A Guide to Financial Planning for Real Estate Agents

Published July 2, 2024 by Real Estate Leads

A Guide to Financial Planning for Real Estate AgentsMoney management skills are important no matter what career you’re in, but for people who are self-employed and don’t have the safety nets that people in the public or private sectors do it is even more important. There is no debating that working in real estate can be a very well-paying profession but you’re not guaranteed even one penny of it the way others are when they agree to take a job. When you work as a real estate agent you make your money through commissions, and that means you need to have people choosing to buy and sell homes through you.

Finding those real estate leads and securing them as clients is what we’ve talked about at length here at Real Estate Leads, and we are among the best real estate lead generation services in Canada. But we’re going to stray from our usual blogging topic this week and look at those money management skills with financial planning for real estate agents that will also serve realtors well as they move through their career years and eventually towards a comfortable retirement.

This is even more of a pressing matter for agents who have their own situations where greater expenses are foreseen, and as we all know the cost of living in Canada is shockingly higher these days and people in any profession are likely going to want to have more for their retirement. Again, there’s no pension plan for a career real estate agent and it’s also true that most working professionals are going to encounter bumps in the road that will be more easily accommodated if they’ve planned for retirement better. This leads us to money management for real estate professionals, and so let’s dig into it.

Fundamental Differences

Real estate financial planning tips can start with understanding some of the principal differences that will come with working as an independent licensed operator versus someone who is a salaried employee. Salaried employees automatically have their taxes, insurance, and retirement contributions deducted from pay cheques. Realtors will need to manually calculate and track these expenses whenever they receive a commission.

Salaried employees will also have a stable income. A realtors income is rarely if ever stable, and none will know exactly how much they’ll be earning three months from now or at any point on a timeline. Salaried employees also only have to budget for personal expenses, but as a realtor you’ll need to budget for personal and business expenses.

On the flip side of that, salaried employees have limited earning potential. Their income isn’t going to be exceeding their salary (bonuses being an exception). Whereas as a realtor your earning potential is unlimited. This is one of the principal draws of working as a real estate agent in Canada – putting more work in means the potential to earn more, and for so many agents that opportunity is a central part of why they choose this profession.

Real estate agents are required to handle their finances differently because of these reasons. Smart money management for real estate professionals goes a long way to building a sustainable lifestyle that has you content in what you choose to do for a living.

A career in real estate comes will present its own set of financial challenges. Here is what you need to know about financial planning for real estate agents, and budgeting is the most natural place for us to begin.

Budgeting for Real Estate Agents

Budgeting is always going to be central financial planning, and that will be true whether or not you’re working as a realtors. A budget allows you to allocate your spending on things that matter most to you and prevents you from overspending on things that shouldn’t be prioritized with your spending, or perhaps shouldn’t even be purchased at all. You can think of this as your real estate financial guide, and it starts with budgeting because it should.

Professionals who do well with this love budgeting because it takes the concern out of spending. Some realtors will spend a small fortune on escorts because they make them happy. Without a budget, every one of them might be questionable; can I afford this evening or will I do better spending my money elsewhere? However, if they can build this into my budget, they can assume that expense with more confidence each time they do it. Knowing that the cost has been allocated for in their budget.

What is often recommended as part of financial strategies for realtors is building a reverse budget. Most people use their income to inform their budget. They determine how much money they have coming in every month, and then decide how it is going to be spent. For a realtor it will be different of course, because the income you earn through commissions is going to be different every month.

This is where a reverse budget works really well. It is one that starts with your expenses to show you how much you need to earn each month. You will start by listing all your expenses – personal and business – including the things that fall into the enjoyment / recreation category. Think of this exercise as designing your life. If your aim is to afford a membership to the local country club, include those membership dues. If you want to take a $5k vacation every year, including that in your reverse budget too.

It is likely that you’ll find some categories to be variable expenses, as they will fluctuate from one month to the next. For this reason, many agents find it helpful to list the total annual amounts for each category and then divide that amount by 12 to come to an average monthly amount.

Personal expenses will include housing, food, utilities, personal vehicle, insurance, savings and investments, debt payments, charitable giving, and the things you do for enjoyment. Business expenses will be your smartphone, work vehicle, marketing, office space, affordable web hosting in Canada, signage, dues, client gifts, and of course your federal and provincial income taxes.

Try to be as realistic as possible with the amounts you set. It might even be an idea to review your credit card or bank statements to see your actual spending over the last year. Then you will proceed to create a total of your expenses, and this will point out what you need to earn each month to cover those expenses.

Measured Income Generation for Expenses

Continuing with Financial planning for real estate agents, it is just as essential to have plans for generating the income required to meet the budget you have for yourself. Many agents struggle to consistently generate enough income to be comfortable, and this is especially common in the early career years. Your primary focus should be on generating income in real estate is by trying to generate new real estate leads every single workday.

You will need to be following up on expired listings, contacting FSBOs, contacting people in your network, and making potential client connections via social media. It is a good idea to create a prospecting checklist to help you stay focused, and your secondary focus so be on diversifying your income streams. Remember that this industry is very much cyclical, and there will be very productive periods as well as ones that are not productive or profitable at all. It pays to have seasonal income streams, passive income streams, and recession-proof income streams, and ideally they are tied to your real estate business.

Saving & Investing Strategies for Real Estate Agents

Investing and saving also come in as critical components of financial planning for real estate agents. These are connected concepts, but have two different meanings here. Saving money is putting away cash or cash equivalents for unexpected expenses. Some will refer to this as their ‘emergency fund’, and then for investing it can mean buying assets that have the potential to grow your money.

All working professionals will require both savings and investments. Your specific savings and investment needs will depend on your unique lifestyle, goals, and to what level you will be willing to tolerate investment risk. Let’s now cover how to save and how to invest as a real estate agent as part of this real estate financial guide.

We can start with and where to save money. With regards to savings, you want to keep enough money accessible (in a savings account) to cover unexpected expenses and emergencies. But not keeping so much in savings that you miss out on the big financial benefits of investing. You should stick to the general guideline that people should have enough in savings to cover 3-6 months of living expenses.

Let’s say your living expenses come to $5,000 per month, you should maintain a savings account balance somewhere between $15,000 and $30,000. Those who have a higher risk tolerance may just keep one month’s expenses in savings. Others with a lower risk tolerance may opt to retain a year’s worth of expenses in savings. Of course the time to save this amount may vary. That’s ok, and you may have to dip into it before it’s fully funded.

In this event make sure that you’re putting some of each commission check into this account until your savings goal has been reached. And you need to ensure yours savings are kept out of your chequing and not be dipped into for covering unexpected everyday expenses. Savings are traditionally kept in savings accounts, and usually these are insured, so there is no risk of losing your money.

Another idea for a better rate of return on your savings is to choose to keep those funds in a high-yield savings account, which pays a better interest rate than traditional savings accounts.

Investing as a Real Estate Agent

You may have a financial advisor telling you to fully fund your emergency savings before you start investing. Saving and investing at the same time may be the recommendation from other investors. Remember as well that with each commission cheque, a percentage of it should be going into savings, a % into retirement investing, and a % dedicated to your other goals. Many agents will choose to to save and invest at the same time simply because it can take a long time to fully fund your emergency savings, and there’s little chance of missing out on the investment gains you could be making during that time.

Real estate agents will do well when they plan for three types of investments as part of financial strategies for realtors:

  1. Retirement
  2. Short-term goals (ones aimed to achieve within the next 3-5 years)
  3. Long-term goals (ones that are on more of a 5+ year timeline)

The general belief is that retirement is the most crucial investment account for real estate agents in Canada. Their lifestyle in retirement depends on how they manage money now. Even if you’re a 20-something year old agent and have a long career ahead of you, the need to start investing for retirement now is there. And that’s because of the role of compound interest.

That is the money you make on the money you invest. Compound interest is when you earn interest on the interest you already earned, allowing you to make money on the money your money is making. Done right there is the potential to grow your money exponentially, so the earlier you start then the more your money can grow. When you invest as early as possible time becomes you ally, and you will be growing your modest investment to more money than you could if you had just set it aside on your own.

Retirement accounts are a complex topic, but here is a simple overview of how they work. A financial planner can help you choose a tax-advantaged retirement account like a Solo 401(k), an IRA, or a Roth IRA. The planner will then take a share of your portfolio earnings as payment, so you can see it as you don’t pay anything out-of-pocket for their service. Your money goes into the account, and you choose to direct it to the specific investments you want to add to your portfolio. Examples being stocks, bonds, and funds. A good planner will advise on these investments based on your retirement timeline and goals.

You can automate your investments so that you only have to review your portfolio periodically to make sure you’re happy with the performance. There’s no need for constant oversight when you’re playing the long game.

Make-Up Investing

Going further with money management for real estate professionals, we need to realize that some agents may be later to come to the realization of the need for all of this. The best time to invest was always X-years ago; the second best time to invest is always today. Interestingly enough this seems to exist the same way when it comes to buying real estate.

It’s fair to say that if you didn’t start saving five years ago, you may have missed out on some growth, but you can still begin with effective retirement investing for self-employed professionals like realtors now. Don’t be discouraged; there are other ways to fund your retirement besides traditional retirement accounts. One example is to build a real estate portfolio that generates enough net rental income to fund your retirement.

You may also want to create other passive income streams like dividend growth investing or digital product sales. Another option may be to sell your real estate practice when you retire. It is possible another agent may be willing to buy your client base and workflow systems and pay an upfront sum for exclusive access to them. An additional possibility could be to arrange to earn residuals on each sale made by that successor.

Look at money as a tool for enhancing our lifestyles. Ask yourself what would make a difference in your life a few years from now? A home reno? A vacation? Shipping the kid off to military school with that gosh darn Finkelstein kid? Maybe it is more simply expanding your business interests. Maybe also ask yourself what you’d do if you could afford anything. You might be choosing to travel the world, build your dream home, or perhaps even open your own brokerage.

It might look like you’d need to save forever to reach those goals, but investing allows you to earn a return on your money so that the growth occurs much faster. Generally, the closer you are to your goal, the less risk you can afford to take. And the less risk, the lower the reward potential. The more time you have to reach your goal, the more risk you can take, and the greater your reward potential can be. This is why dream investing is broken down into two categories: short-term and long-term.

Short-term investing is going to be certificates of deposit (CDs). money market accounts, short-term bond funds, real estate syndication, and crowdfunding. Long-term investing is going to be stock-based index funds, REITs (real estate investment trusts), mutual funds, rental property investments, and alternative investments like collectibles, precious metals, or infrastructure. You can ask your financial planner for guidance to understand which of these investment types best serves your unique needs.

Real Estate Financial Planning Quick Tips

Only saving or investing whatever is left of your commission cheque is never going to be advisable. Set aside your savings and investment contributions first, and then proceed to spend what’s left. You should also be automating your savings and investment contributions, and when you have your contributions pulled directly from your account on payday it makes it easy to stick to your long term financial plan when working as a realtor.

We also recommend that you refrain from checking on your investments every day. The value of your investments will fluctuate with market conditions, so you don’t need to stress over every little dip. It’s better to review your portfolio once a year to see if you want to make any changes. And spending money to leverage the experience of financial planners is highly recommended. They live in the financial world and can offer valuable insights to those of us who only have a very formative understanding of finance.