- Knowing your margins is essential to understanding your business’s health and informing your decision-making in real estate.
- Your strategic expenses should help grow your business.
- Documenting your systems will save you lots of time down the line.
Maybe you don’t consider yourself a business owner; you’re just an agent that “works” for a brokerage.
However, it’s time for independent real estate agents to start thinking of themselves as true business owners, and that means taking time to understand your finances, taxes and the ins and outs of running a profitable realty business.
The following are some tips for how real estate agents can optimize their business processes and become more savvy business owners.
1. Know your margins
On the ABC show Shark Tank, the first question that celebrity investors ask is, “What are your margins?”
That’s because knowing your margins is essential to understanding your business’s health and informing your decision-making as a real estate CEO.
Real estate agents can look at their margins in multiple ways:
- Net commission income vs. gross commission income
- Percentage income left over after expenses
- After-tax income (or true profit) vs. gross commission income
- The percentage of income you actually keep (your real take-home pay)
- Buyer or seller appointments taken vs. leads contacted
- Appointment yield percentage, or the number of leads you need to get one listing appointment
- Number of sales vs. number of appointments
- The number of appointments needed to close one transaction
Once you’re familiar with how your business is doing on these key metrics, then you’ll know what numbers you need to hit to reach your goals for the month, quarter and year.
2. Adopt the ‘red light, green light’ theory of expenses
Introduced by Gary Keller in the book, The Millionaire Real Estate Agent, the “red light, green light” theory of expenses suggests that all of your business expenses should generate revenue.
In other words, your strategic expenses should help grow your business.
These expenses include your assistant and buyer specialist salaries and marketing costs (Zillow advertising, direct mail campaigns, sponsorships, etc.).
Hold these expenses accountable for increasing revenue, and devise a way to track your results. If your strategic expenses are helping to grow the top line (revenue), then you have the green light to continue these actions.
If they’re not growing the top line at all or adequately enough (return on investment), hit the red light and nix that expense.
You will also want to keep fixed costs, such as office rent and monthly services, as low as possible, which will you give you breathing room to adjust discretionary expenses as necessary.
3. Document your systems
Consolidating information into actionable steps and processes is useful for a couple major reasons.
For one, if you hire any new talent, your documented systems will contribute to a standardized training process, so the new team member can onboard quickly and seamlessly.
Your documented systems can also help you to determine what has already been proven successful, by you and others, and will help you provide the same level of service and results time and time again.
The last benefit? Documenting your systems will save you lots of time down the line, sparing you from having to reinvent the wheel every time.
Aaron Lesher, CPA, is part of the Customer Success and Growth team at Hurdlr, the developer of ProfitDash, in Washington, D.C. Aaron also helped create a free tax resource for self-employed entrepreneurs called 99Deductions. Follow Aaron on Twitter or connect with him on LinkedIn.