How Much Does it Cost to be a Real Estate Agent?
Many people who want to become real estate agents focus on all of the potential income they will earn. They daydream about buying stuff they don’t need and have already spent most of the money before it ever comes in. But, as I spoke about in my blog, How Much Money Does a First-year Real Estate Agent Make?, which you can read HERE, most agents do not make a lot in their first few years. On top of that, agents are also required to pay for everything on their own.
Knowing this, let’s make sure you understand how expenses work.
Independent Contractor (1099)
The first thing you need to understand is that, as a real estate agent, you are considered an independent contractor and not an employee. This means you are taxed differently. As an independent contractor, you are considered a 1099 and not a W-2 like an employee. One of the main differences is that when you receive a commission check, no taxes will be taken out of it. For example, if you have ever been paid as an employee, you will see your total amount earned for the period at the top and then a bunch of taxes taken out (state and federal), leaving you with ⅓ of what you earned if you are lucky. This means that come April 15th, the following year, you are on the hook for all of those unpaid taxes.
NOTE: I can't stress this enough: make sure you speak to your accountant before you get your license so you fully understand how things work at tax time.
TIP: Ask your accountant about making quarterly tax payments throughout the year.
But here’s the cool thing. As a 1099, you can write off A LOT of expenses to lower the amount of taxes you will owe.
Write-offs
Before going into expenses, let me explain what I mean by lowering the amount of taxes you will owe come tax time. At the end of the year, your brokerage will send you a 1099 that states the amount of income you earned (either the total or what you actually got paid after fees and commissions are taken out). This number is your “taxable income.” Now, this number is reduced by factoring in all of the expenses you are writing off. Then the remaining amount is what you will need to pay taxes on. For example, if you made $100,000 and had $40,000 in write-offs, you would only be taxed on the remaining $60,000 and not the full amount. You will then owe based on your tax bracket.
Note: Please make sure you speak to your accountant about write-offs so you know what you can and cannot write off. For example, I tried writing off my haircuts, but my accountant quickly explained to me that unless I started modeling on the side, those were on my own dime.
Expenses
Now that you know you will be on the hook to pay your own expenses, let’s talk about what you will be paying for. There are a lot of expenses you will need to consider. So here is a list of some of the main ones…
Common Expenses
Association dues
Brokerage fees
MLS fees
E&O - Errors and Omissions insurance
Cell phone bill
Computer/tablet
Car payment/gas/car insurance/car maintenance/washes
Marketing/advertising
Website/CRM - Contact Relationship Manager (unless given one by brokerage)
Postage
Real estate events
Client meals
These expenses all vary for many reasons, but to help guide you, as a new agent, I would plan to spend around $5,000 - $7,000 a year to cover your business expenses until you can increase any expenses, such as marketing. When you consider how little most first-year agents make, this number feels a lot larger.
But here's the thing, there is also the personal side of expenses you need to care about as well. And I’m not just talking about housing payments or groceries. Of course, those are important to consider, but what I’m talking about are things like health insurance, retirement funds, and disability insurance. Most agents do not consider these because they are usually covered by the company you are employed by when you are an employee. Brokerages typically do not cover these.
TIP: I highly suggest you have enough money to cover your personal and business expenses for at least 6 months before you enter the industry to give yourself a buffer.
So, now you know how agents are taxed, how expenses work, and what you will need to budget for, I want to talk about where to spend your money so it works for you.
NOTE: If you need help budgeting, check out my book The Education of a Real Estate Agent Workbook. I have a workbook inside to guide you through what to do. You can purchase it and the main book that goes with it HERE.
Where to Spend in the Beginning
Look, I know it’s tempting to want to start throwing money at Facebook, Instagram, or pay for some expensive leads program that will overpromise and underdeliver, but before you do, please hear me out first.
If I were starting my business today, with everything I know about how to run ads from studying advertising legends such as David Ogilvy (one of the inspirations for the show Mad Men), John Caples (who the advertising industry's most prestigious tribute, The John Caples International Award is names after), and arguably the greatest copywriter of all time, Claude Hopkins, I’m still spending my budget on the most effective place to market, a database.
OK, I know marketing to a database is not sexy at all. But I’m here to help you make money, not win a beauty pageant. I’ve studied agents for almost two decades, and out of everything an agent can do to create business, there is one consistent with all of the most successful ones: they have a large database, and they market the heck out of it. I get that sending people emails, postcards, giving gifts, calling/texting, sending birthday cards, trying to remember anniversaries, dropping off pies on Thanksgiving, or hosting client appreciation events doesn't exactly scream to have a Netflix documentary made about you, but here is a secret…they work! One thing I learned from David Ogilvy is that it doesn’t matter if something is not sexy; all that matters is if it convinces someone to buy the product or service.
I can tell you personally how right David is. At the beginning of my career, I did not have much money at all. When I entered the industry, I had $2,000 to my name, so I had no choice but to focus what little money I had on the place with the highest probability of a return (especially since I did not have a plan B at all to fall back on). So on the advice of a mentor, I focused every dollar I could spare on marketing to my database. I would contact or “touch” them 28 times a year every year. I would send a personal real estate newsletter at the beginning of every month (still do!), send a postcard in the middle of the month, and send a quarterly update email each quarter. Of the three, the only money I had to spend was on the postcards. Over time, my business began taking off, and I went on to sell close to $75 million and won a top producer award in my final year of selling full-time.
I know I am just one example, so let’s also take into account the close to 50 brand-new agents I mentored at my brokerage before I sold it, who went on to average 2x4 times the national average for the amount of sales and income for agents in their first year. These agents went through our custom-built mentorship program, with a week fully dedicated to their database. We helped them build their database quickly and put a plan together based on spending every marketing dollar they had on it.
So if you are considering becoming an agent and want to start making income quicker, I suggest doing what I and the agents mentioned did and make your database your focus. At the same time, I also want you to keep something in mind regarding expenses: every dollar spent outside your business is one less to reinvest in your business. Think about that before you spend any money to help ensure you are making the smartest decisions to help you achieve your goals.
So now you know what you need to pay for and how to spend the rest! The last thing I want to mention (and please always keep this in the back of your mind),
I hope this makes sense. If not, leave me a comment so I can explain it more clearly for you!
“Your life does not get better by chance. It gets better by change.” — Jim Rohn
P.S. IF you are serious about becoming a real estate agent and want to learn how you can avoid the mistakes 87% of new agents make, I encourage you to check out the coaching program I have developed to help agents before they enter the industry. The program is designed to help you avoid the frustrations I and so many other agents felt when entering the industry, struggling to survive while clinging to the belief we will succeed. It is completely based on proven results from my experience as a top-producing agent, owning a brokerage for almost a decade (where I helped agents average 2x4 times the amount of sales and income), and from spending over 25,000 hours learning from history’s most legendary people! If this sounds like something that would benefit you, please click HERE to set up a FREE 30 Minute Virtual Call to learn more about how I can help you.