As a CERTIFIED FINANCIAL PLANNER™ specializing in helping real estate agents, I understand the unique financial challenges top-producing real estate agents face. According to the most recent study by the U.S. Bureau of Labor Statistics, the top 10% of real estate agents earn in excess of $178,720 annually.* While earning over $178,720 annually is commendable, the uneven income streams associated with the profession require careful financial management. In this article, I’ll address two major issues contributing to uneven income and provide actionable solutions for real estate agents to achieve financial stability.
Big Problem #1: Seasonality
Understanding the Impact
Seasonality significantly impacts real estate agents’ income. Research from the National Association of Realtors reveals that in the western United States, 71% of residential real estate transactions occur during the “peak season.” This leaves agents with irregular income throughout the year.
As any agent knows, the checks come in only when transactions occur, leaving much of the calendar year with a lower average monthly income. The main issue with seasonality is accounting for monthly expenses and maintaining lifestyle. As a result, seasonality is the first big problem agents face with their variable income.
Solution: Emergency Fund
To combat the challenges of seasonality, an emergency fund is your first line of defense. An emergency fund consists of cash assets and can be accessed on short notice at any time. Although the amount to keep in the emergency fund can vary depending on the risk tolerance of the agent, the rule of thumb is to keep three to six months of living expenses on hand. These funds should be easily accessible to help balance variable income through the off-season.
Given the previously mentioned issues surrounding uneven income streams, it makes sense for top producing real estate agents to be on the higher end of the three to six month range.Consider keeping this fund in an FDIC-insured high-yield savings account (HYSA).
Just because your emergency fund must be held in cash does not mean that it cannot work for you. You will want to keep enough in your checking account to comfortably pay your monthly expenses, but you should hold anything above this amount that is designated for your emergency fund in an FDIC-insured high-yield savings account. Online banks offer attractive interest rates, ensuring your money works for you even during off-peak seasons. Used appropriately, an online HYSA account is a valuable tool in maintaining your emergency fund while making sure your money is working for you.
Big Problem #2: Commission Split
Dealing with Commission Structures
Commission splits further complicate income stability. Varying rates paid to brokerages impact your net commission per transaction, affecting your cash flow distribution across the year. Although the rates and amounts paid to the brokerage can vary, the commission split has a large impact on the net commission to the agent per transaction until the hurdle is overcome.
This issue compounds the effect of seasonality by reducing the net income to the agent earlier in the year and allowing for higher payouts later in the year.
Solution: Brokerage Account
While not an emergency fund, a brokerage account serves as a backup. Unlike retirement accounts, a brokerage account allows penalty-free withdrawals anytime.
One mistake we commonly see Top Producers make is keeping too much cash on their net worth statement.
Unlike tax-qualified retirement accounts, which carry a penalty if withdrawn from before age 59 ½, a non-qualified brokerage account is available for withdrawals at any time. Additionally, depending on the investments held in the account, capital gains tax treatment applies in most scenarios, allowing for preferential tax treatment as gains are realized.
The key difference between your cash emergency fund and money held in a brokerage account is the amount of risk you take. Remember, there is no free lunch. The higher the rate of return you can expect from an investment moves in tandem with the amount of risk you take to achieve that return.
Since the emergency fund is meant to be used in the short term, it’s not the place to take risks with your net worth. In contrast, once the emergency fund is fully funded, you can consider a brokerage account. With a brokerage account you can invest in a diversified portfolio that carries a much higher expected return.
Invest in a diversified portfolio for higher returns, managing long-term financial goals while providing a safety net for emergencies. You must have a long-term view when investing in the stock market. Howev you still can access your brokerage account funds as needed before reaching retirement.
Conclusion
Success as a top real estate agent brings the challenge of uneven income streams. Counteract seasonality and commission splits with financial safeguards. Establish a robust emergency fund to navigate lean months and consider a brokerage account for long-term growth and backup funds. By implementing these solutions, you can enjoy both the rewards and stability of your thriving real estate career.
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By addressing these issues and providing actionable solutions, real estate agents can better manage their finances. Utilizing these solutions agents can secure their future and enjoy the benefits of their successful career in real estate.
