Real estate agents face several unique financial planning challenges and opportunities that exist within an industry that’s constantly ebbing and flowing within both the local marketplace and the larger economy.
From managing irregular income streams to planning for taxes and retirement, financial planning is critical for long-term success and stability for agents who want to make long careers out of real estate. Yet, many are way behind and/or have no clear direction on what to do next.
1. Learning to Navigate Irregular Income
One of the most challenging aspects of being a real estate agent is the unpredictability of income. Your earnings are largely commission-based, meaning some months are booming while others are lean. This irregularity can make financial planning seem daunting, but it’s far from impossible.1) Study Your Income Patterns
Take the time to understand your income patterns. Look back over the last few years and identify your peak and off-peak seasons. While real estate markets can be unpredictable, certain trends, such as increased activity in the spring and summer, tend to be consistent. Recognizing these patterns can help you anticipate and plan for the leaner months.2) Plan for Steady Lead Flow
Hope is not a strategy. If you want to be successful in this industry, you need to think about long-term lead generation systems that will allow you to enjoy steady lead flow, even in down markets. It’s difficult to manufacture this on your own, unless you spend years building a big personal network. However, platforms like HouseJet can give you a predictable system that may produce a steadier cash flow for more predictable long-term income.3) Create a Baseline Budget
Once you have a grasp of your income fluctuations, create a baseline budget based on your average income. Start by listing your essential expenses, such as housing, utilities, groceries, and insurance. These are your non-negotiables. Then, factor in variable expenses, which might include marketing costs, professional development, and discretionary spending. Your baseline budget should be conservative, prioritizing essentials and minimizing less critical expenses, especially during lower-income periods.4) Create a Financial Buffer
To smooth out the irregular ups and downs, build in a financial buffer. This buffer is essentially an accumulation of surplus income during good months that can be drawn upon during slower periods. It’s different from an emergency fund, which is meant for unexpected expenses, like major car repairs or medical bills. Think of your financial buffer as a way to “pay yourself” a consistent salary, even when commissions are sparse.2. Smart Tax Planning
As an independent contractor, you’re responsible for managing your taxes, which can be a significant financial burden if not planned properly. Setting aside a portion of each real estate commission check for taxes is crucial as to avoid a last-minute scramble.3. Intentionally Save for Retirement
Retirement planning is another facet of financial planning that can’t be overlooked. Unfortunately, it often is. A recent study suggests 56 percent of Americans feel behind on saving for retirement. Even scarier is the fact that 22 percent of American workers haven’t made a retirement contribution in 12 months or more. Whether you’re behind or on track, you need to prioritize intentionally saving for retirement.
Without the benefit of employer-sponsored retirement plans, it’s up to you to secure your retirement nest egg. Exploring retirement savings options like individual retirement accounts (IRAs) or solo 401(k)s is a good start. Regular contributions, even in small amounts, can compound over time, leading to significant growth in your retirement savings.
4. What to Look for in a Financial Advisor
There are thousands of financial advisors for you to choose from. However, not all are created equal. As you consider hiring one, we recommend setting up consultations with at least two to three folks who you’ve already done some vetting on.1) Credentials and Experience
Start by checking their credentials. Look for certifications like CFP (Certified Financial Planner) or CFA (Chartered Financial Analyst), which signal a serious commitment to their profession. Also, dive into their experience. How long have they been in the field? What kinds of clients have they worked with? Experience tailored to your financial situation can make a big difference.2) Their Approach to Financial Planning
You want an advisor who sees the big picture, not just someone who’s going to sell you the hottest investment. Your advisor should be interested in your overall financial health. This means they should ask about your goals, risk tolerance, and life plans.3) How They Get Paid
This is a biggie. Financial advisors can be paid through fees (a flat fee, hourly rate, or a percentage of your assets they manage), commissions (for products they sell you), or a combination of both. Each model has its pros and cons, but the key is transparency. You want an advisor who’s upfront about how they’re compensated so you can be sure their advice is in your best interest.4) Their Investment Philosophy
Does their investment philosophy align with yours? If you’re all about slow and steady growth but they’re pitching high-risk ventures, there’s a mismatch. Your financial advisor should have an investment strategy that resonates with your goals and risk tolerance.5) Availability and Communication
Consider how easy it is to get a hold of them. Your financial advisor should be accessible and responsive. Check if they have a limit on meetings or calls with you. Also, consider their communication style. Do they explain things in a way you understand, or does it feel like they’re speaking another language? You want someone who makes the complex world of finance clear and understandable.5. How Much to Save for Retirement
Anyone who tells you they know exactly how much you need to save up for retirement is lying. It’s impossible to predict how much you’ll need when you don’t know how long you’ll live, what inflation will do, what sort of unexpected medical expenses you’ll have, etc. With that, there are some general rules of thumb that you can use.The 25x rule is one of the most commonly used “back of the napkin” math formulas for retirement. It essentially says you need to have 25 times your planned annual expenses saved by the time you retire. That means if you plan to spend $8,000 per month—$96,000 per year—you need to save $2.4 million.
This rule is really just a small twist on the classic 4 Percent Rule, which retirement planners have used for years as a helpful rule of thumb. (The idea is that you can withdraw four percent of your retirement portfolio each year, adjusted for inflation, and have a high probability of the money lasting for at least 30 years.)
The helpful thing about using the 25x Rule or 4 Percent Rule is that you can gauge where you are in your retirement savings journey. For example, if you know you need $2.4 million saved for retirement and you’re currently at $1.9 million, then you know you need another $500,000 saved. If you’re able to put away roughly $50,000 per year, then that means you need to work another 7–10 years (depending on how well your investments do).
6. Financial Planning Mistakes to Avoid
As a real estate agent with unpredictable income, you have to be super proactive in your financial planning. A failure to get ahead of things could result in you falling behind and having to work an extra five or 10 years more than you had originally planned.For starters, you have to get really tight on high-interest debt—particularly credit card debt. This is one of the biggest things that can stifle your ability to save for retirement.
Another big mistake is to be overly reliant on Social Security. While it’s certainly nice to know you have some guaranteed income that will come during retirement, these benefits aren’t going to be enough to carry you through. On average, Social Security only covers about 40 percent of someone’s ideal retirement fund. (And, to be honest, if you have expectations of being able to travel, buy a second home, or enjoy a carefree lifestyle, Social Security might only fund 10 to 20 percent of that budget.)
Finally, you have to avoid falling into the trap of living beyond your means. According to a 2023 study by Bankrate, nearly half of U.S. adults have less than or no savings compared to the prior year. In others, half of Americans are spending more than they make. This has them going in reverse rather than progressing.
While easier said than done, you have to find a way to live beneath your means and put away at least 15 percent of your income every month into retirement. In fact, you should go ahead and “tax” yourself 15 percent of every commission check you get. That means if you sell a $500,000 house and get a $15,000 commission check, you should automatically transfer $2,250 of that check into your 401k or other retirement investment accounts.
7. Making Financial Planning a Priority
The key to financial planning as a real estate agent is to (a) smooth out those irregular income cycles and create more predictable deal flow, and (b) have a documented retirement saving/investing strategy that you intentionally and systematically follow over 10, 20, and 30-plus years.Small steps reproduced consistently over time is the key to success.
