Disclaimer: PropStream doesn’t offer financial or tax advice. This article is strictly informational. Real estate agents should consult a licensed financial advisor for specific financial advice or a licensed accountant for specific tax advice.
As a real estate agent, your income can fluctuate depending on the market and your clientele. Some months you may earn a lot, while in other months, you may earn significantly less. This is because agent work is commission-based, which means the amount you earn depends on the number of real estate transactions you help facilitate and how big they are.
Unlike wage earners, you may face periods of high earnings and periods of low earnings, especially given the seasonality of the housing market. So it’s important to stick to a careful budget. Doing so can help you smooth out your income and avoid running short on money when business is slow. Here are eight budgeting tips to help you succeed:
Table of Contents
- Estimate Monthly Income
- List/Track Expenses
- Save for Slow Periods
- Save for Taxes
- Save for Retirement
- Invest in Marketing
- Use Budgeting Tools
- Regularly Evaluate Your Budget
1. Estimate Your Average Monthly Income
Just because your agent earnings are inconsistent doesn’t mean you can’t estimate your average monthly income.
How? Simply look back at your total earnings for the previous year and divide that number by twelve months. This will give you your average monthly income, giving you a better idea of how much money you have to work with for the coming year.
If it’s your first year as an agent, you may want to go into it with a year’s worth of living expenses saved up since it could take six to twelve months for you to close on your first deal.
Hope for the best but make sure you’re prepared if your plans don’t pan out as expected.
2. List and Track Your Expenses
When it comes to expenses, consider separating your business expenses from your personal expenses by creating a separate bank account for each. This may also make it easier to file your taxes later.
From there, add up your personal living expenses, so you know how much money to set aside for basic living costs. You may want to distinguish between needs (e.g., mortgage/rent, utilities, food, clothes, transportation, and medical care) and wants (e.g., eating out, entertainment, and vacation).
As a new agent, try to figure out which areas of spending you can reduce until you make a more substantial income.
Next, consider making an account of all your business expenses. These could include:
- Brokerage dues
- MLS fees
- National Association of Realtors (NAR) membership fees
- Office space
- Office supplies
- Marketing and advertising costs
- Errors and omissions (E&O) insurance
- Continuing education classes
Additionally, you may have some extra startup costs as a new agent. For example, you may want to budget for:
- Pre-licensing classes
- Exam fees
- Background checks
- License fees
Lastly, consider giving yourself a salary to cover personal expenses and adding this as a business expense. That way, you can standardize when and how much you withdraw from your business account (e.g., $5,000 on the first of each month) instead of randomly withdrawing whenever you need money. Then whatever is left over in your business account during active months can help make up for earning dips during slow months.
3. Save for Slow Periods
Since agent earnings can be hard to predict, one of your first priorities should be building an emergency fund for slow periods. Ideally, it should cover six months' worth of living expenses. That way, you have something to fall back on whenever you experience a rainy day (or month!).
For example, the holiday season can be extra slow for agents since it’s a time when fewer people like to move. By setting aside your extra earnings during the active summer months (when kids are out of school and more people move), it may be easier for you to weather the slow winter months.
4. Set Aside Money for Taxes
Agents also need to set aside some of their earnings to pay taxes. Since agents are typically considered self-employed, your taxes aren’t withheld for you the way they are for regular employees. This means it’s your responsibility to track how much you owe in taxes and make the necessary quarterly estimated tax payments.
The two main taxes you need to worry about are income tax and self-employment tax. Your federal and state income tax rates will vary based on the year, how much you make, and what state you live in.
As for the self-employment tax rate, it’s 15.3% for the year 2022. 12.4% of your income goes toward social security (old age, survivors, and disability insurance), and 2.9% goes toward Medicare (hospital insurance).
Keep in mind that agents can typically deduct many business expenses from their tax bill at the end of the year. These include expenses that are ordinary and necessary for business (e.g., professional dues, marketing costs, office space, travel expenses, and business insurance). You may also deduct the employer-equivalent portion (i.e., half) of your self-employment tax from your adjusted gross income, which affects how much income tax you owe.
To help ensure you don’t accidentally spend income allocated toward taxes, consider setting up a separate tax bank account. Then deposit 25% to 35% of each commission you earn. This way, you’re less likely to come up short when taxes are due.
Additionally, you may want to consult a certified public accountant (CPA) to know exactly how much you should save for taxes.
5. Save for Retirement
Real estate agents should also be proactive about saving for retirement. While many employers offer their employees a 401(k) plan, self-employed agents must take retirement saving into their own hands.
To do this, you have many options. For example, you could create and contribute to an individual retirement account (IRA) or a solo 401(k). Each type of retirement plan comes in two forms: traditional and Roth.
Traditional IRAs and solo 401(k)s let you invest with pretax dollars to get an immediate tax break. However, you’ll owe taxes once you withdraw at retirement age.
In contrast, you must contribute to Roth IRAs and solo 410(k)s with after-tax dollars. However, you can withdraw your investment tax-free once you retire.
Whatever plan you choose, experts recommend putting away around 15% of your income toward retirement. You may even be able to set up automatic withdrawals from your bank account, so you don’t need to contribute manually. This can help you streamline your retirement savings.
6. Invest in Effective Marketing
To be a successful agent, consider dedicating some of your funds to effective marketing. Otherwise, you may stop generating leads, and your client pool may dry up.
But how much should you spend on marketing?
According to a 2017 study of 300 active real estate professionals, there’s quite a range of how much agents spend on marketing. 53% of participants spent less than $5,000 per year, while the top 3% spent over $80,000 per year.
The amount you spend on marketing will depend on where you’re at in your real estate career and the size of your business. As a rule of thumb, however, you may want to set aside around 10% of your commissions for marketing.
Your marketing strategies might include:
- Online and print ads
- Yard signs
- Direct mail postcards
- A business website
- Email marketing
- Admission to networking events
- Real estate data software
Experiment with different marketing strategies to see which delivers the highest ROI. The key is to find the most cost-effective way to generate leads and target new clients.
Pro Tip: To avoid overspending on marketing, consider using PropStream. For one low monthly payment, you can generate up to 10,000 seller leads—a much less expensive option than buying pre-made lead lists.
7. Use Free Budgeting Tools
These days, many free tools can help streamline your budgeting process.
For example, some budgeting apps can be connected to your bank accounts to keep track of your credit card spending so you can automatically see where your money is going. Others can be programmed to round up purchases and invest the difference back into your business. And some can send you automatic reminders about recurring bills or low balances.
Consider using such tools to help you meet your budgeting goals.
8. Regularly Reevaluate Your Budget
Lastly, it’s important to realize that a budget isn’t set in stone. If you need to adjust it as you go, you can.
Maybe your monthly expenses are more than anticipated, or you didn’t bring in as many commissions as you hoped. That’s okay. Adjust your budget accordingly and try to balance your budget moving forward.
There are many ways to optimize your budget as an agent. On top of cutting back on unnecessary spending, you may want to try increasing your income by generating more leads. With PropStream, you can search off-market properties, create custom seller lead lists, skip trace owners, run email and direct marketing campaigns, and much more!
Ready to take your real estate business to the next level? Try our 7-day free trial and get 50 seller leads on us!