Jordan Curnutt, CFP®
Top producing real estate agents represent a population with a unique set of financial circumstances. 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.* Although this is a fantastic income level, it comes with the risk of uneven income streams.
In this article, we outline two big problems for top real estate income and provide a logical solution to each.
Two Big Problems That Lead to Uneven Income
Big Problem #1: Seasonality
Two primary issues contribute to the fact of life that is uneven income streams for Top Producers. The first is seasonality. We already know seasonality exists, but the National Association of Realtors has supplied economic research indicating to just what extent. As of 2017, in the western United States, 71% of all residential real estate transactions have occurred during “peak season.”**
As you find out quickly after obtaining your real estate license, the checks come in only when transactions occur, leaving much of the calendar year with a lower average monthly income. And just because the checks don’t come in at the same rate as they do during peak season doesn’t mean your bills and lifestyle grind to a halt.
As a result, seasonality is the first big problem agents face with their variable income.
Big Problem #2: Commission Split
Next up is the commission split. Your brokerage commission presents an additional layer to plan for in your cash flow throughout 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.
Two Logical Solutions That Combat Uneven Income Streams
Logical Solution #1: Emergency Fund
The first tool in the toolbox for combating uneven income streams is the emergency fund.
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 cash on the sidelines to help buoy your financial plan 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 this spectrum.
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 typically pay a significantly higher interest rate than traditional checking or savings accounts. Although they are not set up to accommodate a high number of monthly transactions, used appropriately, they are a valuable tool in maintaining your emergency fund while making sure your money is working for you.
Logical Solution #2: Brokerage Account
Although a brokerage account certainly does not qualify as an emergency fund, which is generally held in cash, it can serve as a backup to your emergency fund. 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 earmarked to potentially be used in the short term, it is not the place to take risk with your net worth. In contrast, once the emergency fund is fully funded and your goals are more long-term, you can consider a brokerage account and invest in a diversified portfolio that carries a much higher expected return.
Although you must have a long-term view when investing in the stock market, you still can access your brokerage account funds as needed before reaching retirement.
Along with the income potential of being a Top Producing Real Estate Agent comes the challenges of uneven cash flows.
Both seasonality and commission splits play a large role in uneven income streams, but safeguards can help.
The first priority is establishing and maintaining a reasonable emergency fund. Once this crucial step is checked off the list, a non-qualified brokerage account for further savings and diversification can allow for both growth potential and a backup emergency fund if needed before retirement.