Here is a quick fix to net income issues. It’s not a long term solution, but maybe it will get you through until you get the help you need from a CPA, Coach, Financial Planner or the CRS200 Business Planning & Marketing class. Here is the disclaimer; I am no CPA, Tax Accountant or Financial Planner, I am just a well battered REALTOR® who learned his lesson the hard way.
Early on in my real estate business I did pretty well. Especially considering my young age of 22 and the small Wisconsin town I was in. It wasn’t long before I averaged a transaction a week, an average of 10 days on the market, and a 99% list to sales price ratio. Respectable stats, but I was working 60 hours a week and netting about $13,000 a year. I could have done better in fast food.
I was sitting in yet another marketing class searching for that magic bullet when something hit me. It must have been obvious to the instructor because he stopped at the lunch break to ask me what was weighing so heavily on me. Frankly, I almost cried. I spent the next 30 minutes of this instructors lunch hour pouring out my heart, I described how I was doing this and that . . . all the latest and so called proven marketing techniques. I realized that I didn’t need another marketing technique and he gathered that. What I really needed was to get immediate control of my finances. And I learned all of this from a CRS Senior Instructor almost 20 years ago. He is now a trusted and lifelong friend! Here is what Chuck taught me and I gladly share it with you:
If you haven’t already, open a dedicated business checking account. Keeping your personal and business finances separate is the first step to gaining control. It’s a very good and recognized bookkeeping practice. When you get commissions from your closing, or from your broker, this is where the funds go first.
Write yourself a check for 40% of the GROSS COMMISSION INCOME from your business account. Give or take a percentage or two, 40% is the minimum NET INCOME that you demand in exchange for your investment of time and proactive organization of your business.
As a rule of thumb, whether you’re a 100% split, 50/50 split, or somewhere in between, about 60% of every gross commission dollar will likely go towards operating expenses and costs of sales, leaving approximately 40% for net income and your personal budget. A 50/50 split example might look like this. 50% of gross commission income is held back by the broker as cost of sales, and about 10% of gross commission income is spent by the agent towards operating expenses. A 100% example might look like this. 100% of GCI is received by the agent and about 6% is spent toward franchise fees while 54% is spent towards operating expenses. There can be as many different examples as there are agents, but let’s get the big picture then talk details with the CPA, Broker and Financial Planner.
Hold those expenses accountable BY CHOICE OR BY FORCE! It’s hard to spend money on unnecessary marketing and business expenses when you pay yourself the 40% first. When there is no longer excess money to pay business expenses, you tend to quickly identify the items that do not produce a sufficient return required to make your investment worthwhile.
Open a savings or money market account for income tax deposits. Taxes are a necessary expense and should be expected when you are making money.
Transfer 20% of your net income into your tax savings account. Take the 40% that you put into your personal checking account and multiply it by .2. Until you get back with your CPA, 20% of NI will help you get close to the money that needs to be set aside for tax deposits. Get used to putting the money aside first. Paying more taxes is usually a sign that you’re making more money. Lack of discipline here just causes unwanted stress.
Transfer 20% of your NI to Debt, Reserves or Retirement, in that order. If you have debt at a higher interest rate then your retirement is earning, it’s likely best to retire the debt before funding retirement.
If you ever experienced life “debt free” you know how it improves your quality of life. Having six months worth of NI in reserve compounds that quality of life. Give it a try. If you are not fully satisfied, you can take your money back!
There are few exceptions to the fact that you must fund your retirement. If you don’t begin funding your retirement now, then when will you? The sooner you start the more it can compound in your behalf. Benjamin Franklin once said that “Compound Interest is the 8th Wonder of the world.” Selling real estate offers us some of the best opportunities to leverage retirement funds into real estate investments. Start saving those down payments, keep your eyes peeled for those “on sale” opportunities and attend CRS204 Investing in Residential Real Estate for both you and your clients.
Live within your budget! Create a budget and stick to it. If you spend 110% of your net income now, you will likely spend 110% when you make twice as much. That’s just how it works. Get it under control no matter what.
For more information on creating a budget, visit debt.org! Keep track of your spending by keeping record of your transcations day-to-day. Lendedu.com provides some helpful tips on balancing your checkbook.
Tithe 10%. I couldn’t possibly know where you’re at with your maker but I know mine. Give back 10% to help make this world a better place and I promise that it will return to you in more ways than one . . . it’s surely worked for me!
Mark Porter is a REALTOR®, Certified Residential Specialist and Graduate of the REALTORS® Institute. Mark has been failing and succeeding at selling, investing and teaching real estate for just shy of 20 years. He is a Senior Instructor for CRS & GRI and a frequent speaker at state, local, and national conventions. You can get more information about Mark or book him for your next event on this website!