a business plan and a financial plan from the beginning of their career,” says Larry Rosenthal, a certified financial planner and president of Rosenthal Wealth Management Group in Manassas. “Just like their clients, they need a road map for their future. When agents sit down with clients to talk about the sale of their home, they discuss the time horizon and the clients’ personal and financial goals. Realtors® need to realize that their own planning needs are no different from their clients.”

START WITH A BUSINESS PLAN
Tracy Comstock, principal broker and owner of Silverline Realty and Investment in Tysons Corner, who also teaches business planning, says less than 10 percent of the agents she teaches have a business plan at all.

“If you’re going to take being a Realtor® seriously, you need a written business plan with a specific goal,” says Comstock. “You need to imagine your vision professionally and personally and decide things like how much time you’ll work each week and your goal for the year. Then you need to write out how you will reach that goal.”

Agents’ business plans necessarily evolve during the course of their career, says Lindsay Reishman, a senior vice president at Compass real estate brokerage in Washington, D.C.

“You need to start each year with realistic revenue goals and then look at what expenses will be required to get to that goal,” he says. “Ultimately, you want to get to an annual budget broken down by month with all your expenses written out as line items in a program like Quickbooks. That version should be saved as your projection for the year and then you work from a second version that you update with your progress monthly as you check your revenue and expenses. Otherwise, you can get halfway through the year and run into trouble.”

Reishman recognizes that during the first few years in business most Realtors® live paycheck to paycheck. “The concept is that you’ll have six months of expenses saved up before you go into business, but I didn’t have that,” says Reishman. “I just focused as hard as I could on building up my business as quickly as possible.”

“While you need to have an emergency fund, as soon as you cover your bills you should keep money in a money market or checking account to use for investments in a photographer, a stager and your marketing campaign.”

In the beginning of any business, cash flow is the most important financial issue, says Chris Krell, a certified financial planner and principal with Cassady & Co. in McLean.
“Realtors® should realize they are their own best investment at first, so they should put as much money as they can into marketing to establish their brand and get their name known,” says Krell. “While you need to have an emergency fund, as soon as you cover your bills you should keep money in a money market or checking account to use for investments in a photographer, a stager and your marketing campaign.”

Cristina Dougherty, a Realtor® with Long & Foster Real Estate in Fairfax, says she didn’t have a business plan for her first decade in real estate, although she doubled her business every year. Now she has a detailed business plan worked out with her business coach.

“I’ve looked at my 2016 performance indicators and established personal and professional goals for 2017,” she says. “I’ve translated those professional goals into math to figure out how many transactions I need to complete to meet my goal and how many conversations I need to have yearly, monthly and daily to get to that goal.”

You have to start at the end and work your way back, she explains. Dougherty says she’s more consistent now about tracking the return on investment for her marketing dollars, such as direct mail and a client appreciation event every quarter.

Dougherty says that it was easier to monitor her business expenses since she was already tracking them for taxes, but now that she also has a financial planner she is ultra-aware of her personal expenses, too, including savings. Comstock says part of every agent’s business plan should be to take a hard look at his or her commission split and to decide what kind of brokerage works best for them.

“Every agent needs to know how much support or coaching they need and to understand their own strengths and weaknesses,” says Comstock. “That analysis should include deciding whether you want to work alone, hire an assistant or be part of a team.”

In addition, your business plan should include a realistic outline of your expenses, including membership fees, marketing, equipment, software, continuing education, a cell phone, health insurance and your car, says Comstock. “You can’t starve your business, but you also can’t starve your personal life or your retirement by not saving money,” says Rosenthal.

WHAT DO YOU DO WITH YOUR COMMISSION CHECK
Eighty percent of agents take their whole commission check and deposit it directly into their personal account, according to Tom Ferry, CEO of Tom Ferry – Your Coach in Irvine, Calif. “This means taxes, expenses, entertainment and funds for the business will all have to be sorted out later on,” says Ferry.


Ferry says only 15 percent of agents split their check evenly, with 33 percent each going to accounts for taxes, personal spending and business costs.
“The best plan, which only 5 percent of agents follow, is to take the next step and work with an investment quarterback who will help you manage the funds in your personal account,” says Ferry.

Dougherty says she sets aside 36 percent of each commission check for taxes and savings that she uses to buy investment properties, 20 percent for marketing, and the rest to fund personal expenses, college funds for her kids and a 401k for her retirement.

“My CPA insisted I have a business account with money transferred automatically to an account to pay my quarterly estimated taxes,” says Dougherty. “He does a projection of my taxes for the following year near the end of the fourth quarter of each year. That helps me save money, and then I often have a little extra cash at the end of the year.”

STEP UP WITH A FINANCIAL PLAN
Dougherty says having both a solid business plan and a financial plan is eye-opening.

“Now I think ‘no wonder I’m sometimes chasing my tail,’ ” says Dougherty. “Both plans are really necessary to see what it takes to run your life at a higher level and to run your business at a higher level.” Many agents begin in the business without a robust savings plan, even though that’s recommended.

“When I decided to go into real estate full-time, I sold my car and dropped my husband off at Metro every day so I could have his,” says Comstock. “I looked at every credit card I had and the new credit card offers that came in to see how much I would have if I needed to max them all out. Luckily, my husband’s income paid the mortgage. Every agent needs a back-up plan when they are getting started.”
Today Comstock works with a CPA and a financial planner to manage her money.

“When agents are new to the business, they need to figure out how much they need each month to pay their personal expenses and then come up with a budget for their business expenses,” says Krell. “If you need $7,000 per month to cover everything, then you should start out with six times that – $42,000 – in the bank. Then focus on marketing to get those commissions coming in as soon as you can.” Building out your financial plan should start with a hard look at your assets, liabilities, goals and your time horizon for those goals, says Rosenthal.

"While paying taxes, keeping up with living expenses and investing in your business are all essential, it’s best to begin saving for your future retirement as early as possible in your career."

“When you’re new to the business, your standard of living needs to reflect that,” says Rosenthal. “You can’t run your business operating on the hope of next month’s sale, so you need to be realistic about where you are now and cut back on all nonessential expenses.” Reishman says that eventually successful agents can restructure their business and pay themselves a salary.

“You can give yourself just enough to pay your bills and meet your needs, then reevaluate quarterly to see if you can give yourself a bonus,” says Reishman.
Krell says a financial plan should also include insurance coverage for you and your family and estate planning, including life and disability insurance, umbrella liability coverage and long-term care insurance.

INVESTING IN YOUR FUTURE
While paying taxes, keeping up with living expenses and investing in your business are all essential, it’s best to begin saving for your future retirement as early as possible in your career.

“In the beginning, it’s enough to get by and to pay your taxes,” says Reishman. “Then you need to reinvest in your business to start a snowball for your future success. At some point – the earlier the better– you need to layer in retirement planning. That’s an expense like any other, and it’s dangerous if you wait too long.”
Krell recommends that sole proprietors set up an individual 401k, also known as a solo or self-employed 401k.

“The maximum you can save is higher in these accounts than in a typical 401k,” he says. “You can set aside money all year in the account, or you can wait until the end of the year to determine how much you can afford to put in based on your revenue.”
Krell says top-earning agents can establish a defined benefit plan for themselves.

“Some real estate agents, because they know the market so well, tie up a lot of their money in real estate,” says Rosenthal. “You need to be diversified in your investments for safety.” Rosenthal also recommends investing in your business at the end of each year to purchase things such as new technology.

“You’ll get a tax deduction for your business and a return on investment when you use the technology to reach new customers or to streamline your processes,” he says.

A career in real estate can be profitable, but planning is essential. The rollercoaster nature of the real estate business and the inevitable fluctuating commissions earned by agents requires Realtors® to be strong stewards of their finances.

Resources for your business and financial planning:                        

•  Agent success kit from NVAR includes goal-setting: https://nvar.com/press-media/agentsuccesskit
•  Business plan guide from NAR: http://www.realtor.org/field-guides/field-guide-to-writing-a-business-plan
•  Real estate brokerage business plan template: http://www.bplans.com/real_estate_brokerage_business_plan/executive_summary_fc.php#.UMJD6nfsKWo
•  Free basic automatic budgeting tool: https://www.mint.com/
•  Automatic investing tool: https://visit.acorns.com/
•  Budgeting tool with automatic and manual inputs: https://www.youneedabudget.com/
•  App to track deductible expenses for taxes: http://deductr.com/
•  App to track all expenses: https://www.expensify.com/

Budgeting tips for real estate agents:                                           

•    Establish a rainy day fund you can rely on as you get your business started with at least six months of your personal and business expenses available.
•    Create a realistic budget, and stick to it.
•    Reduce your personal spending as much as possible, especially early in your career, by eating out less, driving a less expensive car, living with roommates or housemates to reduce housing costs and practicing frugal habits.
•    Grow your business by using your time and free opportunities to market yourself to reduce initial business expenses.
•    Recognize that each commission check should be divided in thirds for taxes, personal expenses and to invest in your business.
•    Set up an automatic system to sweep money into different accounts when you deposit a check.
•    Use a spreadsheet to track your income and expenses monthly.
•    As soon as you can, outsource some of your financial planning.