Don’t Die Broke: Six Tips for Saving for a Rainy Day

“If we winter this one out, we can summer anywhere.”

This powerful line from Seamus Heaney rings so true today as the first chill evenings of fall and winter are upon us. We find ourselves in uncharted waters in so many ways. The COVID-19 pandemic seems to have no end in sight, the economy is in a difficult place, unemployment is high and it feels like things are incredibly polarized right now. It may be an exceptionally long and challenging winter.

Despite these headwinds, many REALTORS® are having the best year of their careers. Market activity is far above any historic norms, inventory is in woefully short supply and multiple offers are common in some segments. This is a perfect recipe for REALTORS® to shine, and many are. But what happens when the music stops?

For those of you licensed since 2011 or so, you have only ever known a recovering and improving market. All ships rise with the tide, and the tide has been doing exactly that for years. I entered the real estate world in 2005 and saw similar conditions – until 2008 or 2009 when I learned just how difficult this profession can be. With the current uncertainties, protecting yourself and your business is more critical than ever.

Perception vs. Reality

TV shows and YouTube channels portray flashy “million-dollar” agents in couture clothing, jet-setting across the country (preCOVID of course), and closing deals after three showings and in less than 27 minutes of airtime. The day-to-day reality of our profession requires far more substance than flash. As I tell my wife, those shows deal with imaginary estate, whereas I deal with REAL estate.

Thanks to the NAR archives, we know that the median gross income of REALTORS® was $41,800 in 2018, an increase from $39,800 in 2017. Income was typically equal to experience. REALTORS® with 16 years or more experience had a median gross income of $71,000—down from $78,880 in 2017—compared to REALTORS® with two years or fewer experience that had a median gross income of $9,300—an increase from $8,330 in 2017. (Source NAR Archives).

Whether it’s car repairs, health insurance, unplanned housing expenses, education or a host of other things, it’s very easy to fall into financial jeopardy. REALTORS® are not the only ones living close to the fiscal edge. You might be surprised to learn just how close most Americans are.

For example, a Bankrate survey found that 46% of the population said they would be challenged to come up with $500 to cover an emergency expense and would likely borrow or sell something to afford it. Another study found that nearly one-quarter of households making $100,000 to $150,000 a year claim they would not be able to raise $2,000 in a month to cover an unplanned expense.

A survey by the Consumer Federation of America and the Financial Planning Association found that 21% of Americans felt the “most practical” way for them to get $100,000 dollars was to win the lottery.

Hope is not a strategy. Instead, careful and considerate fiscal management and planning for that “rainy day” are critical to any REALTOR®’s long-term success. Let’s explore six ways you can prepare for those events.

Your Chart of Accounts: When you establish your business, you should create three business accounts. The first is for general business operations and receipt of income. Whenever you receive a commission, immediately take 30% of each check and move it to your second account, which will be an interest-bearing saving account. This will be your tax reserve and will save you from that gut-wrenching feeling on April 14 when your accountant lets you know that you’ve had a great year in real estate and you will be paying thousands of dollars tomorrow. Then, take 10% of your income and move it into your third account, which is a reserve or rainy day fund.

This simple discipline will put your business on the right path and provide a healthy balance between operating capital and reserves. Keep this up until your reserves are sufficient to support your business for at least six months of operation. Once you have a healthy reserve, continue to save, but earmark this money as a down payment on a piece of investment real estate. Alternatively, you can periodically sweep this account into conventional investment vehicles, like a 401(k), IRA, SEPs and 529’s.

BOMD: Early in your career, the BOMD, or Bank of Mom and Dad, is quite powerful. In 2019, family borrowing ranked as the seventh largest lender in the United States. This can be a quick and informal safety net, but the emotional challenges and conflicts that may arise can be significant. However, we recognize that is not an option for everyone based off your family’s economic situation, their stance on supporting children and more.

Personal Credit: Always maintain meticulous records of your business and personal financial dealings and keep them well separated. However, you can utilize your personal cash, credit cards or lines of credit in a pinch. One side benefit is that you can charge your real estate company interest on the loaned money, potentially decreasing your tax liability. Consult with your tax professional about the best way to structure this.

Business Credit: Apply for a line of credit with the bank who holds your business accounts. This may provide a nice backstop in case of emergency and does not cost you anything to maintain if you are not borrowing against it.

Explore cash-back credit cards and use one for your reoccurring business expenses like phone, internet, utility or marketing expenses. The rewards can accumulate quietly and provide a nice cushion if you need them. Be disciplined and set up corresponding automatic payments to these same credit cards to be sure you are running a $0 balance each month.

Invest in Real Estate: As REALTORS®, we have an incredible array of advantages when investing in real estate. Investing in real estate is a unique tax treatment that no other profession has. Access to industry insights, a potential commission advantage when trading for our own accounts, depreciation, cash flows from tenants and the ability to indefinitely defer capital gains taxes thanks to the Section 1031 tax-deferred exchange make investing in a property of your own a powerful way to create a bright financial future.

Having this extra income can also be a great resource in case of emergency. As your real estate business grows, continue to invest and expand your portfolio using your reserve account. There is no feeling in the world like having your tenants building your equity and making you more financially secure.

Corporate Benefits: If you are operating as a corporation, explore the option of adding benefits to all full-time employees. Make things like life insurance, health insurance and retirement account matching employee benefits. This also has the potential to reduce your corporation’s taxable income, which is always a good thing. Interview several tax professionals to determine the best way to structure these benefits.

These strategies will set your business on a solid path and provide a comprehensive, sustainable safety net should an unplanned emergency arise. You may face pitfalls and unexpected challenges along the way, but if you remember these six strategies, your business will be set up for success in the long run.