Finances are difficult for many of us. Creating and sticking to a budget, filing taxes, monitoring expenses, auditing your own financial history- it’s a lot of work and can often be stressful and frustrating. This can be especially true for real estate agents who run their own businesses and sometimes have to be their own accountants.
There are common financial mistakes that real estate agents make that can affect the way your business runs, your income and your tax filings. We’ve laid out the five most important financial mistakes every real estate agent should avoid, whether it’s your first year in the business or your twentieth year.
5 Financial Mistakes Real Estate Agents Make- And How to Avoid Them
Mixing Business and Personal Accounts
When you’re self-employed and responsible for every financial aspect of your business, it can be difficult to keep it completely separated from your personal finances. There are still some agents who use one bank account for everything- business and personal. We get it- you may be thinking it’s just easier to keep everything in one place. But keep everything separate will make tracking expenses much easier which will in turn make filing your taxes easier.
The same logic goes for using separate credit cards for your business and personal life. A business credit card will help you keep a record of all business-related expenses which you would easily be able to provide if you are audited by the IRS. Bonus: the interest rate on your business credit card is considered a deduction on your taxes!
It’s too easy to muddy the waters when you use one account and one credit card for both business and personal life. You may find it too easy to dip into your personal funds for business expenses and vice versa.
What Can You Do?
If you haven’t already separated your finances, you still can. Set up a separate business account solely for business-related expenses and get a separate business credit card linked to that account. Go through your financial statements with a fine-tooth comb to establish which expenses are personal and which are business so you can document them if necessary for your next tax filing.
Some expenses will overlap (is your car a personal or business expense?) in which case you need to be prepared to meticulously document whatever you spend on it either in your accounting system or with your accountant. If you don’t have an accountant yet, consider working with one to establish your business accounts. They can help you separate your finances and document your transactions so you can stay organized.
Not Making or Sticking to a Budget
This is the most straightforward financial advice you might ever receive and yet so many of us struggle with it: make a budget and follow it.
Your budget is the foundation of your business’ finances- you need to know exactly how much income you need to bring in to cover business expenses and still make a profit. If you use a program like QuickBooks, you can use their budgeting tools to map out what expenses to anticipate every month. Your budget should distinguish which expenses are fixed and variable and reflect the seasonality of the real estate market.
You also need to include the hard costs of living in your budget, such as your mortgage payment, utilities, insurance, etc. You’re paying yourself from the salary that’s worked into your budget- it has to cover your essential costs of living. Without a budget, you may find yourself struggling to cover monthly costs, unaware of how much you’re spending or unable to plan for the income you want.
What Can You Do?
Set aside a few hours to really audit yourself and figure out what a reasonable budget looks like for your business. If you have an accountant, schedule time with them to work on this. Your budget needs to be comprehensive and thorough, include every expense no matter how small.
Make sure to include a salary for yourself- it is technically a business expense! Set an amount that is reasonable for how much business you do in a year. Be prepared to re-evaluate your budget periodically to make sure it still accurately reflects your business. Whether it’s annually, quarterly, or somewhere in between is up to you.
The goal here is to know exactly how much you spend and how much you make so you can determine just how profitable your business is and where to make adjustments to improve it!
Not Having 3 Months of Income in Savings
This is generally a good rule of thumb no matter which industry you’re in, but for real estate agents savings can make all the difference. Your income as an agent is dependent on clients buying and selling homes. But the real estate market can change according to the seasons, it can be affected by major world events (like a pandemic) and sometimes you may just hit a slow spot in your business.
But how do you maintain your business if your income is dropping due to a slowdown in the market? Even if you sold a house right away, it can still take at least 45 days for you to receive the commission from a transaction. Business expenses don’t stop- taxes still need to be filed, office supplies purchased, if you have an assistant they still need to be paid, your NAR® dues will still be expected, and so on. If you don’t have the savings to maintain your business when it slows down, you may find yourself quickly going into debt or losing viability as a business.
What Can You Do?
Save, save, save! Even agents in their first years of business should make sure they’re saving something from each transaction. There are a few easy ways to do this. Our accounting team usually recommends saving 30% of each transaction for taxes. After that, you can split the rest of your commission and put some of it into a savings account. It’s really up to you how to save a portion of your income as long as you are saving it.
Paying for Unnecessary Tools and Systems
It’s easy to sign up for platforms that offer a subscription of some kind. Most real estate tools like CRMs, marketing systems, websites and apps offer subscriptions that will charge you on a regular basis. The question is are you actually using everything you pay for?
In 2019, the Warstone Group conducted a survey of 2,500 consumers and asked them to take 10 seconds to guess how much they spend on monthly subscriptions. The average answer was about $79.74 a month. Then the survey walked the respondents through calculating exactly how much they spent every month on subscription services. The average? $273.33. That adds up to more than $3,000 a year on subscription services!
Granted this survey looked at entertainment and retail subscription services but the same analysis could extend to your business. How much do you think you’re paying for and what’s the actual amount? What have you signed up for that you don’t use and can you live without it?
What can You Do?
Take a moment to look through the last three months of statements from your business account. How many automatic withdrawals or charges do you have monthly for subscriptions to CRMs, marketing apps, data reports, or any other platforms or systems? Calculate how much you’re spending on recurring charges. Then make a list of all those tools and systems and determine how many of them you actually use on a regular basis.
Ask yourself these questions:
- Are you actually using all of them?
- Are you using them enough to make paying for it worth it?
- How much would you save every month if you cut out the unnecessary subscriptions?
- What does that add up to annually?
Audit your subscriptions and cancel the ones you just don’t use or don’t use enough to make the expense worth it.
Being Unprepared to Pay Taxes Every Quarter
One of the pros of being a real estate agent is owning and running your own business. The Internal Revenue Service (IRS) classifies agents as self-employed which means you pay taxes every quarter in addition to filing annually in April. Your quarterly taxes will cover Medicare, Social Security, federal taxes and state taxes. When it comes to paying income tax, you’ll have to determine which tax bracket you’re in based on your estimated taxable income for the previous quarter.
Real estate agents are able to write off business expenses as tax deductions. This includes:
- What you pay to either rent an office or maintain a home office
- Vehicle expenses, including mileage, gas and maintenance
- Office supplies and equipment
- Marketing costs, including your website, social media ads, mailers, billboards and more
Don’t miss out on these deductions! They can make a big difference for your business finances.
What Can You Do?
Stay organized! You have to track all of your business expenses and commissions with an accounting program. QuickBooks Self-Employed offers inexpensive programs that will help you keep track of your receipts and expenses, income and help you file quarterly taxes. TurboTax also offers a program for anyone who is self-employed.
If accounting takes up too much of your time or you have the funds, consider hiring an accountant to take care of your finances, monitor your deductions and income and help you file taxes every quarter. You may find their help well worth the expense!
Financial literacy is difficult for many of us and can be tricky, even for the most experienced of number crunchers. Take the time to map out your finances, create (or evaluate) your budget and make sure you have a plan in place to save for your taxes and regular business expenses. It’s essential you have a strong financial plan and budget in place so you can succeed in real estate.