When people think of the real estate business, they often picture a realtor collecting a hefty commission or celebrating in style another successful sale. What they may not realize, however, is that there are many costs associated with being a real estate agent because being a realtor isn't as simple as showing properties and collecting commissions.
KEY TAKEAWAYS:
Starting a real estate career can be an exciting yet expensive venture. The cost can vary depending on many factors, including the state of residency, education requirements, and licensing fees.
Licensing fees
Becoming a licensed real estate agent generally includes pre-licensing courses ranging from $100 to $2,000 or more, depending on the provider and location. After completing the course requirements, most states require prospective agents to pass a licensing exam which comes with additional fees. The average cost of the test is $100-$300. Exams are computerized and consist of a national portion on general real estate principles and practices and a state-specific section covering your state’s real estate laws.
Membership dues
Other costs associated with this field include ongoing expenses such as membership dues for local and national associations like the National Association of Realtors (NAR), subsequent renewal fees, and continuing education courses to maintain active licence status.
At this point, you have already spent a considerable chunk of cash upfront on education, licensing, and association fees on your way to becoming a licensed real estate salesperson or broker.
If you are still in the dark and wish to learn about the whole process of becoming an estate agent step by step, check out this Beginner’s Guide to Being a Real Estate Agent.
Don't forget about other expenses once you are legally approved and ready to go full throttle on your project. These can vary depending on the individual, but some general costs are common to most agents.
It is good to remember that a startup company's overhead costs will differ from an established real estate business. Opening a brokerage firm will require a sizable financial investment, respectively a property management company must have significant funds to acquire investment property or rentals.
One of the biggest expenses agents face is real estate overhead. Of course, you should keep a detailed record of all your business expenses, but to calculate overhead, you must first separate indirect and direct costs. We will break it down to help you understand these costs better.
Examples: rent or mortgage payments, licenses, salaries, property taxes, insurance, etc.
Examples: advertising, marketing, education and training, rental maintenance, etc.
Examples: transportation, utilities, plans for company cell phones, and website maintenance costs.
Tally all overhead expenses
Why is such information useful? When you know how much you spend, you can cut costs which is handy, especially during the economic downturn. Also, it will show you where your money is leaking and motivate you to find cheaper and more efficient ways to run your business.
Keeping the books
If you’re new to the real estate business and lack the expertise, you might consider hiring a real estate accounting specialist to keep track of things for you. Solid record-keeping will prevent you from losing money, especially as your company grows.
Even though the bookkeeping part of the business might not seem fun for you, you should still be able to tell the difference between direct vs. indirect costs, different types of expenses, and categories. Once you learn to calculate overhead with as little fuss as possible, you can delegate that job and truly focus on doing business.
Office rent and utilities
There are office-related expenses such as rent, utilities, equipment costs (computers, printers, software), and office supplies (paperwork) that are unavoidable when operating as an independent contractor under a brokerage firm/company or working independently as a broker-owner/sole proprietor in the brokerage services sector.
These are basic fixed costs around the year and fairly easy to budget, so you should secure stable cash flows independent of the year's peak selling season(s).
However, don’t forget to calculate them in your cost estimation. They will add up quickly over time - further depleting profits unless managed prudently.
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Professional fees and licenses
As mentioned, agents must be licensed by their state's regulatory board to practice real estate legally. Licensing fees vary from state to state and can range from a couple of hundred dollars to over a thousand dollars.
According to the NATIONAL ASSOCIATION OF REALTORS®, dues are $150 per member for 2023 and $156 for 2024. This amount is billed to all active REALTOR® and REALTOR® Associate members through their primary local association and is due and owing to NAR by Jan. 1.
If you hold a real estate license, you will be required to renew it frequently in order to maintain it. Your total real estate license renewal cost will depend on several factors. These include:
For example, in Alabama, the total cost would range from $185-$355, with $245-$750 in California and $223-$460 in Washington.
After obtaining your real estate license, you'll need to fulfill continuing education requirements to keep your license active. These courses are typically required to be completed every 1-2 years and help agents stay updated on industry trends and regulations. The costs for continuing education courses can range from $100 to a few hundred dollars per course.
Don’t forget about listings. Your brokerage may provide access to a multiple listing service, but if you have to cover the costs, it could be anywhere between $25-100 per month for these services.
Working for a brokerage firm has its advantages and disadvantages, but remember that you will likely have to pay a commission. The percentage of profit earned from the sale of a house is divided into quarters between realtor-buyer intermediary and realtor-seller inter-mediation.
The list of “other costs” is not exhaustive. You should remember about your health insurance or consider saving some of your profit for retirement, as well as put some money away for the rainy day.
For instance, health insurance costs around $450 for an individual and $1150 for families. Rates will vary depending on the provider and the plan. Some brokerages will help cover premiums which is beneficial to real estate agents just starting out.
Marketing and advertising costs
Advertising in the real estate business is tricky because you sell high-ticket items - it is not like your customers see a realty ad, click it, and buy. The process of buying a house is different than buying a new dishwasher. Agents must invest in marketing to build their brand and advertise their listings to attract clients and close deals successfully.
The usual spendings include: creating a professional website, hiring photographers for listing photo shoots, running social media campaigns, and even purchasing advertising space on popular websites or local newspapers.
As a realtor, any marketing expenses you incur will depend on the amount you make and the resources you have at your disposal. When you're just starting, the money is tight, so when you hear that most experts suggest spending about 10% of your commission income on real estate agent advertisements, you might run away screaming.
Newbies usually need help to come up with $1,000 or more to finance real estate company ads. Meanwhile, top real estate agents with much competition would choose to spend anywhere from 15% to 20% of their earnings on real estate broker ads.
What do you pay for?
When it comes to ads for realtors, you are spoiled for choice. You can turn to digital ads while advertising real estate online, outdoor real estate advertising, or rely on print real estate marketing. You must include real estate banners for websites, local service ads for realtors, listing in online directories, google ads, advertising on social media (Facebook, Instagram, YouTube, LinkedIn), traditional real estate newspaper ads, flyers, yard signs, and brochures in your marketing budget.
Old-school real-estate advertising is deemed reliable to this day. Networking and promoting your business through social circles are among the most effective approaches. Unfortunately, it doesn't come for free, as you need to invest in business cards, roll-ups, banners, event fees, and local fares to be present at any type of gathering where you can meet prospective clients. You can invite potential buyers to open-door days and reward them with promotional items (branded pen drives, tote bags, water bottles, etc.). If you can fork out more, think big: billboards in high-traffic areas, such as major highways or busy streets, TV and radio ads, and large-scale promotional campaigns.
Insurance Costs and Taxes
As a real estate agent, you can claim many tax exemptions. For example, if you travel to and from your destination to an appointment, you can deduct this from your expenses.
Other deductibles include marketing, advertising, home office (energy and Internet bills), office supplies, and administrative fees. They are all tax deductible.
Of course, most businesses can deduct these types of expenses. However, real estate businesses are also deductible for operating fees, license payments, and National Association of Realtors contributions. As a real estate professional, carefully keep track of all your expenses to save yourself hundreds and possibly thousands of dollars in taxes during tax season.
Don’t forget the cost of professional liability insurance. If a client sues your real estate business for a mistake in the services given, errors and omissions insurance for real estate (E&O) can help cover your legal costs. Premiums can vary based on firm size, area of specialization, risk assessment, and other factors. Average costs for E&O coverage for small business owners ranges from $500 to $1,000 per employee, per year. So, if your business has 50 employees, you can estimate your errors and omissions premium to be between $25,000 and $50,000 annually.
Technology and Equipment Expenses
According to the National Association of REALTORS® Research Group's 2021 Technology Survey, 36 percent of real estate agents spend between $50-$250 monthly on technology tools, with only 17% of respondents spending less than $50 monthly. However, as many as 18% of professionals spend between $251 - $500, with 23% of respondents spending more than $500 monthly on technology!
Naturally, real estate technology costs vary from agent to agent and year to year. Still, with the technological advancements, it will be rather a bigger chunk of the monthly budget in the future.
According to Investopedia, the average cost for an agent is between $1,500-$2,000 a year. Your top expenses will cover licensing courses, association fees, marketing, professional insurance, bookkeeping, equipment, and technological tools.
Remember that you spend a lot upfront, and being a real estate agent, it is not a “get rich quick” scenario. One of the biggest cons of this job is the amount of patience it requires. It may take months to find your first client or close the deal. Realtors do a lot of work before they see the profits, such as prospecting, advertising, and conducting open houses.
On the upside, there is an income potential, versatility, changing environment, and a flexible schedule. Real estate is a people business, as you help them to fulfill their dreams. A mission tag is attached to the job, so if you set your heart on becoming a professional, you will enjoy this career's benefits.
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