As independent contractors, most real estate professionals don’t have the typical structures in place to help them set up their businesses properly, scale to meet rising demand or get ready for retirement. But some brokerages are trying to get ahead of the problem, offering investment information and support for the many financial decisions agents and brokers need to make on a daily, monthly and yearly basis.
Agent Publishing sat in on just such an event this week. Coldwell Banker has been hosting its so-called Wealth Builder events in select markets across the country all year, and this week the series landed at the Donald E Stephens Convention Center in Rosemont. Here are some of the takeaways from that event.
- Have an end goal in sight
One of the primary reasons Coldwell Banker is organizing these events is to get agents ready for retirement. In kicking off the day-long seminar, Ayoub Rabah, president of Coldwell Banker Residential Brokerage Chicago, noted that less than 50 percent of Realtors are planning for retirement, according to data from the National Association of Realtors. “That’s a little sobering, isn’t it?” he asked the audience, adding that the average age of a Realtor is 58, and that their median net worth, outside of a primary residence, is a little under $10,000.
Kimberly Alexander, a professional development expert, encouraged attendees to not only set goals but also think deeply about why they want to achieve them and what it will take to do so. She compared the effort to dieting, wherein any weight a person loses is generally determined by what they eat and how much they exercise. “What you want and the actions that you take should mirror each other,” she said. “Do the choices you make fall in line with what you want?”
- Be serious about owning your business
Adrian Scurtu, a CPA and tax strategist with Manning Silverman & Company, told attendees that there are a lot of little best practices that real estate professionals can adopt to make sure they’re not risking their investments or leaving money on the table. For the most part, these to-do items fall under the category of operating one’s real estate career in a professional way.
“Run it like a business,” Scurtu advised, advising attendees specifically to separate business bank accounts and credit cards from personal ones, keep detailed expense receipts in an organized way, pay taxes quarterly, regularly fund retirement accounts, and undergo a regular profit-and-loss analysis. Otherwise, “we’re really leaving money on the table.”
Scurtu recommended three tools, with which he doesn’t have an affiliation, to help make some of these processes easier: MileIQ, a mileage tracking and logging app; Expensify, software that helps businesses manage receipts and business travel; and accounting software QuickBooks.
- Don’t be the cobbler with no shoes
Real estate professionals have a leg up when it comes to investments of a certain type, but they don’t always take advantage of it. Craig O’Rourke, a Coldwell Banker agent in the Los Angeles area, told attendees how his father, an agent who worked with real estate investors, was in this same boat when O’Rourke was a child. “He did it for dozens and dozens of clients, but he didn’t do it for his own family,” he said.
O’Rourke noted that while investing in real estate can be overwhelming, it’s got a built-in benefit that other investment vehicles generally don’t. “Every investment needs a funder,” he said. “Real estate has a third funder: You have a tenant who every month is paying rent… it’s a self-funding, self-sustaining investment.”
Of course, that doesn’t mean agents and brokers can just start buying up buildings and hope they’ll turn into a retirement fund. “When you invest in a piece of real estate, you are investing in a business,” O’Rourke said, advising that agents talk to their financial advisors and family members about where money for the down payment, maintenance and unforeseen expenses will come from before diving in. “Anything you invest in you’re going to have to take money out of your pocket… Make sure you go over these questions together.”
Bruce Heller of Coldwell Banker Commercial NRT in Chicago agreed that it’s important to be realistic about both investment goals and whether or not you need to hire someone to manage the property. “Do you have the time? … Be able to know the resource world you have and who you can count on,” he said. “If you don’t know the economics, you don’t know the rent [or] you don’t know the real estate taxes… You can easily find yourself upside down.”
- Structure your business properly
While most agents register their businesses as sole proprietors, limited liability companies and S-corporations can have more financial benefits for real estate pros, according to Scurtu. He noted that independent contractors have to pay a 15.3 percent tax due to the Federal Insurance Contributions Act (FICA), but that by creating an S-corp, “You are acting as both employee and employer.” That means you’ll still have to pay FICA taxes on whatever salary you decide to pay yourself, but the remainder of the business’ proceeds are considered dividends, upon which no FICA taxes need to be paid.
There are a few caveats in terms of how little you’re allowed to pay yourself, however. The Internal Revenue Service requires “reasonable compensation,” though Scurtu noted “they don’t give much guidance on what that should be.” But also, he noted that paying less into FICA can impact how much social security you’ll be able to draw on in retirement. Scurtu recommended agents “take a holistic view of their tax strategy” to ensure “it falls in line with [their] retirement plans.”
- Know the investment vehicles that pertain to real estate
There are other ways to invest in real estate other than becoming a landlord, according to Dan Wagner, senior vice president of government relations at The Inland Real Estate Group of Companies. He characterized the opportunity to buy into a real estate investment trust (REIT), which is essentially a company that owns, operates or finances income-producing real estate, “the mutual fund of real estate.” Furthermore, he referred to 1031 exchanges, a method of deferring capital gains taxes by reinvesting them in a similar investment, as the “401k of real estate.” Finally, he noted that using a Delaware statutory trust in conjunction with 1031 exchanges can help deal with some of the uncertainties of a 1031 exchange (read more in his recent op-ed with Chicago Agent ).
Real estate professionals who are looking for a middle ground between owning an investment property and taking the passive approach with a REIT might consider creating a partnership or small investment group to purchase property together. Armond Boulware, a Coldwell Banker agent who works in Hyde Park and Highland, Indiana, said this can be a great way to scale ownership quickly, as long as you know your partners well and ensure collective strengths and weaknesses are balanced. “You really have to share the why… What’s the end game?” he said. “What’s your vision for the future, and is that going to align with mine?”
- Deduct intelligently
Another potential tool in independent contractors’ toolboxes is tax deductions. This isn’t a new concept for most agents, but there are some new and novel ways to get the biggest bang for your buck come tax time. While depreciation rules don’t allow you to write off 100 percent of a business investment that first year, a recent change may impact the kind of car you choose for your business. Scurtu noted that now, a car or truck over 6,000 pounds is considered a “heavy vehicle” and is eligible for a full write-off, meaning it might pay dividends to think about scaling up next time you’re thinking about purchasing a car or truck for work.
Scurtu also noted there’s a little-known but potentially lucrative write-off to be found in Section 280a of the IRS code. If your business is structured as an S-corp, you’re required to have at least one business meeting a year. But going back to his advice about running your business like a business, Scurtu said this practice can help brokers be more strategic about their analysis and future planning. “How much more productive do we think we could be,” he asked, “if we took one day a month and worked on your business instead of in it?”
Taking the time out to meet with business partners can be costly, though, running into the thousands to rent space and feed everyone for the day. But Scurtu noted that S-corp owners are able to rent out their homes to their business for up to 14 days out of the year, and that “that rental income you collect is tax deductible.”
Finally, most agents know that if they’re planning on writing off business travel expenses, they need to make sure that more than half of the time spent on the trip is dedicated to business purposes. So Scurtu suggested that if you’re going to tack some tourist activities to your next business trip, balance it out with some time for your career to make sure you’re still on the up-and-up with the IRS. “Network with local agents. Go to local offices,” he suggested. “Always make sure you write down where you’re going, what you’re doing and who you’re meeting.”