Creating a Real Estate Budget is one of those things that nobody seems to talk about in those real estate education classes, but it is definitely something they should be. However, how many people really budget efficiently, effectively and religiously? As a realtor, our income can shift significantly with the ebbs and flows of the market. Knowing all the pieces of your financial life can help ensure that you’re consistently reaching your goals.
#1 Piece: Fixed Expenses
Understanding the “locked in” monthly expenses that you have each and every month is the best place to start. These are items that there is NO running away from. There is NO way of avoiding paying them and NO options on whether you pay them or not. Mortgage, car payments, insurance, and child care are all things that we pay every month to live. I also look at items like cell phone, cable, electric/water/internet bills as FIXED EXPENSES. Sure, they might fluctuate month to month, but they will never go away. I avoid monthly expenses AT ALL COST! My wife does not. This is a struggle, but, as with everything in marriage, we are able to come to a common ground. We have more fixed monthly cost than I would like (subscription to hair bows for my daughter/fabletics), but not quite as many as my wife would want.
NOTE: Once you have a total for your monthly FIXED Expenses you will need multiply it by 12…
#2 Piece: Variable Expenses
Once you’ve compiled all your Monthly FIXED Cost for your Real Estate Budget, it’s time to start working through your variable costs. I defined these as categories where the total amount can vary month to month, but I typically have some expenses in each category each month. I put Starbucks, Date Night, Eating Out, Personal Expenses, Kid Expenses, Gas, miscellaneous, and Grocery Store. Out of all those categories, the Grocery Store is the one that might jump out. Why is it a VARIABLE cost verse a FIX cost? I have two reasons why.
The first, I got caught up watching some late night show when I was having trouble sleeping and I watched some family save hundreds of dollars every month! They coupon clipped and worked rebates and systems to maximize their budget for groceries. Now, I know this is an extreme way of doing things but it made me feel like our grocery expense is something that could shift every month if we really focused on it.
The second reason why I placed groceries into our VARIABLE Expenses is because of what I saw once we created our budget. I noticed that we were spending close to $1,000 per month on groceries. That’s a family of 4. Mom, Dad, a 1 ½ year old and a newborn. THAT SEEMED CRAZY! Then I noticed that we did all of our grocery shopping at Target. This is where we bought our groceries, but while we were there we’d pick up some kids cloths, a mug, some throw pillows. These bonus items were all things that WE DIDN’T NEED!
After putting together our “new” budget, one of our action items stated; “TARGET MUST DIE!” We no longer go to Target for groceries and try to avoid going there all together. It was CLEARLY the enemy of our budget!!! …and our goals!!! Once we made this shift away from Target to a more traditional grocery store we cut our expenses in this category by 40%! That was a huge savings every month, just by making one small change!
NOTE: Once you have a total for your monthly VARIABLE Expenses you will need to multiply it by 12…
#3 Piece: Rainy Day Fund
The part of the Real Estate Budget that is often overlooked is your Rainy Day Fund. Life is crazy and is consistently keeping you on your toes. To prevent life’s little (or BIG) curveball from putting you into a tale-spin you need to have a fund to catch the curve. The amount in that “Rainy Day Fund” is different for each person and their circumstances. I’ve heard people talk about needing to have enough money to pay your bills for 3 months. I’ve heard people say you need 6 months of reserves. So, I figure you need somewhere between three and six months. You can decide what makes you comfortable.
As a realtor, it’s possible for you to go significant chunks of time without closing a transaction. Which means you’re not getting paid. Understanding and controlling your expenses during those times can save you a ton of hardship, stress and unhappiness. These are all emotions that will prevent you from generating and capitalizing on leads. Not a good thing!
- Dial in your FIXED Expenses
- CUT any unnecessary FIXED Expenses
- Breakdown your VARIABLE Expenses
- This will give you an understanding on where your money is going.
- SET GOALS / Limits to each one of your VARIABLE Expenses
- CREATE a RAINY DAY FUND (separate bank account)
- Transfer a set amount from every transaction until you get your goal amount
REAL ESTATE TIPS: once you have your Rainy Day Fund established… you no longer have this as an expense! What a relief!
#4 Piece: Retirement Fund
As a realtor, our retirement is our responsibility! You have to own that and be committed to that idea. The longer that you put the idea of preparing for retirement off, the less time you’re going to have to build it. START NOW! As a former teacher, I had to make the calculated decision to walk away from a job where I got a consistent pay check and would be guaranteed a pretty comfortable retirement to jump into the world of Real Estate. One of the major delays in me making the jump was the pension. So, I did some math on what I would have to do to in order to provide myself the same pension the education system was going to give me. (Skip to Bottom Line if you don’t want the math…)
This is what I found. As a Teacher, if I retired when I was 55 and started collecting may pension immediately, I would collect $1.2 million over the next 25 years. Assuming I die at 80…morbid thought! Then I looked at that $1.2 million and subtracted the pension that I’m guaranteed as a vetted teacher now which brings me to $780,000. I divided that number by the 15 years I have to get to retirement age of 55 and this gave me my yearly retirement contribution.
Bottom line…I need to put $52,000 a year into a retirement fund to equal my teacher pension benefit. Is this doable in Real Estate? I have found that it absolutely is! There are a couple of things to think about. That yearly contribution does not factor in the compounding effect of the investment and it doesn’t factor in the ancillary investment opportunities that are available to Realtors. Building a rental portfolio, engaging in flip properties, and wholesaling are all some great revenue sources that can help to build your short term and long term wealth.
NOTE: this contribution should NEVER end! NEVER trade your Long Term NEEDS for your Short Term WANTS!
#5 Piece: Vacation Fund
What’s life without a little enjoyment…or a lot of enjoyment!? We definitely want to set a little stash to the side for some Vacation time. However you want to say it; “stop and smell the roses”… “gotta unplug”… “get some me time”… “reconnect”. Vacations are VERY necessary! But, you also need to be responsible about your vacations. That means you need to plan for them and budget for them! For example, I’m at that point in my life where my kids need to go meet Micky and Minnie! However, I know that’s going to cost me a pretty penny. I’m figuring $4,000.
So, how do I budget that? The process is simple. I create another bank account (also known as a “sinking fund”) and I start making deposits. Once I’ve done that, I do the math. $4,000 divided by the 12 months means that I need to put $335 a month into that account to make Disneyland happen! If I can do it, ANYBODY can. Whether it means that I increase my production or that I limit my VARIABLE Expenses, I can set aside an additional chunk of change every month.
#6 Piece: Industry Averages
Once we’ve really understood our expenses we need to start to figure out what it’s going to take to get there. Knowing your industry numbers will allow you to dial in your production goal. The number you need to know are…
Average Home Sales Price in your Area
Average Commission % Rate Earned
Your Split of the Commission
Plug these three numbers into some formulas and you’ll be able to figure out how many transactions you’ll need to have this year.
- Formula #1: Average home price (X) Average Commission % = Earned Commission
- Formula #2: Earned Commission (X) Your Commission Split = Earned Income per transaction
Now you have a ballpark number on how much should be in your pocket when you close on a transaction.
#7 Piece: YOUR Transaction Goal
So how many transactions to you need in a year? Well, total up all those numbers that we started with; FIXED Expenses, VARIABLE Expenses, Rainy Day Fund, Retirement Fund, Vacation Fund. What’s that number look like???
Take it and divide it by the “Earned Income per transaction number you just got… CONGRATULATIONS… you have your production goal for the year!
Now that we have identified our transactional target for the year, let’s get to work, shall we?!