In this episode we will discuss the pros and cons of salary income versus commission based income and how best to manage your money.
Careers in Real Estate - Your Five Minute Monday explores the many areas in the real estate industry to participate in and if it is the right career for you. I delve deep into the dozens of niche’s and specialty areas that many people never new existed. I also bring listeners up to date with the most relevant real estate market news and trends to be sure that new real estate professionals clearly understand how and why we work in our industry. Each episode is time sensitive to the market at that moment.
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Commission versus salary how to manage your money.
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Are you wondering how you will manage your commission based income in real estate, stick around and I’ll tell you exactly how.
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One of the scariest things about getting into real estate is the sudden change of your income format. For instance, going from a salaried position, giving you a certain level of security each week or month, to a commission based business, which could have unlimited potential, could be a little daunting.
Once you get past the shock of this transition, it could be easy to manage. The good news is, the type of commission checks you will probably get in general real estate, (helping people buy and sell houses), is often much higher than a typical weekly or monthly salary check. So you’ll have more to work with when that check comes in.
The most important advice I can give anyone starting out in the real estate business, is to put as much aside in reserve as possible in the beginning. So when you receive a $12,000 commission check and your bills for the next two month are about $4000 per month, use that for your bills, but put the rest aside in a reserve budget for slower months in the future. It could be as simple as that.
I have seen many new agents unfortunately go off the rails when they first start in the industry. They’re blinded by the extra income they’re making on these larger checks, and they start spending irresponsibly or buying things they don’t even need.
If you don’t put money aside and watch your budget, you could get hurt in the future.
This is what you need to prevent from happening. You don’t want to have to be worrying about your money while trying to make money. It could take 60 days or more to get your first check in your hand. This means you’ll have to be well prepared from the beginning. You may even have to have some savings put aside for emergencies to carry you through those first couple months to make sure you’re not gonna be at risk.
In addition, there’s about $1200 of cash layout when you first get started. This will be for things like the board of realtors and your multiple listing service. It’s about $1200 a year in general to join all these groups. That might sound frustrating at the beginning, because you would like to start making money before you spend money. But it is all part of the investment and succeeding in real estate.
Your first $1200 to join the boards is the only one that will actually hurt. After that, you will just take a little out of your reserve when the time comes the following year. It will feel like a drop in the bucket compared to the income and the checks that you can make in real estate.
Apart from an emergency fund, to put aside when things are slow, you also need to have a separate bank account for taxes. Remember, you will be a 1099 independent contractor, not an employee. So there is no employer taking out tax or Social Security or FICA for you. That money has to be put aside so that once you do your taxes at the end of the year you’ll have that money ready to go.
A good rule of thumb will be to put aside 25% of every check you make for taxes. I know that sounds harsh, and it is. But there’s nothing we can do about it and there’s no sense in fighting it.
With that said, I suggest very highly that you use a good accountant. Not just a CPA, but also an enrolled agent, an EA. These are accountants that were once agents with the IRS. They have a whole different bag of tricks to choose from to save you money and keep you flying under the radar when it comes to audits.
I have nothing bad to say about companies like H&R Block or Jackson Hewitt, but keep in mind, these are not accountants. These are people who took a six week computer course and will try to save you as much money as possible, but don’t have the skill to prevent any audits or throw you under the bus with certain things.
For instance, they will try to take the highest standard deductions they can for you, But there are certain standard deductions that raise a red flag with the IRS, such as home office use, gas mileage, etc.
They have other ways to save you more money in other areas without taking full deductions in these areas and again to keep you flying under the radar with the IRS.
Once again I cannot stress enough the importance of having a good accountant. If you don’t know any you can ask other successful agents who they use or ask your broker who he/she uses.
As a 1099 independent contractor the IRS will require you to pay your taxes quarterly rather than annually. Although you could pay it annually, there will be a penalty for that, and it will absolutely hurt a lot more later on. I suggest very highly that you do pay your taxes quarterly. Your accountant or IRS will set you up with coupons or pay slips that you will use to send that in with an estimated tax amount.
While making the type of checks we make in real estate, it is easy to get caught up in the Realtor lifestyle that you might not be ready to handle. Such as buying an over priced car that you really can’t afford just yet or even buy a new home or condominium that you’re not ready for.
I suggest very highly you take your time with these items. Do not get into a vehicle that you cannot or should not afford right now. When I got started real estate over 30 years ago, my brother I both used the same 1970 Volkswagen beetle.
We got off to a great start using that and then we moved up slowly from there, but to dive into something expensive can absolutely hurt you when things get slow.
There will be plenty of time for that later on.
If you have never been in the habit of budgeting yourself or managing your money carefully in the past, then it could be a little bit of a culture shock for you now. But well worth it in the long run and you’ll be very happy you did.
And that is your five minute Monday.
Have a great day