There are few business opportunities that have a lower cost of entry and a higher income potential than real estate sales. Why then are so many agents and brokers living closing to closing?
The problem lies in understanding what we make (our gross income) and what we keep (our net income), and how to allocate resources from there.
Most team leaders and agents that we coach work on a cash-in, cash-out system—often in their personal checkbook. Rule one: Always separate your real estate income and expenses and your personal income and spending. Additionally, you should have separate credit cards for business expenses and personal expenses for ease of tax-time recordkeeping.
Once a commission check passes through your business account, you can “pay” yourself whatever you like (see your cash-flow budget). Now, the money coming into your personal account will be your “income.” The first step should be to set aside 20 percent of the money in a tax “bucket.” This “bucket” is a separate savings account where you can accrue money you owe for federal and state income taxes.
Next, set aside 10 percent in a savings “bucket” to build a minimum of six months’ reserve. Those of us who survived the market crash of 200-2010 remember the transition period when we had to determine which side of the business to work to continue to make money during every shift, even when we were doing the right money-making activities daily. Having a good savings reserve provides a safety net in case you find yourself in similar situations that are out of your control.
After we’ve built the basics, we can move to “elevating our wealth.” Always start by paying off high-interest debt. Most people can get a 27 percent return on investment (ROI) by paying off credit card debt. Next, you have to realize that true wealth is built through regular small investments in low-cost index funds over long periods of time. Most people overestimate the return of the big score and underestimate the return of long-term investment. Pay yourself first. As little as $25-$50 a week can add up to $1,000,000 given 30-40 years to grow.
A self-directed IRA, also known as a “checkbook” IRA, can be a great vehicle to leverage our real estate investment opportunities (rentals and flips) and build additional streams of retirement income and wealth for future generations.
In summary, separate your commission/real estate income expenses from your personal expenses; budget for taxes with every check; build a six-month savings account; pay off and avoid high-cost debt (i.e., live within your means); pay yourself first and build a long-term, low-cost investment portfolio; and use tax-deferred, self-directed IRAs to leverage real estate opportunities.
Nearly three decades of real estate experience—including 15 years of coaching with Verl Workman—has made Jim Knowlton one of the top agents in the country and one of the most popular coaches on the Workman Success Systems’ team. In addition to serving as director of Coaching for Workman Success Systems, Knowlton also owned and managed several real estate franchises, earned numerous awards for his performance and continues to lead a Keller Williams Mega Agent team in New Hampshire today. Contact him at Jim@WorkmanSuccessSystems.com. For more information, please visit www.workmansuccesssystems.com.