How much money will you make during your first year in real estate? It’s hard to say. So much comes into play to determine your real estate income. Your market, the overall state of the industry, how many agents you are up against, and how well you manage your time will all affect your bottom line.
As many tenured agents can attest, the first year in real estate can be grueling. And while some agents make big money very early, many don’t. Truly understanding your financial picture—and being prepared for what’s to come—is your best bet for achieving success during your first year in real estate. Use the following guidelines to develop a sound financial plan for the year ahead.
- Set a realistic financial goal for your first year in real estate.
Decide how much income you will need to support yourself, and establish a financial goal. Just be realistic. Talk to other local agents about what they made in their first year—and what it took to reach that number. Do your research and analyze your local market. While it’s possible that you will far exceed your initial goal, you don’t want to set yourself up for failure—or assume that you will make more than you will. Many agents have to work another job while they build their business, so keep that in mind as you start your real estate career. That doesn’t mean you won’t succeed, however.
- Understand your employment status
The majority of agents affiliate with their brokers as independent contractors rather than employees, according to the IRS website. In fact, most real estate professionals operate their business as a sole proprietorship. What does that mean? It means you aren’t an employee, you haven’t formed a partnership with anyone, and you haven’t incorporated your business.
As with most agents, you likely are considered “self-employed” or “a statutory non-employee,” because your payment is tied to your sales, rather than the number of hours you work. As a result, you have federal tax obligations, including both income and employment taxes, and other obligations that most American professionals have covered by their employers, including:
Health, dental, and retirement benefits
Fees for licensing, dues, and continuing education
Office expenses, marketing, advertising, and postage costs
The full share of federal Social Security and Medicare taxes
The same federal income, state, and local taxes as other workers
Financial experts advise that you should set aside 35% of your income to cover those costs. Although they will also be offset by certain deductions and tax credits as well, the 35% range should safely keep you from having an unexpected tax debt at the end of the year.
As you establish your financial goal, make sure that you factor in that percentage. For example, if your first year’s goal is to net $50,000, you need to actually gross $67,500.
Also, remember that all self-employed professionals who plan on owing more than $1,000 in federal taxes must pay them ahead of time in quarterly installments. The IRS inflicts late penalties if you wait until your annual tax statement is due.
Track and calculate business deductions
Now for the more positive aspects of running your business. Although you incur additional costs that regular employees do not, many of them count as tax credits come Tax Day in April. Deductible expenses include, but are not limited to:
Mileage and other automobile expenses
Meals and entertainment
Rent, mortgage, and utilities (if you have a “home office” as defined by the IRS)
Health insurance premiums
Professional membership fees
Licensing and education fees
Additional one-time business start-up costs
To be deductible, the expenses must fit the official IRS definition; be directly associated with your real estate duties; be paid for by you, not your broker or another party; and be documented with receipts, written files, or a computer log.
It’s critical that you are extremely organized to ensure that you can account for all your expenses should the IRS have questions. It’s always a good idea to contact a certified tax professional to receive more detailed information. Or you can visit the IRS website for details specific to real estate professionals and self-employed professionals.
Outline a plan to meet your real estate career goals
Now, once you have set an annual financial goal taking your tax obligations and deductions into consideration, sketch out a plan of how you will actually meet that goal using the PALS approach:
Prospects: The number of prospects you must contact to get an appointment.
Appointments: The number of appointments it takes to get a signed listing agreement with a buyer or seller.
Listings: Listing agreements result in actual completed sales and, therefore, commission dollars.
Sales: The number of deals you actually close.
Talk to your broker to find out that information based on your local market area. Then, plug them into a financial worksheet. From there, you can set measurable, real-world tasks by the day, week, and month to ensure that you meet your annual financial goal. The plan should basically tell you what you must do—at any given time—to keep progressing toward your goal.
All of this may seem a little overwhelming—if not outright scary. However, take the time to plan upfront, set goals, and create a plan to reach those goals. Doing so will drastically increase your chances of success during your first year in real estate.