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This article was updated on Dec. 9, 2024.
As a real estate agent, your financial fitness is just as crucial to your success as closing deals and building relationships. While many focus on sharpening their negotiation skills or learning the latest market trends, it’s easy to overlook the health of your business’s finances.
Without a strong financial foundation, even the most talented agents can find themselves struggling to stay afloat. So, how do you know if your business is financially fit? Here’s a comprehensive checkup to ensure your business is healthy and ready to thrive in any market condition.
Cash flow: The lifeblood of your business
Real estate is often a feast-or-famine business, with commissions rolling in after months of work and then dry periods with no income. The first sign of financial health is positive and consistent cash flow.
Ask yourself:
- Do I have enough cash reserves to cover business expenses during slow months?
- Am I tracking my income and expenses to spot trends or areas of improvement?
- Do I have a budget for marketing, technology and professional development?
Having a clear view of your cash flow helps you stay ahead of potential financial difficulties and gives you the ability to invest in growth when opportunities arise.
Emergency fund: Your safety net
Life is unpredictable, and so is the real estate market. A financially fit business has an emergency fund that can cover at least three to six months of operating expenses. This cushion allows you to weather unexpected challenges, such as a market downturn, a personal emergency or the loss of a major client.
- Have you set aside enough savings to handle unforeseen expenses?
- Are you regularly contributing to your emergency fund, even during good months?
A solid emergency fund provides peace of mind and keeps you from scrambling for cash when the unexpected happens.
Debt-to-income ratio: Keeping it in check
Debt can be a useful tool in real estate, but too much of it can weigh down your business. Your debt-to-income ratio is a key indicator of financial health. High levels of debt relative to your income can increase financial stress and limit your ability to make important investments.
Consider the following:
- Are you relying on credit cards or loans to cover routine business expenses?
- Is your debt manageable relative to your monthly income?
- Have you set up a plan to pay down any outstanding business debt?
Keeping your debt under control ensures you’re not drowning in interest payments, which can erode your profits over time.
Tax strategy: Avoiding surprises
Taxes are an inevitable part of running a business, but proper planning can make them less painful. Many real estate agents overlook tax strategy, leading to surprise tax bills that can disrupt cash flow.
Stay on top of your taxes by:
- Working with an accountant or tax professional to ensure you’re maximizing deductions.
- Setting aside a portion of each commission check to cover taxes.
- Review your tax strategy annually to adjust for changes in income or expenses.
By planning ahead, you can avoid the stress of a hefty tax bill and keep more of your hard-earned money.
Profitability: Beyond just revenue
It’s easy to get caught up in focusing on revenue — how many homes you sold, how much commission you earned — but profitability is the real measure of success. You can bring in a lot of money and still not be profitable if your expenses are too high.
- Are your operating costs in line with your income?
- Are you reviewing your expenses regularly to identify areas where you can cut back?
- Is your pricing strategy in line with your profit goals?
Ensuring your business is profitable means you can reinvest in marketing, technology, and yourself without financial strain.
Retirement planning: Building a future beyond today
Real estate agents often prioritize immediate income over long-term planning, but retirement should be a part of your financial fitness plan. Since real estate agents are typically self-employed, there’s no employer-sponsored 401(k) to rely on. This makes it even more critical to take charge of your retirement savings:
- Do you have a retirement account in place, such as a SEP IRA, Solo 401(k), or traditional IRA?
- Are you regularly contributing to your retirement fund, even in small amounts?
- Have you consulted with a financial advisor to map out your long-term goals?
Planning for retirement today ensures you’ll have the freedom and financial security to enjoy life beyond your career.
Insurance: Protecting your business and yourself
Insurance is a key component of financial fitness that often gets overlooked. As a real estate agent, you should ensure you’re protected against liability, business interruptions and personal risks:
- Do you have adequate health, disability and life insurance coverage?
- Have you considered professional liability insurance to protect against potential lawsuits?
- Do you have a plan in place for income protection in the event of an illness or injury?
The right insurance policies act as a safety net, ensuring that your financial health is protected, no matter what life throws your way.
Just like physical fitness, financial fitness requires regular checkups and adjustments. By maintaining a healthy cash flow, controlling debt, building an emergency fund, planning for taxes and retirement, and protecting yourself with insurance, you can ensure that your business is on the path to long-term success.
Take the time to evaluate your financial fitness today, and you’ll not only survive but thrive in the competitive world of real estate.
As the head of inclusion and belonging for Keller Williams Realty International, Julia Lashay Israel advises, trains and coaches leaders, team members and agents to recognize and address diversity, equity and inclusion opportunities and challenges across the organization.
