Recently I wrote the article Five Vital Questions to Ask About Your Business. In that article, I explained that questions are the best way to think through situations.
As I’ve progressed through both my business and personal life, the times I’ve asked myself questions such as the following
- What do I want?
- Why are things not working?
- How do I get what I want?
- How can I make that work?
- What caused this to happen?
It’s been amazing the answers I get when I ask questions. As one person once said, “Ask, and you shall receive?
There is a powerful lesson in the above comment.
Most people I talk to who get in the Realtor Business don’t take the time to think into how much money they want.
When they do take the time to think about how much money they want, often, they think about the wrong number.
Most Realtors make two drastic mistakes when they think about the income they want to earn.
- Mistake Number One – Focusing On Gross Commission Income.
- Mistake Number Two – Focusing On Annual Income.
Mistake Number One – Focusing On Gross Commission Income.
What, aren’t I supposed to think about gross commission income?
Of course, you are. However, most people don’t do the correct thinking to determine what their gross commission income should be.
Here are some common reasons I hear people chose for their gross commission income number:
- I want to grow 25% more than I did last year.
- I want to replace my job income.
- Everybody else chose that number so I’m going to choose this number.
- I want to be #1 in my office.
- I want to be Rookie of the Year.
- It sounds like an ambitious number.
The major mistake people make when they focus on their gross commission income is they inadvertently choose gross commission income as the income they personally want to make.
If we spend any time thinking about our gross commission income, we realize that not all of the gross commission income belongs to us.
Thinking about gross commission income is how most Realtors become hardwired to think.
The more important number to think about is your owner pay. This is the amount of money that you actually get to keep.
When I describe owner pay, this is the amount of money that goes to pay your living expenses. If you were previously employed, this would be equivalent to your salary at your old job.
The first money objective one should choose to obtain is earning enough money to pay themselves.
Let’s say that in your last job, you earned $60,0000 per year.
$60,000 per year should be first target owner pay amount.
By earning $60,000 a year, you will be able to maintain your current standard of living.
Once you reach your target owner pay amount, you will have the peace of not worrying how you are going to make ends meet.
If you’re constantly worrying about how you are going to feed your family or pay your bills, you will be holding negative energy that will make you less successful selling homes.
Now that we have your target owner pay number, it’s important to now to calculate your gross commission income.
When looking at your gross commission income, it is important to realize that not all the gross commission income belongs to you.
In a healthy business, you have to realize that there are four recipients of your money as follows:
- Profit – This is the money the business earns from the business.
- Owner Pay – This is the money the owner earns from the business.
- Taxes – This is the money the government earns from the business.
- Operating Expenses – This is the money that vendors earn from the business.
Too often, I find that most businesses give way too much money to their vendors. This results in the owner working for next to nothing.
This violates one of the most important money laws. Spend less than you earn.
If you violate a money law, you get punished. The punishment for spending more than you earn is living commission check to commission check.
Conceptually this makes sense, but how does one determine how much money should be allocated to the four recipients of a Realtor Business?
I’m going to give you an example of the target percentage of money that should go to the four recipients of a Realtor Business receiving less than $250,000 in gross commission income per year.
- Profit percent should be 5%
- Owner Pay Percent should be 50%
- Taxes Percent should be 15%
- Operating Expense Percent should be 30%
If we translate these percentages to US Dollars for a Realtor business earning $120,000 in gross commission should allocate the following amount to each of the four money recipients.
- Profit should be $6,000
- Owner Pay should be $60,000
- Taxes should be $18,000
- Operating Expense should be $36,000
Now that we have reverse engineered our gross commission income based on owner pay, gross commission income is meaningful.
Now by reaching your gross commission income of $120,000, you know that you will have enough money to maintain your standard of living.
Mistake Number Two – Focusing On Annual Income.
When I look at how much money I spend and how much money I earn, looking at annual numbers becomes confusing.
A better way to look at the money is to focus on monthly amounts.
Almost everyone thinks about money in terms of how much they spend in a month on a particular item. Let’s look at common examples:
- Monthly car payment $567
- Monthly mortgage payment $1,539
- Monthly cell phone bill $153
- Monthly cable bill $139
I could go on and on with many more examples. People can easily grasp what a monthly amount looks like when they are deciding how much money they can spend.
You do this all the time when you sell a house. Let’s take an example of a home selling for $250,000.
In this example, a person probably is going to pay ~$1,300 per month.
You go to show that person a few homes that fit in their price range. The person decides he wants a few extra features to the house.
You spend a little time doing the math on the new house, and you determine that it will only cost the person $100 more per month to have the house they want.
It is a lot easier to sell a house that costs $100 more per month than it is to sell a house that costs $20,000 more.
The reason being is $20,000 doesn’t really translate into monthly spending.
So let’s take this a little bit further and look at your $120,0000 gross commission income every month.
Each month you need to have gross commission income of at least $10,000. With gross commission income of $10,000, you will divide the $10,000 up as follows:
- Profit $500
- Owner Pay $5,000
- Taxes $1,500
- Operating Expenses $1,500
Monthly amounts are much more real than annual numbers.
The other reason you want to focus on monthly amounts is that most Realtors deal with seasonality in their business.
Every year most Realtors sell fewer homes from October – February.
It is vital that you earn enough money in October – February to cover your Owner Pay. Otherwise, you have to dip into savings, and you go back to becoming a “hungry and poor” Realtor.
In our example of $120,000 annual gross commission income, you must earn at least $10,000 per month in gross commission income to stay in business.
You need to do a little math to calculate your gross commission income goal to be meaningful. It’s also vital that you remember that your gross commission income does not all belong to you.