The Beginner’s Guide to Bookkeeping for Real Estate Agents
Nobody becomes a real estate agent because they love bookkeeping. But the agents who build sustainable, and most importantly, profitable real estate sales businesses all have one thing in common: they know their numbers.
This is the setup most agents wish someone had walked them through on day one. Before we do that you should know one thing. The agents who do these things are not just more organized and less stressed out. They do more business, are more profitable, and keep more of their profits after taxes because they do these things!
Step 1: Separate Business and Personal Finances
This is the single most important step, and it’s the one most new agents skip. Open a dedicated checking account, savings account, and in some cases a dedicated credit card, and run every real estate related transaction through those accounts. Your commission deposits, marketing spend, MLS dues, gas for showings, everything should run through an account that is only used for business.
Mixing personal and business finances makes every later step harder: you can’t get an accurate P&L, you’ll miss deductions, and if you’re ever audited, unclear records make everything more painful than it needs to be. REProphet can separate business and personal expenses, even when they are running through the same accounts but everything is easier when you have separate business accounts.
Step 2: Understand How You’re Actually Paid
Most agents are independent contractors (1099), not employees. That means:
– No taxes are withheld from your commission checks automatically
– You’re responsible for both the employee and employer portions of Social Security and Medicare tax (self-employment tax)
– You’re expected to pay estimated taxes quarterly, not just once a year
If this is new to you, it’s worth a short conversation with a tax professional before you get deep into a busy season. The earlier you understand this, the less painful tax time becomes.
Step 3: Get a System, a Person, or Both to Help You
A real estate agent’s time is best spent generating new business and servicing that business. Tasks like bookkeeping should be leveraged to a system, a person or both. Any cost involved should be considered an investment in your business. It is going to save you time, money, and stress in the long run.
Step 4: Set Up Real Estate Specific Expense Categories
Generic “business expense” tracking isn’t specific enough. At minimum, track these categories separately:
* Commission Income: You should be able to separate this out into Listing Commission, Buyer Commission, Rental/Lease Commission, and Referral Fees Income
* Salaries/Benefits: This is not just if you have employees. If you pay subcontractors like a stager or a translation coordinator those expenses would go in a subcategory of Salaries/Expenses.
*Marketing/Lead Generation
*Occupancy: This would apply if you pay office rent. If you do not pay rent but have a home office there are separate home office expenses that you may be able to deduct and it may be more than you think.
*Communication/Technology
*Education/Dues
*Supplies/Office Expenses
*Mialage
*Cost of Sale: Cost of Sale in a real estate sales business is an expense that only happens when you close a transaction. This is usually your split with your broker, team members, referral fees etc. Many bookkeepers and accountants will tell you that you don’t have to track this and they would be wrong. Cost of Sale is an important factor in the profitability of your business and it should absolutely be tracked.
Clear categories now save hours of reconstruction later, and they’re what makes your deductions defensible if you’re ever asked to substantiate them. They are also what allows you to understand the financials of your business and make improvements when needed.
Step 5: Run Your Business on a Budget
In order to run a highly profitable business you have to know what you did, and you have to know what you should be doing in order to maximize your profit. What you did shows up on your profit and loss but the first step is to plan what you should do, which is your budget.
If you are recording your income and expenses but not planning them you will always be working backwards and you will always be fixing leaks in the boat. Use a budget to plan your income and expenses and your P&L to hold yourself accountable to that budget.
This doesn’t have to be complicated or requires a lot of knowledge if you use the right, real estate specific bookkeeping software. The platform that you chose should be able to build a real estate specific budget for you based on the volume of sales that you close.
Step 6: Build a Weekly (Not Yearly) Habit
The agents who dread tax season are almost always the ones who only look at their books once a year. We coach agents to put a “15 Minute Financial Friday” in their calendar. That’s a 15 minute block, every Friday morning while they’re sipping their coffee, to go into their P&L, do whatever categorization they need to do, review the numbers and move on. If you can automate the categorization piece with software like REProphet, that weekly habit gets a lot shorter.
Step 7: Know What to Set Aside for Taxes
A reasonable starting rule of thumb is to set aside roughly a quarter to a third of net income for taxes, though the right percentage depends on your total income, deductions, and state. Moving this money to a separate savings account as it comes in rather than leaving it in your operating account prevents the common mistake of spending money that was never really yours to spend.
This is arguably the most common mistake that self employed people, not just real estate agents make and it can be a painful one. If you wanted to play it really safe you could make payments directly to the IRS every time you receive a commission through the IRS Direct Pay Portal.
Step 8: Track Your Return on Investment (ROI) on all marketing and lead generation expenses
If you are spending money on things that are intended to generate business you have to track that expense, the income it generates, and the return on investment separately. Too many agents spend too much money in the hopes of generating more business and do not actually track if, or how well it’s working.
If you are not doing this you don’t truly know what’s working and what’s not, what to keep and what to cut, or where to reinvest when it’s time to grow your business. This is another area where the right platform is key and the seemingly complicated can become simple.
Step 9: Inspect for Progress and Bloat
Now that you have a system and good habits in place start comparing your income, expenses, profit margin and ROI to previous periods. You should compare this January to January last year. First quarter of this year to first quarter of last year, end of year this year to end of year last year.
This helps you identify where you are making progress, where you might be lagging, and where you might be experiencing bloat. You can learn more about this practice in our “Let the Numbers Guide Your Business” Blog.
REProphet helps real estate agents automate bookkeeping, track profitability, and stay financially organized throughout the year so quarterly taxes become part of the plan — not a surprise.
Tax Disclaimer
If you have a business that does not have a budget and a P&L, or has them but you don’t look at them, you don’t have a business. You have a job or a hobby that may or may not make you money. If you’re serious about your real estate sales business don’t spend time that you could be spending with clients, building complicated spreadsheets and manually entering transactional data. Invest in a real estate specific software platform like REProphet, that is designed specifically to do these things for real estate agents, and is backed by a team with real industry knowledge and experience. If you’d like to find out if REPropher is right for you, schedule a demo discovery call with our team today.
