Cash flow management is integral to success as a commercial real estate broker. However, erratic cash flow is difficult to manage. It causes stress that is not there for a salaried employee. It is why some CRE brokers choose to leave the 100% commission world for a REIT or developer, leasing their properties as a W-2 employee with bonuses.
A salary and income consistency are enticing. Risk and return are correlated, though. Less uncertainty of your next transaction is related to increased income opportunities. To find your next opportunity requires a clear mind and direction. Erratic income and bad cash flow management are significant distractions.
Forming an entity and being taxed as an S Corporation enables better cash flow management. An S Corp must pay W-2 wages to its owner and employees. Generally, you are the only employee of your S Corp as a CRE broker. Your wages will fluctuate as your income expectations change. However, you can still recreate the world of having a paycheck.
We all have personal expenses and lifestyle desires. First, determine your personal monthly cash needs. Your business can transfer cash to you on autopilot based on your expected personal cash needs.
As an S Corp, you need to run payroll, but in most situations, you don’t need to do this frequently. Another responsibility and due date to manage is another distraction. Because you’re an S Corp and have a separate business bank account that your commissions are paid to, you can set up an automatic transfer of cash to your personal bank account.
Think about your approximate cash need per month to pay all of your bills and do everything you want to do. Round up. What is that amount? Set up that amount as an automatic transfer between accounts.
You don’t need to go through the formal process of running payroll to mimic the feel of a paycheck and have consistent cash flow. The automatic transfer will provide “income” from your business during the months that there is no revenue to the business. You can go months between commissions, but that automatic transfer will feel like a paycheck and help you ignore the inconsistency of a 100% commission situation.
The business owner is the last to be paid. You are a business owner but also an employee of your business, so pay yourself like one. It’ll help you better focus on the next big opportunity.
