August 23rd - 2014

Dollars and sense: Managing your money

Starting out in real estate can be financially challenging, especially given the initial lack of income and the volume of upfront expenses.

Wallet and coins

Wallet and coins

Starting out in real estate can be financially challenging, especially given the initial lack of income and the volume of upfront expenses. Three seasoned real estate professionals share their experiences and what they’ve learned -- sometimes the hard way. 

The biggest financial mistake people make is being underfinanced when starting out, according to the sources. Be prepared for large expenses and limited income for the first six months, and maybe longer,” says Steve Kotan, a North Bay REALTOR® with 24 years’ experience. “As soon as you start working for a brokerage, you’ll have expenses. Depending on your office and its commission structure, monthly costs can run from a small amount up to $3,000. Speak to REALTORS® from different brokerages to learn more about their costs.”

A nest egg is a good idea, suggests Ian Smith, a broker of record and 25-year veteran of real estate in Oshawa.  “I advise new REALTORS ® to start with $10,000 in the bank as backup,” he says.

Be aware of the income gap at the beginning, advises Sheree Cerqua, a Toronto REALTOR® with 15 years’ experience. “Even if you sell a house right away, it can be 120 days before you’re paid.”

Fees and dues are the biggest costs when you are starting out, they say. Registration fees and real estate board or association fees must all be paid “before you sell a piece of real estate,” notes Smith. Education and training are other costs because you must complete all necessary courses to earn your licence, adds Kotan.

Working in real estate often means long hours and therefore a home office is a good idea, says Cerqua. Other basics include signs and business cards. Increasing your car liability insurance is also a smart move, she says.

There are different schools of thought about the proportion of budget you should spend on advertising. Cerqua advises REALTORS® to invest 20 per cent of their income on advertising and promotion.  As you become more successful, you’ll likely spend much more, she says.

However, Smith has a different viewpoint. “If you’re new in the field, advertising probably takes up 50 per cent of your budget.  If you’re experienced, have money coming in, and are getting client referrals, you may only need to spend 10 per cent on advertising.”

Once you have identified potential repeat customers, it’s important to keep in touch, says Smith. Sending out freebies such as home show tickets or other items of value are good ways to stay in contact, he says. “Just calling people to see if they want to sell or stuffing their mailbox with flyers wears thin after a while.” 

There are cost effective ways to boost business when you are starting out, Cerqua notes. “Advertise online. Develop a database and reach out to friends through social media,” she says. Smith adds that “Knocking on doors is very inexpensive and often generates fabulous results.”   

Most brokerages offer access to inexpensive, often under-utilized resources to produce feature sheets, just-sold or just-listed flyers, says Smith. Some offices will provide salespeople with a cold call list. Cold calling can be very successful and has little or no cost, but be mindful of the National Do Not Call list, the REALTORS® advise. OREA and real estate board websites are also useful resources with free, helpful information, says Smith.

New REALTORS® can learn financial skills from their broker manager who can mentor them and help with a business plan. Experienced salespeople are also a valuable resource who can be vital to your own growth and development, says Smith. “This is often the first unstructured, unsupervised job for people so they don’t always make the best decisions.” Create a support system, adds Cerqua. “It might be as part of a team or by being an assistant. Working in real estate is a big responsibility and mistakes can be extremely costly.”  

Another financial pitfall is failing to track the impact of your expenditures, says Smith. “If you’re spending money on newspaper ads, radio spots and flyers, determine which ones are bringing back business.” 

Don’t fall into the trap of viewing a commission cheque as a paycheque, the REALTORS® advise. “There are expenses associated with making that money,” says Kotan. “HST and income tax must be paid out of that cheque. New salespeople sometimes forget to put aside money for income tax.” Splurging after you receive a commission cheque is a common mistake made by new salespeople, Cerqua adds. 

Stressed businessmanSet up several bank accounts to help with money management, they suggest. One account might be for HST and income tax, another for business expenses such as advertising and the third for you. You might also want a separate savings account as a cushion for tough times.

Your costs can go up in real estate even as you become more successful, Cerqua notes. “We often start out working for buyers. Several years later these people call us again to help sell their homes. This is a common way to grow our business, but the costs are much higher when you represent sellers. You have the cost of listing the home, which includes photographs, virtual tours, feature sheets, distributing flyers and sometimes a pre-home sale inspection report.” 

Business expenses vary from market to market, says Kotan. “In North Bay, we don’t have just buyer reps or listing reps. We do everything.”  In a successful year, he does not see big changes in his expenses. 

As business grows, you’ll probably set up a website, says Cerqua. “This can cost $5,000 and up. You might also hire an assistant and need more office space.” Expenses increase as you become more successful, but ideally not at the same rate as income, says Smith. Your expenses may increase 50 per cent but you’ll do 100 per cent more business. Over time, you’ll get better results from systems and procedures you put in place. Advertising and promotion as well as managing your client data base are the main areas where expenses increase, says Smith.

Avoid the temptation of frivolous purchases, Kotan advises. “It’s easy to be attracted to the shiniest new thing, but you don’t need the best computer, smartphone or car. Put together a business plan and stick to it.”

Kotan says REALTORS® can get caught up in “flavour of the month” marketing. Smith says they’ll look for what they think are the easiest ways to generate business such as newspaper or radio advertising or producing fancy brochures. These don’t replace face-to-face client contact, he says. “Some REALTORS ® think if they’re spending money, they’re making money. That’s not always the case,” says Kotan. 

“The most common pitfall in real estate is that people treat it like a job, but it’s not just a job,” says Kotan. “It’s a business, and you must treat it like a business. Having a business plan will help you determine what your expenses will be, what your goals are and how to achieve them.”

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