Marketing Budget for Real Estate Agents: Using your Money as a Tool
A Marketing Budget for Real Estate Agents has to be based on a plan and anticipated commission income.
In one of his many webinars, Tom Ferry says, “Money is a tool”. He goes on to talk about the people have with money.
Think of the apps you have on your cell phone. They are tools some of us rely on every day. They all have a set of rules to be follow if you want to achieve the desired outcome. I check Waze every morning when I am heading to work and again when I am heading home. I have to type in the correct address that I am heading to, or retrieve from my saved addresses, then the GPS that I have allowed access to find where I am and calculates the quickest route to where I am going. If I had not authorized GPS or if I type an incorrect address the app is not going to give me the desired result.
Tom explains that money functions in a somewhat similar way. If you follow the rules you will achieve the desired result.
Relationship with money
Mr. Ferry claims that there are 5% of the population that has what he refers to as generational wealth. These are the people and families with five million dollars or more than have the assets and wealth to leave to the next generation or whomever their heirs may be.
Next, comes the 15% of the population that is middle class. These agents have enough money to live on, enjoy the fruits of their labors, and have sufficient set aside to ensure that they will not have to continue to work nor be a financial burden to the government or their relatives.
Last comes the 80% that live paycheck to paycheck. These are the people and families that as time goes on will need assistance from family, friends and the government to survive.
To verify these findings I suggest that you look at the Report by the Federal Reserve Board of Governors, published in May of 2017, “Report on the Economic Well-Being of U.S. Households in 2017.”
Some of the findings in that report:
- Changes in family income from month to month remain a source of financial strain for some individuals. Financial support from family or friends is also common, particularly among young adults.
- Three in 10 adults have family income that varies from month to month, and 1 in 10 adults experienced hardship because of monthly changes in income.
- Nearly 25 percent of young adults under age 30, and 10 percent of all adults, receive some form of financial support from someone living outside their home.
Dealing with Unexpected Expenses
- While self-reported financial preparedness has improved substantially over the past five years, a sizeable share of adults nonetheless says that they would struggle with a modest unexpected expense.
- Four in 10 adults, if faced with an unexpected expense of $400, would either not be able to cover it or would cover it by selling something or borrowing money. This is an improvement from half of adults in 2013 being ill-prepared for such an expense.
- Over one-fifth of adults are not able to pay all of their current month’s bills in full.
- Over one-fourth of adults skipped necessary medical care in 2017 due to being unable to afford the cost.
As Tom Ferry states in the webinar, he is not a financial planner, and neither am I. What he offers are some simple examples of how real estate agents spend or could spend the money they receive in commissions. He also gives some suggestions on the allocation of the money earned. In the webinar, Tom uses several illustrations to emphasize his points
The 80% Marketing Budget for Real Estate Agents
Figure 1 illustrates how the average agent handles money.
The average agent gets a commission check and deposits it into their personal account where they proceed to spend it on all sorts of things. They probably pay a tax rate of 2$% or more according to Forbes.com. Often these are the real estate agents that struggle to find marketing money, that can never seem to get the momentum going to grow their business, and, I believe these are, for the most part, the 87% of real estate agents that fail in the first five years.
The 15% Marketing Budget for Real Estate Agents
The 15% are the agents that are really in business. They have probably formed some corporate structure (LP, LLC, CORP, …). The reason for creating a corporation is, it has tax advantages. The current federal income tax rate in 2019 for individuals is as follows:
Now compare that to the federal corporate tax rate. “ Since January 1, 2018, the nominal federal corporate tax rate in the United States of America is a flat 21% due to the passage of the Tax Cuts and Jobs Act of 2017.
Not every individual will save money by switching to a corporate structure
. These figures do not take into consideration your deductions, state taxes you may owe, not other factors. To find out if this would benefit you it would be best to talk with an accountant or some other type of tax professional.
What you can do is set up your finances along with more of a business model illustrated in Figure 3
If set up your account in this way, then have a standard amount transfer to your Home Account, your Business Expenses, you tax Account every month you should always have money available for marketing.
Your Business Expenses should probably be in the range of 33% of your commission income and you would do well to have that amount transferred to that account with each deposit made to your business account. This account can then be used to pay desk fees, marketing expenses, MLS dues, Realtor dues, postage, administrative services, gifts to clients, etc….
Your tax account should have a sufficient allocation to cover your taxes, both federal and state if they apply. I live in Massachusetts. I know that as a corporation I need to pay 8% to the Commonwealth of Massachusetts state and 21% to the federal government, so I should be transferring at least 29% of every deposit made to the business account into the tax account. Remember to check these figures with your account or other tax professional as they are subject to change.
There is some debate over how much one should allocate to marketing expenses. In a blog entitled “HOW MUCH SHOULD A REAL ESTATE AGENT SPEND ON MARKETING?”, From ZipperAgent, is was suggested that 15% of your commission income should be reserved for marketing. Tom Ferry suggests that, “No more than 10% of your anticipated commission income should be spent on marketing.”. The Small Business Administration writes that, “As a general rule, small businesses with revenues less than $5 million should allocate 7-8 percent of their revenues to marketing.” The point is that all sources say that this is an important item to include in your business expenses and should be set aside to pay for these expenses regularly.
The 5% Marketing Budget for Real Estate Agents
Five percent of agents act like the wealthy. Their relationship to the tool money is a little different. See Figure 4
Like the 15% noted earlier the 5% have commission checks deposited into a business account. They also have deposits moved to a tax account and a business account based on predetermined budgets. Where they differ is in in the Investment of the money. These agents are thinking long term. They are making investments in their business and more importantly in their life. These agents are building wealth not just making a living.
The above obviously begs the questions as to which of the three groups do you want to be in.
- The 80% that are living paycheck to paycheck. Whose life is a roller coaster of having money and not having it.
- The 15% that are at least taking the time to put money aside for their business
- The 5% that are actually building wealth. Those that are prospering.