Dec 20 , 2016
We’re often asked, “How much money can I make my first year?” There is no simple answer to that question. There are many factors that come into play when determining your real estate income. The biggest factor is how much work you are willing to put in, but you will also need to account real estate expenses, your local market, how well you manage your time, as well as many other factors that affect your bottom line.
Many long-time agents will agree that the first year can be very challenging. While it’s absolutely possible to earn big money right away, that is not always the case. Understanding your financial picture and being ready for the road ahead will help you achieve success in your first year as an agent. The following guidelines will help you develop a sound financial plan for your first year and beyond.
Understand Your Financial Goal
First, you will need to decide how much income you will need to support yourself and cover any necessary real estate expenses. This is your absolute bottom line that you must meet. To be safe you should add a 20 to 30% buffer to this number to make sure you account for unexpected real estate expenses.
Now you can factor in how much additional income you would like to earn over and above your real estate expenses. Be realistic with this number. It’s not really the question “Is this level of income achievable?” The real question is “Am I really going to put in the necessary work to achieve this level of income?” The higher you make your income goal the more focused and dedicated you will need to be.
To get a better idea of what work translates to what income, try out our Business Plan Calculator. This tool is great for estimating how many people you will need to work with at what average home value to meet your income goal.
Do some research about your local market, identify the type of housing and transactions you want to specialize in. The more you understand your goal and what is required to achieve it, the better chance you will have at reaching your goal.
If you’re not ready to fully commit to real estate you’re not alone, many agents start part-time in real estate while keeping their day job. Your clients will all have jobs as well so it will be easy to juggle if you have normal working hours at your non-real estate job. Starting part-time gives you the ability to build up your real estate business until you can make the transition easily.
Whatever your goals and aspirations may be, the key is to stay persistent and focused. Don’t get discouraged. Keep putting in the work. It’s the people who never give up who eventually achieve their goals.
Understand Your Employment Status
Your employment status can change your real estate expenses. According to the IRS, the majority of real estate agents are considered independent contractors, or 1099 contractors, rather than employees of their broker. You can think of it as operating a business within a business. This gives great flexibility for when and how much you want to work; but keep in mind, these two factors will contribute directly to how much money you will be able to earn.
Because your earnings are based on sales and not hours worked, you are likely considered “self-employed.” This type of classification means you have an extra real estate expense in the form of income tax obligations. In addition to taxes, there are other real estate expenses based on your employment status such as:
- The full share of federal Social Security and Medicare taxes
- The same federal income, state, and local taxes as other workers
- Health, dental, and retirement benefits
- Office expenses, marketing, advertising, and postage costs
- Fees for licensing dues and continuing education
Financial experts recommend that you should set aside at least 35% of your income to cover those costs. Tax credits and certain deductions will offset some of the real estate expenses but the 35% amount should safely keep you from having an unexpected tax debt at the end of the year. When determining your financial goals be sure to factor in the 35% cushion.
In addition, all self-employed professionals who will owe more than $1000 in federal taxes must pay them in advance in quarterly installments. If you wait until your annual tax statement is due you will be charged late penalties by the IRS.
Understand Your Real Estate Expenses
On the positive side of running your own business, although you incur expenses that traditional employees do not, many of them will count as tax credits on your tax return. Deductible real estate expenses include but are not limited to:
- Licensing and education fees
- Professional membership fees
- Advertising costs
- Rent, mortgage, and utilities (if you have a “home office” as defined by the IRS)
- Phone bills
- Office equipment
- Mileage and other auto expenses
- Meals and entertainment
- Health insurance premiums
- Additional one-time business start-up costs
For a real estate expense to be considered deductible, it must fit the official IRS expense definition. The expense must be directly associated with your real estate duties, be paid by you, not your broker or another party, and be documented with receipts, written files, or a computer log.
It’s imperative that you are extremely organized to ensure you can verify all of your claimed real estate expenses should the IRS have any questions. Always consult with a certified tax professional to receive more detailed and personal guidance. You can also visit the IRS website for details specific to real estate professionals and self-employed professionals.
Create a Plan to Meet Your Goals
Once you have set your financial goals- including your tax obligations and deductions- using the PALS approach, draft a plan of how you will actually achieve that goal.
- Prospects: the number of prospects you need to contact to get an appointment
- Appointments: the number of appointments it takes to get a signed listing with either a buyer or seller
- Listings: listing agreements resulting in completed transactions which translate to commission dollars
- Sales: the number of deals you actually close
Talk to your broker to get these figures based on your local market area. Plug these figures into a financial worksheet and you will be able to set realistic and manageable tasks to ensure you meet your financial goals. Please see our article on How to Write a Real Estate Business Plan for additional tips on getting started.
If you’re feeling overwhelmed by this information, and that is perfectly normal for someone new to real estate. Your first step is to set your goals. Once you’ve done that, work on getting a better understanding of your real estate goals and what is required to achieve them. Create a plan to reach those goals and finally execute your plan. Follow these guidelines to set yourself up for success in your first year as a real estate agent.