The real estate industry can often be considered one that is high-risk yet high-reward.
Doing as much research on the industry before you start, whether you simply want to invest in or list commercial property for rent, is recommended.
A lack of knowledge of how it all works can really hurt you financially.
That said, much money can go into the real estate industry. It’s easy to get overwhelmed by the amount of money that goes into working as a real estate professional.
Let’s discuss some budgeting tips and tricks to reduce how much of your money goes into the work.
The Basics of a Budget
Working as a real estate professional isn’t always like any other profession; the work is very often commission-based.
Therefore, your income may change as the market does too. Budgeting is essential to ensure you’ll still be able to make ends meet even during your low-income periods.
When budgeting for a small business, there are 3 basics to consider:
- Income: How much money you earn from commissions, brokerage profit share, your base salary, coaching, and any other revenue;
- Fixed expenses: These are the essential expenses that are unlikely to vary from month to month. It includes rent (whether for your home or office), mortgage, utilities, and other bills, Multiple Listing Service (MLS), and other associated dues;
- Variable expenses: These are the costs that will likely change each month. Think of groceries, gas prices, clothes, and other personal care costs.
Financing apps or other software is a great way to start your budget. Most apps can allow you to have all the bills and other numbers in one place, making it easier to manage your finances.
Budgeting Tip #1 – Set Aside Money for Taxes
Many real estate professionals are self-employed, which means they pay self-employment taxes.
Paying taxes this way means that tax rates will change based on current rates and your general income.
To make setting money aside for taxes easier, you should make a separate tax account in that you can then deposit the taxable amount of money you make on each sale.
Being self-employed means that you’ll need to give the IRS your quarterly payments.
Having your tax money in its own account allows you to make these payments easily and on time.
Budgeting Tip #2 – Don’t Skimp on Marketing
Marketing is an important part of growing your real estate business. When creating your budget, you shouldn’t forget about allocating funds for marketing expenses.
Marketing will include social media ads, other print or digital ads, signage, and in-person events.
Once your business grows, you can split the marketing responsibilities with someone else. Early on, however, it all falls on you.
Although marketing is important, you should always examine your monthly priorities to determine how much you should spend on marketing.
For example, you don’t want to spend much of your budget on marketing only to realize that you’ve had important loan payments to make.
Budgeting Tip #3 – Managing Your Debt
According to Pew, 80% of Americans have some form of debt.
Those who work in the real estate industry, especially commercial investors, likely took out a loan for any of the properties that they own.
Managing as much of your debt as possible while your interest rates are low is important.
Worrying about how much money you can contribute to your real estate business can be extremely stressful when you are also concerned about your debts.
Here are some other tips that may help you pay off your debt faster:
- Pay more than the minimum amount that you owe;
- Pay your loans more than once a month;
- Pay off your most expensive loan first;
- Consider using the “snowball method;”
- Utilize bill reminders or online payment options.
The “snowball method” refers to when you pay off the lowest balance first, then use that same payment to pay the next lowest balance until you pay off the highest balance.
Using this tactic can help build momentum as your balances are paid.
Budgeting Tip #4 – Hire an Experienced Accountant
Accountants are typically associated with tax season, but you can utilize them all year-round.
Accountants can be incredibly helpful if you struggle to implement your budget successfully.
They will help you make smart decisions regarding your money and business.
Budgeting Tip #5 – Plan Your Retirement ASAP
Even if you don’t intend to retire from a real estate career officially, you never know what could happen in the future.
Therefore, you should consider adding contributions to a Roth IRA or 401k to your monthly budget.
Budgeting Tip #6 – Create an Emergency Fund
Emergency funds are essential regardless of your career but will be especially useful in a situation where you’re having a low month.
If it seems too difficult to set aside so much of your monthly income based on these tips, the least you should do is set aside for taxes and for an emergency fund.
When you have a particularly good month, you should put more into your emergency fund/savings.
That way, you will know that you have something in your account if things go south.
Budgeting Tip #7 – Invest When You Can
Investing has always been considered a great way to generate a passive income that can help boost your savings accounts.
Sometimes it is unrealistic to invest, especially if you live in an expensive area, but if you think you can afford to do it, it can help you boost your finances significantly.
The commercial real estate market has continued to do fairly well considering the pandemic, especially multifamily and industrial properties.
Investing can be a risky venture, though, so you should do as much research as you can.
Budgeting Tip #8 – Make Smart Purchases
While you may think it is smarter to spend less on key technologies you’ll be using for your real estate career, it will cost you more in the long run, especially if the items you purchase are unreliable.
It is smarter to spend more upfront on higher-quality products and services.