To enjoy a successful business as a Realtor, you must obtain legal, financial, insurance and accounting security. Although you don’t have a set number of vacation days or an employee handbook addressing most any situation, you do have the freedom to customize the way you cultivate your business. The best method of operation: Consult the experts, and spread your investments around.
By Jennifer Morrell
As a Realtor, your considerations regarding financial protection now and in the future are different from the typical corporate 9-to-5er. Big picture planning can be a challenge, especially for a Realtor who is just getting started.
Planning for the future means creating a plan for your finances that works for you now and will continue to work for you in the future. Realtors have the advantage of great cash flow when they are working. The more they hustle and harder they work, the more income they’ll undoubtedly generate. The flip side is that when a Realtor retires or stops working for unforeseen reasons, the income abruptly ceases. So, planning accordingly is of the utmost importance.
“Realtors are independent contractors and therefore responsible for their own insurance, taxes and retirement plans,” says Jeff Morr, CEO of Majestic Properties. “Consistency is the key. Put money away consistently, plan for the future and remember that top producers are the ones that invest most heavily in marketing. If you want to boost your income as a Realtor, have an organized, strategic marketing plan.”
Morr founded Majestic Properties in 1995, and the independent, full-service real estate firm now counts more than 200 associates and staff. Morr says his company brings in financial planners throughout the year to talk to agents. “One recommendation is that Realtors should have at least six months of operating expenses available in cash when the market slows down temporarily,” he says.
Realtors should invest in at least one well-priced property per year, according to Morr. “I have been buying real estate since age 20,” he says. “I recently turned my first $57,500 purchase into a $2,100,000 sale by selling, buying and exchanging at the right time. Ten percent of a Realtor’s earnings should be invested in traditional investment vehicles such as mutual funds, annuities and life insurance.
“It’s important to diversify and hold some investments that don’t go up and down in the same cycles as real estate. Also, it’s a good idea to have investments that are more liquid than real estate, such as stocks, bonds and mutual funds”
– Dan Prebish, attorney, A.G. Edwards & Sons
“I put money in retirement accounts, life insurance and, recently, art,” Morr continues. “Diversity is the key. Have fun with your investments.”
Dan Prebish, a tax attorney with A.G. Edwards & Sons, agrees with the concept of investment diversity. “Realtors know that real estate markets move in cycles, not in a straight line,” he says. “It makes sense to have assets outside the business and during an opposite cycle.
“You don’t want to be invested in one thing, even if it’s the best performing option,” Prebish continues. “It’s important to diversify and hold some investments that don’t go up and down in the same cycles as real estate. Also, it’s a good idea to have investments that are more liquid than real estate, such as stocks, bonds and mutual funds.”
Although it used to seem Realtors were at a disadvantage as self-employed entrepreneurs, with no 401(k) or other such retirement plans being offered to protect their futures, this is not necessarily the case, according to Prebish.
“Most agents can tailor a retirement plan to fit their needs,” he says. “Each Realtor is different and has a unique set of needs. The agent must look at the overall growth income and determine what the long-term objective is.”
Understanding the rules surrounding the different plans is important as well (see “Your Financial Options” pp. 32-33). With most large companies, an employee’s retirement plan is based on employee contributions. Fewer and fewer companies are contributing to employees retirement plan. Luckily for Realtors, opportunities are available that are comparable to what many large companies might offer.
“There are more options today than ever,” says Prebish. “This clears up the myth that retirement plans are too expensive. And, with technology increases and improvements in record keeping, prices are kept down.”
Prebish notes that self-employed agents need adequate life insurance as well. It is not tremendously expensive to have basic term coverage for the agent, his spouse and his dependents. Permanent insurance, which builds cash value, is like a savings plan and is a great idea to consider. This type of insurance will not build a lot of cash during the first 10 to 15 years, but will produce financial gains for the long term. The agent can enjoy life insurance and tax savings simultaneously.
For those Realtors who have extremely high incomes, schedule a meeting with a certified public accountant to discuss tax protection. This meeting should occur in October or November, before the year ends, rather than in the spring during tax season. Information can be gathered and a tax return mocked up. This way, the agent has a chance to prepare and can still do things to change the outcome of what might be owed the following year.
“April is too late,” says Prebish. “If you think you are having a good year, you should meet with a CPA early on. You can accelerate deductions and determine how much cash you should hold to pay in April. This saves you from anxiety and stress later. An expert will be able to help with short cuts as well.”
There are even more areas to consider if you own your own real estate company. You are faced with several decisions that will shape how you operate your company, according to Al Gonzalez, attorney and partner at Adorno and Yoss.
First, you have to determine if you want to incorporate, and whether you want to be a limited liability corporation (LLC) or corporation. Doing so will shield your personal assets from contract-based claims or claims based on acts or omissions of others. Incorporating allows you to deduct expenses, such as gas. Meeting with an attorney is necessary to help you decide whether a LLC or corporation is better for you.
Should you form a LLC, Gonzalez recommends you create a policy manual to set rules for your company, keep control of all the contracts, monitor advertising, provide ongoing training and be sure all agents’ credentials are current.
The next task is finding a banker you trust. You will need cash flow to span the life cycle of your listing, from the time a property is listed to the time a contract is written and closed. This period could be six months or more, and you’ll need a line of credit to run your business.
Look at benefits, such as insurance and retirement. Many LLCs don’t provide benefits, or only do so at the individual’s cost. If the agents are independent contractors and not actual employees, they can pay for their own insurance. You will need to assure your agents’ car insurance is current and appropriate.
Should you opt to create a corporation, it can be an S or a C corporation. S corporations are attractive for small businesses, because income generated from an S corporation is subject to only one level of tax (at the owner level). Income generated by a C corporation is subject to tax at the corporate level as well as the owner level, when such income is distributed. A benefit of a C corporation is that medical expenses in excess of medical insurance premiums can be deducted by the corporation through a medical reimbursement plan.
A policies and procedures manual is paramount, and an attorney can help you to determine the content and customize any basic manual. Most Realtor boards have standard manuals that can get you started. Assuring all agents are licensed with the state of Florida and with all appropriate organizations is also necessary.
“It’s important to protect yourself as a business owner,” says Gonzalez. “People will sue, and liability insurance is needed to cover you.”
Gonzalez advises owners to distance themselves from their agents. “They are independent contractors,” he says. “Make them responsible. Have them sign agreements regarding commission splits, specific situations (for example, if an agent sells his own property, the broker doesn’t get a cut of the profits), what kind of insurance to carry, etc. Be sure they comply with the state requirements and understand everything they sign.”
Mind over matter
Florida Realtors are in more competition with one another than ever before, says Monte Kane, CPA with Kane and Co. “There are a lot of part-time agents, which is not true in other professions,” says Kane. “Agents are permitted to work for brokers and not be considered employees but, instead, independent contractors.”
Kane acknowledges that Realtors need to have their finances, retirement, taxes and insurance in order. He regularly lends guidance to agents who are learning to take control of their businesses. But Kane values a way of thinking that, though intangible in the fast-paced real estate industry, has real importance in agent performance: the power of self-assessment.
“Every agent needs to evaluate where he wants to be in three, five and 10 years,” says Kane. “What type of work he wants to be doing, how much money he wants to be making and what lifestyle he wants to live are all important in business development. Look beyond the short-term goals.”
Kane says it is important for an agent to avoid having regrets, set long-term goals and create action steps for his professional career, family, finances and health and fitness levels.
“Realtors have to realize that the business of real estate is cyclical, and (learn) how to anticipate the cycles,” says Kane. “It’s important to be adaptable, even if that means having a second or back-up job.
“Real estate can be a frustrating field, because there is so much that is beyond the agent’s control,” Kane continues. “A Realtor can spend a lot of money and time trying to sell a property, but will never really know what the final outcome will be until it happens.”
Kane suggests meeting with a CPA to help address goals, and he says CPAs are good listeners who will ask you probing questions to get you to think outside the box and challenge yourself.
Kane’s mantra says it all: “When patterns are broken, new worlds emerge.”
Attorney & Partner, Adorno & Yoss
CPA, Kane & Co.
CEO, Majestic Properties
Attorney, A.G. Edwards & Sons