1 Net Worth. Do you know what it is? How do you figure it out?
Add up your assets:
- Bank account balances?
- Balances in your retirement and investment portfolios?
- Equity in your home based on today’s pricing minus your mortgage(s)?
- Equity in rental properties based on today’s pricing minus any liens?
- Equity in other items such as paid off cars, etc.?
Add up what you owe:
- -Consumer debt like credit cards?
- -Student loans?
- -Tax liens?
- -Personal loans?
Subtract your debts from your assets and you’ll have your net worth.
What to do about it? Is it positive or negative? Is it trending up or down?
Are you diversified or are you dependent just on one asset class?
What effect can you have on either paying off debt or growing your assets, or both?
ACTION STEP: Use Mint.com to track all of your debts as well as your assets. Mint.com will calculate your net worth on a daily basis so you can track how you’re doing all the time!
2 Income. Do you understand your own personal income trends, needs, and requirements for financial success? Do you feel like your income is random and dependent on the moods of the real estate gods or are you earning with a purpose, based on your goals? Time to figure out your ACTUAL income versus what you NEED it to be…
Secret: Most agents (and people in general) earn only what it takes to pay for their basic needs. This is why agents get into trouble at tax time – they did not budget for it. It’s also why real estate agents often feel they are living from paycheck to paycheck. Use this formula to know what you REALLY need to earn to achieve your personal, business, family, and financial goals this year!
A. Personal Overhead $____________________
B. Business Overhead $____________________
C. “Fun”: This is the money necessary for you to accomplish all of your “fun” goals this year. If you skip this category, you won’t have any fun! If it’s not planned for, it doesn’t happen. $____________________
D. Taxes: Add up A, B, and C, and add 20% as a general rule of thumb. Some people pay more, some less, but 20% will allow you to prepare for taxes. $______________
E. Savings: All real estate agents say, “I want to save more,” decide how much more. A good place to start is at least 90 days of personal and business savings. If you already have that, work on having one year of reserves saved. $____________________
Add up A + B + C + D + E =
Income required to earn per MONTH =
My Outside Income is: $____________________ (This is any non-real estate income, including spouse’s income, investment income, etc.)
The difference is: (Take Income Required from above, and subtract Outside Income.) = $____________________
It’s okay if you don’t have any outside income. Many agents don’t. But if you do have money coming in from somewhere else, if it’s predictable income, you need to account for it.
What I MUST EARN: $____________________ / Month.
Take the amount from What I MUST EARN, and multiply it by twelve to equal your required YEARLY income for personal, business, savings, taxes, and fun. That amount is: $____________________.
The amount of my average net commission is: $____________________
Secret: If you’re not sure, ask your broker if he or she tracked this for you. If you’re a NEW agent, find out the average sale price in your area and use the average net commission based on that price.
Secret: Net commission is what you KEEP after all broker splits, any processing fees, etc.
Take the amount you must earn per MONTH and divide by your average net commission. This will reveal the number of transactions necessary to cover your personal, business, savings, fun, and tax requirements each month. Amount needed per month, divided by my average net commission = __________ deals needed monthly, x 12 = deals necessary yearly.
I am currently averaging __________ deals per month. This does/does not cover my personal, business, savings, taxes, and fun. (Circle your answer.) I am/am not satisfied with continuing to earn at this level. (Circle your answer.)
3 CREDIT SCORE:
Understand your credit score. Experian, TransUnion and Equifax are where your FICO score comes from. Get your score at freeCreditScore.com
Use AnnualCreditReport.com for free reports from all three bureaus. Look for errors, wrong names, addresses, etc. Monitor your credit regularly. Your score determines how much you can borrow and at what interest rate.
Fact: Checking your own credit score will NOT hurt your credit.
Fact: Your credit score determines how much you can borrow, at what rate, with which down payment requirements. This applies not just to real estate purchases, but insurance, cell phone contracts, car leases, etc.
What DOES impact your credit?
A) Credit card utilization: This refers to how much of your available credit you’re using at any given time. It’s determined by dividing your total credit card balances by your total credit card limits.
Most experts recommend keeping your overall credit card utilization below 30 percent. Why? Because lower credit utilization rates suggest to creditors that you can use credit responsibly without relying too much on it. Individuals whose credit card utilization soars above 30 percent may be more likely to fail to repay their loans than those who keep their balances low.
B) Payment history: This is represented as a percentage showing how often you’ve made on-time payments. Paying bills on time shows lenders and creditors that you’re reliable and more likely to pay back your debts.
Late or missed payments can significantly harm your credit scores, so it’s important to try to pay all your bills on time.
C) Derogatory marks: As of July 1, 2017, about half of all tax liens and nearly all civil judgments have been removed from consumers’ credit reports. That’s good news, because having those derogatory marks on your reports can lower your credit scores. Other derogatory marks that may affect your credit include accounts in collections, bankruptcies and foreclosures.
Medium impact on credit…
A) Age of credit history: This factor shows how long you’ve been managing credit. It doesn’t refer to — as some may think — your actual age.
While your average age of accounts isn’t typically the most important factor used to calculate your credit scores, it’s important to think about. Closing your oldest credit card account, for example, could end up negatively impacting your scores.
To sum up: The longer you manage your credit responsibly, the more you demonstrate your creditworthiness to lenders.
4 SAVINGS. What do you have saved for a) reserves, b) emergency, c) taxes, d) investment, e) college? What is your savings PLAN? 10% off each check? More? None?
5 MAGIC NUMBER: This is the number of listings you must have at all times to meet or exceed your income goals on a monthly basis. Each listing should create at least one more listing in the neighborhood for you, and a minimum of 2 close-able buyers.
Fact: You must have a handle on how to maintain your magic number of listings, which drive your consistent income. Not being clear on this puts you at risk of financial hazard if/when any of the following happen:
-Market changes and you can’t rent your properties for as much or as easily.
-Properties stay vacant longer, draining your cash flow.
-Nature of the neighborhood changes for the worse and you have to sell, netting less than you owe potentially. (Creating a short sale or foreclosure for yourself, which is NOT the goal!!)
ACTION STEPS / Homework:
1) Get clear on all of your 5 financial numbers.
2) Set up www.Mint.com to track your net worth, your bills and your spending trends.
3) Order your credit report at www.FreeCreditReport.com and review it for accuracy. Know your scores so you can get the best loans if you’re not paying cash for your investments.
4) Review your income. Is it consistent yet, or are you still in feast or famine, real estate commission roller coaster mode? Take action to implement your ‘spokes in the wheel’ to create consistency.
5) Get to your Magic Number of listings for 90 days straight, minimum, before you start investing. It’s likely that lenders will ask to see this consistency, so you’re working ahead here. If you’re already super consistent, get going on your investment properties!
6) Study the market. Know what’s a ‘deal’, what’s not. Understand how to analyze an investment property so you make good decisions.