For most folks, being a real estate agent will take you into 1099 territory for the first time. You’re likely accustomed to a W-2, having your taxes taken out of your paycheck, perhaps you’ve had an employer with a matching 401k or other retirement plan, maybe you’ve got a sweet benefits package with health insurance and vacation days. Kiss those things, give them a hug and wish them well. As a real estate agent, managing all of these things is now part of your life.
Being an independent contract, running your own business, allocates responsibilities and duties in your life that are incredibly important. You first order of business? Set up a meeting with an accountant to get some advice on managing your checkbook and meet with an attorney to help identify how to set up your business i.e. as an individual, LLC, partnership, corporation or other structure.
Your meeting with a CPA will arm you with expectations that will help plan out your first year with a “lumpy” revenue stream. As you’ve no doubt considered, as a real estate agent (as with other commission based businesses), some months you’ll earn money in big lumps and other months you’ll earn no money whatsoever. Managing your cashflow will be of the utmost importance.
A commitment to real estate requires regular expenses like association dues, subscriptions, supplies, marketing, continuing education and so on and these things do not stop during your slow months. Bigger yet, paying rent or a mortgage, groceries, gas and other life expenses do not stop either. I recommend abiding by the old rules of “Make hay while the sunshines and save for a rainy day, because it’s gonna rain”.
Offering up a personal example, one of my first years in real estate I had a September in which I earned $25,000. I had never seen that much money in my account before. The best thing that had happened leading up to that big month were several slow months in which I flirted with red numbers in my checking account. This set the stage for diligent spending over the months that followed, fortunately, because I went through the winter without another dime of income. By putting aside money for taxes and budgeting my regular expenses out, I was able to drag that money out until we made it back to the Spring market and business got going again.
You may have noticed the phrase “putting aside money for taxes”. Yes, as an independent contractor, your taxes are not longer taken out of your paycheck. You will be writing a check to Uncle Sam directly from your checking account and man, does it sting. There’s something about never having the money in your possession before it goes to the IRS that makes paying your taxes more palatable. Watching that big check clear from your account, after enjoying the big fund balance for a while is something that takes getting used to, but planning takes out some of the sting. Personally, I’ve set up a seperate account from my business account and for every dollar earned, I allocate the appropriate percentage for taxes into that account and I “forget about it” (more on this, as occasionally I pilfer this account as a “loan” to myself, but it always remains, that money is earmarked for the government).
Back to budgeting. Planning sets the stage for success and mindset. Understanding your personal expenses, by taking the time to put together your household budget, postures you for an elegant transition from living the bi-weekly paycheck life to the lumpy income life. With apps and online programs, services and experts and the simple availability of your credit card expense breakdown and exports into spreadsheets, creating a personal budget has never been easier. Do this! It will set expectations for your expenses and will definitely impact your business plan and career or income goals.
Towards the beginning of your real estate career, the most important personal finance investment you can make is investing in yourself and your business. The more you invest in education and learning and improving your business strategies the better real estate agent you’ll be and the more revenue you’ll earn. By allocating your investments to yourself and your business, you will not only learn the lessons you seek out, but you will have created accountability for yourself by making a commitment to ensuring your investment delivers a return. In short, the more you bet on yourself, the more you’ll commit to following through.
Reconsidering mindset, remember that not all investments deliver an economic return. Some of the best investments I’ve made, including bets on myself, ended up costing me money, sometimes much needed money at the time, but I had the perception that any failed investment was a “tuition expense”. I learned a lesson and was damn sure the lesson would stick and wouldn’t make the mistake again. These lessons and their tuition are often a front loaded expense, but the nature of them is to be lessons well remembered and over the long term serve you well. When you make it a conscience practice, you will identify what others deem a “failure” as an opportunity. The faster you make that distinction, the faster you “fail” and proceed to the opportunity, the more opportunities you will have.
In summary, for the beginner, like in real estate the rule is “location, location, location”, the rule is to “plan, plan, plan”. Plan your business, plan your budget, plan your success. In addition to being simply a practical and pragmatic approach, it’s also the first step towards visualization, a powerful tool in creating victories.