Written By: John Kageleiry, Verium Planning & Asset Management
www.veriumplanning.com, 603-343-2903, John@veriumplanning.com
I spoke with a number of commercial real estate brokers in the greater Seacoast market to gather their thoughts and views on how their job and their compensation affects how they prepare financially for a range of financial goals. There are common themes in what I learned but also particulars that underscored the fact that all people have different situations. The following is an attempt to see the financial challenges of commercial real estate brokerage and offer what I feel are helpful and worthwhile solutions to the particular financial needs brokers have.
This will be the first of 3 articles and it will focus on the goals and needs of younger brokers. Part 2 a will focus on established brokers and then part 3 on those who have had an extended career in real estate brokerage.
Commercial real estate brokers come into their business for a range of reasons. Some knew that was what they wanted to do right out of college, others changed roles within established companies and yet others were in sales and became interested in the rewards of commercial real estate. And while they may have arrived in different ways and no 2 people are the same, they contend with common challenges that are somewhat unique compared to the average job in America.
Commercials real estate brokers play a pivotal role in helping to contribute to business formation and growth, attracting strong businesses to the area and contributing to the health of the local economy. As such commercial brokers are strongly affected by the overall business cycle. So even in a good market they may experience long sales cycles which means long waits to get paid. This creates strains on their cashflow and makes planning for buying a home, college costs and retirement a bigger challenge. But starting with the first right steps and having a plan is invaluable to their success
Emergency funds, Roth’s, where you live, debt management and retirement saving
For younger brokers the challenge starts with just making enough money to cover their everyday living expenses. Once there is some momentum is earnings there needs to be an emergency fund. Most young brokers struggle to set money aside for their long term goals at this stage but can, through thrift and wise spending, squirrel away money to fund an emergency fund.
These young brokers may want to consider using a Roth IRA for this purpose. If you fund a Roth it can always be tapped in an emergency. IRS rules allow the contributions to come out first and are tax free. So if you don’t have that emergency you have started a small but important effort to save for your retirement. Once they have an ample emergency fund built in the Roth they can now focus on saving for a real emergency fund.
If the Roth/other savings approach can be achieved then those savings will now be available to possibly purchase a home.
How a new broker chooses their housing arrangements can also have an outsized benefit. One new broker and her husband chose to live with their relatives and help with the care of the home. Another young broker decided to move back home until she was in a better financial position to start thinking about her savings and financial goals. In both instances this allowed them to build their savings faster, which is the goal at this stage. Yes, I know, living with your parents or relatives isn’t exactly glamorous but it is smart and can pay off financially.
Life moves on for everyone and brokers are no exception. They find spouses or partners as they move along their path. And with it comes some relief but also more challenges. Having someone else with a more predictable income can really lower your worries but you may also find yourself thinking about starting a family. This is when people start thinking about homes and possibly families. Something that worked well for one broker I spoke with is that they used their own income, even if it was unpredictable, as the primary savings source.
Did I mention saving for retirement? Even as a younger person with many demands on their income needs to consider starting a self employed savings plan at this juncture. It will be challenging but just getting started with a modest yearly contribution can make a big difference 30 years down the road. They should consider starting a SEP IRA and can do so with just about any financial service company. Putting money in when you do get paid, even if a small amount, will work. Also consider using the lowest cost providers like Vanguard which will help make that money work harder. You can choose from many different index funds to build a diversified portfolio, use a pre-set strategy like a target date fund or an asset allocation fund.
Like many younger people debt management is a primary concern for new brokers. As we can see there are quite a few things they will need to deal with and student and other debt competes for their money. These loans can carry interest rates between 4.5% for federal loans and as high as 8% for private loans. So how should someone prioritize between paying down debt and other savings? Like most other debt the higher the interest rate the faster you want to pay that down. Whether federal loan or private you will realize a return equal to the interest rate when you pay extra towards principal each month. Realizing a return between 4.5 and 8% is pretty good for a no risk proposition.
And with that thought in mind how should you prioritize between paying debt and saving for retirement? Pay the majority of your savings towards high interest debt and gain that guaranteed return. If you are able to put money into a retirement account while paying down debt, consider using most or all of that retirement money for buying stocks. The gains you get on paying down debt will act as the guaranteed “bond” part of your investment mix allowing you to be more aggressive with your retirement savings.
One thing that will be critical to their chances of success at this stage is having an actual financial plan. This will help people understand how much they should be saving, where the money should go and when they can expect to reach some of the shorter term goals, like a house. What a financial plan does is act like a map to where people want to go. Starting a long trip without a map, to place you have never been, decreases the odds that you end up off track and lost. The earlier you start a plan the better you can see results and avoid getting off track.
The next article will be coming soon and focuses on more established brokers and the issues and challenges they face.