Jay Thompson is a former brokerage owner who spent over six years working for Zillow Group. He retired in August 2018 but can’t seem to leave the real estate industry behind. His weekly Inman column publishes every Wednesday.
You’ve endured real estate school and passed your state and national licensing exams. You’ve interviewed with brokers and found the one for you. You’ve burned up your checkbook or credit card and joined local, state and national associations, and your MLS (or MLSs, depending on where you work).
Then you’ve worked on a logo, set up all those social media accounts, bought business cards and signage — the list of expenses and things to do probably seems daunting and expensive.
And you haven’t even come close to selling a home and generating income. Yet.
Hopefully, you did your research before even setting foot in the classroom and had a good understanding of the initial expenses of becoming a real estate agent. If not, you’ll find out soon enough!
If you think getting started is expensive, hang on because it doesn’t really ever end. Next up, you’ve got marketing and advertising expenses, transportation costs, brokerage fees and commission splits, continuing education, and before you know it, license renewal fees.
Welcome to a real estate career!
When I first waded into the space, I knew little about running my own business — and that’s exactly what you are doing. There was a lot of trial by fire and a lot of mistakes made. You will make mistakes, too, no matter how experienced you might be. Welcome to being human!
The financial side of this business is essential to understand. You probably no longer have an employer that is withholding your taxes, setting up your retirement accounts, subsidizing your health insurance, processing your expense reports or issuing you a paycheck.
Here are a few things I wish I had better understood at the beginning of my real estate career. From discussions with countless agents ranging from the freshly minted licensee to the grizzled veteran, it’s apparent I’m not alone in my ignorance of some basic financial tips and techniques that can help you earn more, save more, and prepare for eventual retirement.
1. Use separate bank accounts for personal and business expenses
You probably don’t have to set up separate banking accounts for your personal and business expenses, but doing so will make life — and taxes — so much simpler to manage.
You’ll also want a business credit card used only for business-related expenses. Every business-related expense needs to be paid out of your business account, no matter how small. Many (but certainly not all) of those expenses can help reduce your state and federal taxes.
2. Set aside money from each commission check
Despite 17 years passing, I still remember that first commission check. Much of it went to pay personal expenses, like the mortgage and the light bill. Some of it paid off credit cards that were a mixture of personal and business expenses (because I didn’t have a separate bank account for my business until months after I started, a big mistake.) Of course, I also blew some of that first commission check. You will, too.
With hindsight being 20-20, I later learned what I should do with each commission check to set aside some designated amounts for certain large-item expenses. Taxes, for one.
Trust me. You don’t want to have to scrape up an estimated quarterly tax payment the week before it’s due. Ideally, you should set aside a percentage of each commission that matches your tax rate.
If, for example, you’re in a 20 percent tax bracket, set aside 20 percent of each commission check — and don’t touch that money for anything else.
It’s also wise to set aside something for each check for marketing and advertising expenses. You might not know exact proportions for any of this when you first start, but estimate and set aside something.
3. Keep good financial records
To put it bluntly, taxes suck. Fortunately, as a small business owner, many expenses can offset that tax burden. To take full advantage of the tax laws, you’ll need to keep excellent records.
The separate bank accounts help with this task, but they aren’t enough. You need to keep detailed records and receipts for all expenses.
Software can help. I used QuickBooks, as that’s what my accountant used, and it made it relatively easy come tax time to share expense files with her. You can also keep a spreadsheet. What you don’t want to do is shove everything in an envelope or showbox and hope to sort it all out the week before tax filing time.
4. Set up an LLC and get an EIN
One of the most important things I did as a business owner was set up a limited liability company (LLC). You’ll also need an employer identification number (EIN) from the IRS. Getting an EIN is remarkably simple and free. Beware of services that want to charge you to do this.
State laws vary as to what kind of LLC a real estate sales agent can use. You’d be wise to consult with both your broker and CPA or tax adviser before establishing an LLC.
The tax benefits of an LLC, PLLC (professional limited liability company) or S-Corp can be significant. Yes, you can do the legal work via an online service, such as LegalZoom, but consider paying an attorney for help. It’s not terribly expensive, and it avoids FSBOing something as crucial as legal documents.
5. Pay your quarterly estimated taxes on time
Assuming you’re a self-employed 1099 independent contractor, as the vast majority of agents are, no one is going to withhold taxes from your commission checks like they do if you have a “real job.”
The IRS, however, still wants your money. So you’re going to have to make quarterly payments of estimated taxes. The IRS will get very angry if you don’t make payments on time. They will also knock you over the head with late payment penalty fees and interest. Heck, they even charge you interest for underpayments. And their interest rates are painful.
Not making money right now and thinking you don’t need to make estimated tax payments? Think again. Believe me, the IRS wants and will get your money one way or another — I speak from personal experience.
Estimated tax payments are especially tricky when you’re just starting, and they have no history to help you determine what you should pay. Seek the advice of a tax professional.
6. Get an accountant or tax professional
Here’s a step a lot of agents skip, whether they are new or experienced. You might have noted how many times in this article I’ve already used the words “taxes” and “IRS.” I’m guessing you’re thinking, “A CPA? Yet another expense?” Yes, the services of a CPA or tax adviser (they can and often are the same person, but sometimes not) aren’t free.
Why not just use a program like TurboTax? After all, it’s about $100, much less than a CPA. Much like going FSBO on your legal work, you can indeed go FSBO on your taxes. People can FSBO the sale of their own home too, and we all know what a bad idea that is. Simply put, you are not a tax expert, and TurboTax won’t come close to making you one.
Every agent I’ve ever talked to who uses professional services for accounting and taxes has told me that they save more than their CPA charges. Taxes are too expensive, too risky, and too crucial to FSBO. Hire a professional.
7. Talk to a financial adviser
Many agents don’t use a tax professional; a lot more don’t use a financial adviser. There are many reasons you should. Like you as an agent (in most cases), a financial adviser has a fiduciary duty to you. That’s pretty important for something as important as your financial future.
Yes, they will cost money. But much like a CPA, they tend to pay for themselves. Self-employment, wonderful and enriching as it is, is fraught with potential pitfalls. You want a team of professionals on your side. If nothing else, at least talk to one. Most do free initial consultations.
8. Set up a SEP IRA or individual 401(k)
If you were a W-2 employee in the past, the odds are pretty good that you had the opportunity to contribute to a 401(k) plan. Maybe your employer even contributed to it. They are a great way to save for the future, whether or not you plan to eventually “retire.” Relying solely on Social Security for your future needs is a mistake.
Unfortunately, as a self-employed business owner, you don’t have the option of a corporate established 401(k). But you do have alternatives. The primary vehicles for the self-employed are SEP IRAs, solo 401(k)s and Roth IRAs.
These accounts are relatively easy to establish, but the IRS complicates things like contribution limits, tax deductibility and withdrawals. Again, this is an area where the advice of a tax professional can be beneficial.
The great thing about these accounts is they enable you to save for the future while reducing your tax liability. That’s a great combination that every self-employed individual should investigate.
9. Visit the National Association of Realtors Center for Realtor Financial Wellness
There are many more financial-related tips and techniques than this column can possibly cover. The National Association of Realtors (NAR) has a comprehensive site covering many aspects of financial awareness for agents. The internet is full of financial advice, some good, some not-so-swift. As always, exercise caution, and use reliable sources.
Your financial security and future are critically important. Self-employment can be a wonderful experience and a way to earn a living. There are, however, significant differences between being self-employed, a business owner and an entrepreneur versus being a W-2 salaried employee. Understanding those differences and taking advantage of the opportunities provided to the self-employed can go a long way toward making yourself a better life.
Jay Thompson is a real estate veteran and retiree living in the Texas Coastal Bend, as well as the one spinning the wheels at Now Pondering. Follow him on Facebook, Instagram, and Twitter. He holds an active Arizona broker’s license with eXp Realty. “Retired but not dead,” Jay speaks around the world on many things real estate.