How to Start a Real Estate Business

When considering a new business venture, real estate sales can be especially appealing. Many agents and brokers are initially attracted by the prospect of substantial commissions—a five percent cut on a $300,000 sale, for instance, yields $15,000. However, there’s much more to understand before taking the leap.

The current landscape

Part of the appeal of real estate sales is that the industry has relatively low barriers to entry compared to other types of businesses. No college degree is required, and, with virtual capabilities and co-working options, you might not need a physical office space. The hours are flexible, and the business is scalable. You can take on as many or as few properties as you’d like. You can also start part-time or as a side gig and grow your business over time.

And, while high mortgage rates and low inventory can dampen the demand for homes, the demand for investment properties has been steadily climbing. Millennials and Gen Z, in particular, are increasingly looking beyond stocks and bonds to build their wealth, driving demand for alternative investments, such as real estate.

It’s also worth noting that real estate agents and brokers are less threatened by the rise of artificial intelligence (AI) than some other occupations. The role of the human touch in facilitating such large and sometimes emotional transactions still holds significant importance. If anything, by handling tasks such as drafting property listings and marketing content, performing property searches, and qualifying leads, AI could free you up to focus on relationship building and more strategic matters.

You should take heed of the potential downsides, though, starting with those seemingly whopping commissions. That $15,000 example is the gross payment, before deducting all of your expenses and possibly splitting it with the others involved in the transaction. It also doesn’t account for your time investment. You can spend months to land just one sale, during which time you’re not getting paid, and agents and brokers often field calls and texts 24/7.

According to the latest figures from the U.S. Bureau of Labor Statistics (BLS), the median annual wage for real estate sales agents was $54,300. The BLS also projects that overall employment of real estate brokers and sales agents will grow by two percent from 2023 to 2033, which is slower than the average growth rate for all occupations. Despite limited employment growth, about 46,000 openings for real estate brokers and sales agents are projected each year, on average, over the decade.

Types of real estate businesses

At this point, you might have some understandable confusion about the differences between agents and brokers. A real estate agent is licensed to assist with the buying and selling of real estate, working on behalf of either buyers or sellers. Real estate agents work for real estate brokers, who get a cut of their agents’ commissions.

A broker is a licensed agent but is also licensed to work independently. Brokers typically run a business with non-agent support staff. The role is more complex but comes with greater financial opportunities.

A broker may be independent or part of a franchise. Franchise brokers pay a fee to conduct business under a brand name and obtain access to proven tools and resources. They must strictly adhere to the brand’s rules on a variety of matters, including marketing and price negotiation.

Both agents and brokers may choose to specialize in a specific niche. The primary markets are residential and commercial, but you can specialize in more narrow areas, including:

• New construction
• Revitalization areas
• Timeshares
• Vacation homes
•  Luxury homes
• First-time buyers
• Investors

Specializing can make it easier to target your marketing efforts (see below for more information on real estate marketing).

With either role, there’s much more to real estate sales than simply listing a property, putting a sign out front, and waiting for calls. For home buyers, for example, an agent’s responsibilities include:

·      Locating potential properties

·      Scheduling tours

·      Preparing and submitting offers

·      Managing the extensive paperwork

For home sellers, among other things, an agent usually will:

• Guide pricing decisions
• Market, stage, and show the property
• Organize open houses
• Receive offers and coordinate with buyers’ agents
• Manage the paperwork

Real estate licensing requirements

While the specific requirements vary by state, prospective real estate agents generally must complete 40-90 hours of state-approved pre-licensing education and pass a licensing exam. Upon passing, they submit a license application and pay the activation fee.

Brokers must initially satisfy the same criteria. They’re generally also required to spend a minimum period working for another broker, complete additional pre-licensing education, pass another exam, and apply and pay the activation fee.

Planning your real estate business

Whenever you’re weighing a new business idea, comprehensive market research should be the first serious step. It’s essential to get a handle on the market before you invest your time and money. At a minimum, you need to know:

• Who are your likely competitors?
• Is the market you’re considering already saturated (that is, covered by too many competitors)?
• How many properties are available, what kind, and at what prices?
• Who are your target customers?
• What do they seem to value and prioritize when looking for a real estate agent or broker?
• How can you best reach them (where are they both online and offline)?

A good place to start is by googling real estate agents in the area where you’d like to locate your business to get an idea of how they reach clients. Review their websites to view their commission rates (or flat fees) and the services they offer. You can check online reviews to determine their strengths and weaknesses from the perspective of clients.

Draft a formal business plan that lays out what you’re going to do and how. Your plan should include several sections:

• Executive summary (the introduction to your real estate business)
• Company description (greater detail on your business’s set-up and history)
• Market analysis (data and research on the viability and profitability of your business)
• Financials (budgets, expense and cash flow projections, funding sources, revenue sources, etc.)
• Services (descriptions of your offerings and explanations of how they provide value)
• Marketing strategy (how you’ll build a customer base and sell your services)

The financial section must be specific and fact-based, not what you hope for in an ideal world. Your budget should encompass both the startup and ongoing costs for the business, including:

• Business registration, license, and/or permit fees
• Equipment and office supplies
• Insurance
• Marketing expenses
• Transportation
• Wages and benefits (if applicable)
• Office space and utilities (if applicable)
• Technology (for example, accounting and payroll software)
• Multiple Listing Service (MLS) fees
• National Association of Realtors fees (if applicable)

Grants and Small Business Administration loans and microloans can help with some of the initial financial burden. Brokers, in particular, need additional financial resources because they often operate with a negative cash flow for at least one to two years.

Track your costs closely in the first year to more accurately budget your ongoing expenses. Brokers should ensure their long-term budgets also include a salary for themselves, a profit to invest further in the business, and taxes.

The amount and breadth of business taxes can catch new entrepreneurs off guard. Consult with a professional to reduce the risk of surprisingly high tax bills, as well as penalties and interest for noncompliance with the numerous tax rules for businesses.

Legal requirements and compliance

Another vital issue for brokers is choosing a business structure—or business entity. A real estate brokerage typically is formed as a sole proprietorship, partnership, C corporation, limited liability company (LLC), or S corporation.

Your entity choice has far-reaching implications in terms of legal and tax liability. For example, a sole proprietorship is usually the easiest to form and maintain, but you’ll be personally liable for all business debts and liabilities, as well as the 15.3 percent self-employment tax. With an LLC, you can separate yourself from personal liability for the business and pay less in taxes, but it’s more complicated, and you must keep up with certain formalities.

Depending on your entity choice, you may also be required to register your real estate brokerage with the local government, city, and/or state. These jurisdictions may also require specific licenses or permits.

As a broker, you’ll likely have employees working for you (see below). When you bring on your first employee, you’ll need to obtain an Employer Identification Number from the IRS. You may also need to register with the state department of revenue.

Employers are expected to withhold and deposit income tax withholding and each employee’s share of Social Security and Medicare taxes under the Federal Insurance Contributions Act (FICA). FICA is a federal tax that is split between employers and employees. You’ll also be required to pay unemployment insurance taxes and satisfy multiple federal and state reporting obligations.

Insurance coverage is important and, in some instances, required. Even if not required, appropriate insurance provides valuable financial protection while simultaneously enhancing your credibility with prospective clients. Policies to consider include:

• General liability: This provides coverage if your business is sued for bodily injury, property damage, or personal injury, including defamation.
• Workers’ compensation: Workers’ compensation is likely required by your state if you have employees. It covers expenses related to work-related illnesses or injuries.
• Commercial auto: Your personal auto coverage doesn’t apply to accidents that occur while you’re driving to open houses, for showings, or other business purposes. Commercial auto also covers theft, weather damage, and vandalism.

Additional coverage might also be advisable, depending on your circumstances. 

Setting up operations

Brokers must hire both real estate agents and staff. There are several factors to consider when building your team.

It pays to be picky when hiring agents. They’re an extension of your brand and, in turn, you. Experienced agents will likely have a book of business, a solid network, and an excellent reputation, but newer agents may be easier to recruit, mold, and train. To attract experienced agents, you must have something to offer. For example, maybe you can make their job easier with the latest technology or top-notch sales associates, or perhaps you can reduce their out-of-pocket expenses by paying for seminars, memberships, or other perks.

Look beyond an experienced agent’s book of business, though. Take the time to actually check their references and ask around to learn more about their reputation.

The level of experience will determine the amount of training your agents require. You can develop in-house training or send agents to outside sources. Even experienced agents should receive internal training, though, on your specific protocols, processes, and procedures, as well as your ethos and culture.

An established brokerage generally employs a staff in addition to agents. It typically will have an office manager, an accountant or bookkeeper, a marketing director, a listing manager, a Human Resources department, and an IT department. When starting out, at a minimum, consider hiring an office manager with real estate experience and a sales associate to drum up prospects for the agents. You can outsource these roles initially or for the long term. Outsourcing allows you to tap into expertise when you are unable to afford it on a full-time basis.

You’re going to have your hands full as you get ready to launch your brokerage, and some things might fall through the cracks. Don’t let background checks be one of them. Invest the money to run background checks on all employees and agents.

Note: Real estate agents typically work as independent contractors; however, non-agent staff may be considered employees under the law. Understanding the differences between contractors and employees can save you a significant amount of headaches and money.

Where will all of these people work? Virtual operations are certainly possible in today’s real estate industry, but brokers often want brick-and-mortar space for at least some of their operations. That means you may need to find the right property (but that’s what you do, right?) and arrange for utilities and a security system. Virtual or brick-and-mortar, you’ll need to license real estate and other software platforms, too. 

Marketing your real estate sales business

Real estate sales is a highly competitive industry, and effective marketing is critical. It’s best to have a multi-pronged plan of attack, especially early on, when you don’t have the benefit of word of mouth.

The importance of networking can’t be overstated. You should connect with agents and brokers, of course, but also attorneys, title companies, and mortgage brokers. Join groups, virtual and offline, and leverage resources like LinkedIn and the National Association of REALTORS. Holding and attending open houses is a great way to meet others in the industry and potential clients.

Digital tools play a significant role in today’s real estate marketing. A website is a must-have. It should be easy to navigate and mobile-friendly.  Make it simple for prospective clients to find all the information they may need, such as:

• Listings
• Intake forms
• Contact information
• Testimonials
• Past sales
• Information on neighborhoods (schools, property taxes, etc.)
• Your bio, with an explanation of your philosophy
• Up-to-date content for search engine optimization (SEO)

You also need to maintain an active presence on social media (Facebook, YouTube, Instagram), posting listings and helpful information, such as tips on staging or pricing a home. However, don’t neglect the old-school methods. Mailers, door hangers, bus stop ads, and event or team sponsorships are still effective ways to get your name out there.

A real estate-specific Customer Relationship Management (CRM) system will make this all less daunting. A CRM system can simplify:

• Managing your contacts and client relationships
• Tracking your leads and sales pipeline
• Running marketing campaigns
• Messaging and follow-ups
• Scheduling appointments
• Collaborating with your team

It will also generate reports and analytics that tell you what’s working—and what’s not.

New business owners have a lot on their plates, and Gusto is here to help. With reliable commission payments and support for both employees and independent contractors, we simplify the payroll process for real estate professionals.