What are the 10 biggest financial mistakes real estate agents make? How many are you guilty of? And how can you correct them?
As a real estate agent, you don’t have the comfort of regular, reliable paychecks. You only get a commission check when you close a deal. So financial planning is more complicated for you than for the average worker.
It’s easy to make financial mistakes as a real estate agent. So we want to warn you of the potential pitfalls and help you correct any mistakes early for the sake of your business and your sanity!
Here are the 10 biggest financial mistakes real estate agents make (and how to correct them).
The 10 Biggest Financial Mistakes Real Estate Agents Make
Let’s count them down…
Mistake #10: Failing to Pay Quarterly Taxes
Many new agents are surprised to learn that they must make quarterly income tax payments.
If you were an employee of any company before joining the real estate industry, your income taxes were simply taken out of your paycheck every pay period by your employer. And your employer submitted those tax payments to the IRS (and the state if you live in a state with state income tax).
But self-employed workers, like real estate agents, are responsible for making their own income tax payments. And this cannot wait until you file your income tax return in April. You need to submit four quarterly payments by:
- January 15
- April 15
- June 15
- September 15
Mistake #9: Cutting the Marketing Budget When Sales Slow
At first glance, it makes sense to reduce your marketing budget when sales slow (whether because of a seasonal slump or a housing market recession). After all, less money coming in means less money available for marketing.
But, because every agent’s knee-jerk reaction is to reduce all spending when sales slow, you can actually capture a larger market share by maintaining your marketing budget. In fact, it might make sense to spend a bit more than usual. When everyone else is pulling back, a marketing push means your local market will see more of your ads than anyone else’s!
Mistake #8: Missing Tax Deductions
As business owners, real estate agents are entitled to a long list of tax deductions. These deductions reduce the amount of income taxes you owe.
Every spring, you’ll prepare your income tax return for the previous calendar year. You’ll be able to list your tax deductions on these returns.
Basically, any expense associated with your business is tax deductible. For example, if you subscribe to DRIP (the service that provides monthly marketing materials for agents), your subscription fees can be deducted from your taxable income. The costs of your work phone, real estate website, and business templates are all deductible as well.
You can even deduct amounts for home office spaces, wear-and-tear on your vehicle, health insurance, and investment properties.
Having a CPA prepare your tax return is the best way to make sure you don’t miss any deductions. Tax laws change every year, and tax professionals will know if there’s a new deduction opportunity available at any given time.
Mistake #7: Failing to Have an Emergency Fund
How do you cover unexpected expenses? Do you have cash available for when the car breaks down or when you need to replace the water heater?
Having an emergency fund is personal finance 101. But as a real estate agent, it’s even more important because your income isn’t as stable as someone on a salary. You don’t have the luxury of simply waiting until your next check comes in two weeks. You need cash reserves to cover these unexpected, but inevitable expenses.
The amount you should keep in your emergency fund depends on your lifestyle and your comfort level. Many financial advisors recommend keeping 3-6 months’ worth of living expenses on hand. This way you have enough money available to support yourself in case of job loss (or, in your case, during draughts where you don’t have a sale for a while).
This money should be kept completely liquid, meaning that it’s accessible at a moment’s notice. The best place for this money is typically in a designated high-yield savings account. Don’t keep this money in your checking account; it’s too easy to accidentally spend it if it’s mixed in with your other funds.
Mistake #6: Overspending in Categories that Don’t Move the Needle
As a real estate agent, you probably have ongoing business expenses in several categories. In fact, agents often subscribe to so many tools and services for their businesses that they lose track of how much they’re spending and what those expenditures are doing for the business.
Run a quick expense audit. Write down all your monthly expenses and see how they’re contributing to your business.
Common areas of overspending include:
- Overly-robust CRMs. If you use most of the features your CRM offers, it’s probably a good investment. But if you’re simply logging contact details and tracking touches, you can do that in a simple, affordable CRM.
- Rented websites. In Are You Just Renting Your Real Estate Website? we looked at renting your site vs. owning it. As in real estate, renting is more expensive over time and doesn’t give you an asset of your own. But, before you consider paying a web designer for a custom website, consider building your own site. Today’s tools make it easier than ever! And with our free guide to building a real estate website, you’ll be up and running this week!
- Printed materials. Back in the day, agents had to hire graphic designers to prepare their Buyer Guides, Seller Guides, FSBO guides, and mailers. Today, you can do all of this in Canva, the easy-to-use online design program. Even better, you can get professionally-designed templates for all your marketing materials, then customize these affordable designs in Canva.
Mistake #5: Doing it All Yourself to Save a Buck
The flip side of overspending is underspending. New agents are often afraid to spend money because they don’t know when their next commission check is coming. But trying to do everything yourself to save a buck is an inefficient use of your time and will result in fewer sales and lower income.
Here are things you should be willing to spend on:
- Social media boosters. Social media can be a great lead generator. But it can also be a massive time-suck! Instead of creating all your content from scratch, invest a little money in social media marketing packs. That $20 per month can save you hours and hours of content planning and graphic creation.
- Professionally-designed marketing. Top-quality marketing materials can be extremely affordable thanks to sites like Etsy, which allow content creators to sell customizable templates for real estate agents.
- A virtual assistant (VA). VAs can take so many administrative tasks off your plate! And because they don’t require full-time employment, or even office space, they can be extremely cost-effective. You just need to hire and train your real estate VA carefully.
Mistake #4: Not Diversifying Their Income
Having your income tied to performance is a good thing! It means that working smart and hard gets rewarded. But relying solely on your commission checks is dangerous. It means your income can take a hit because of market conditions beyond your control. It also makes time off extra difficult. There are no paid vacation days or sick days when you’re an agent.
But, if you have additional income streams, you can give yourself more freedom while protecting your business.
The trick is to find income streams that complement your real estate business, rather than detract from it. For example, driving for Uber in your spare time might bring in quick cash, but it can also undermine your position as a real estate professional. Offering property management services, on the other hand, can bring in reliable monthly cash flow while boosting your image as a well-rounded real estate professional.
Check out our list of 55 Ways to Make Money in Real Estate for income-diversification ideas.
Mistake #3: Failing to Plan for the Future
It’s hard enough for the average citizen to plan for retirement with the help of pensions and employer-sponsored retirement plans. But you don’t have either of those safety nets as a real estate agent. It’s up to you to save for retirement on your own. And when your income is unstable, saving for retirement can be daunting.
One method of saving for retirement is to designate a specific percentage of each commission check as retirement savings. The moment your commission check is deposited, you transfer 5-15% to your retirement account (typically a Solo 401(k) or an IRA, which you can open with any investment brokerage).
Another option for retirement is to acquire rental properties that generate enough passive income for you to live on in retirement.
Whichever method you choose, build it into your budget to secure your financial future. This leads to the next item on our list of the biggest financial mistakes real estate agents make…
Mistake #2: Ignoring Their Budget
I love a good budget! While some people find them restrictive, I find them liberating. Your budget gives you the freedom to spend with peace of mind. You can see your income and expenses in black and white and figure out how to spend in a way that allows you to buy the things you want most!
But budgeting as a real estate agent with unsteady income can be tricky. Most people can start with their income, then decide how to spend it. For agents, a reverse budget works better; you start with your necessary expenses to see how much money you need to cover those. Then you prioritize the other things you want to spend on. This gives you a concrete income target.
The first two or three years in real estate can be tough to budget because you just don’t have the experience to know how much things cost or how much you’ll be making. But, generally, your real estate income will go up every year as your skills improve, your network grows, and property values rise. So many agents try to keep living expenses to a minimum for the first few years while their business is being established. Then you get to add in more and more fun stuff as your business grows.
Mistake #1: Mixing Business and Personal Accounts
The biggest financial mistake real estate agents make is mixing their business and personal finances. Mixing accounts creates a confusing mess. It makes income and expense tracking difficult. And it will create a massive headache every tax season.
If you don’t already have a business bank account, get one! This is where you will deposit your commission checks. You’ll also pay all business expenses from this account. Then, you’ll essentially cut yourself a paycheck from this account. That money will go to your personal bank account to be used for living expenses.
Get Your Finances in Order Today!
With a little planning, you can avoid the biggest financial mistakes real estate agents make. Check out our Financial Plan Workbook for a quick, easy way to analyze your income and expenses and create a financial plan that works for you!
