Opening your own brokerage is a huge milestone in your real estate career. However, if you don’t accurately estimate your real estate brokerage expenses, your startup dream can quickly become a nightmare.
I learned this from experience. In my 27-year career in real estate, I have launched or coached more than 20 startup real estate brokerages. Accurately estimating expenses was one of the most critical steps we took. That’s why I decided to put together this article to outline the right way to estimate expenses for your new brokerage.
Real Estate Brokerage Expense Categories
In this article, I’ll review all the possible real estate brokerage expenses you may incur operating a new business. Each of the categories below represents a group of expenses along with their estimated annual costs. I’ve also pinpointed the percentage of your overall revenue that each category should ideally be.
Each category will be broken down and explained in detail later in the article. After reviewing each of your brokerage expense categories, you can move to estimating your revenues and completing your real estate brokerage budget.
**It’s important to note here that profit is not, strictly speaking, an expense. However, we’ve factored in a 20% profit margin, assuming you’re running a reasonably profitable brokerage business by efficiently managing expenses and revenue according to the guidelines we’ve set forth here. More on this topic later.
Pro Tip: If you’re looking for some extra support with your brokerage budgeting and finances, look into Xendoo. Xendoo’s experienced real estate accountants can streamline your accounting at an affordable cost. Their services are a la carte and include bookkeeping and accounting, tax preparation, and financial statement preparation.
Real Estate Brokerage Expense Categories
|Expense Category||Estimated Annual Costs||Ideal Percentage of Revenue|
|Office||($0 virtual) $80,000-$260,000/year||(0% virtual) 20%-30%|
|Advertising (Buyer and Seller Leads)||$20,000-$100,000||(Excluded from operational budget)|
|Associations, Insurance, and Professional Fees||$12,000-$18,000/year||2%-4%|
|Recruiting, Advertising, and PR||$6,000-$60,000||5%-10%|
|Meals and Events||$9,000-$24,000||2%-5%|
Estimated cost: $45,000-$120,000/year
Ideal percentage of revenue: 20%-30%
Your real estate brokerage payroll expenses may vary across several different variables. The number of employees you have, the employment market in the city where your brokerage will be located, and the additional benefits you choose to offer your employees are just three such variables.
Many new brokers forget to factor in the other expenses included in payroll, such as family leave time, insurance, and payroll taxes. Here are the main expenses you will need to account for:
The number of employees you have at any given time is dependent on the services you are offering to attract agents and the size of your brokerage. For deeper insight on which employees to hire at different stages of growth, see my previous article: The 5 Employees You Need to Hire to Grow Your Brokerage.
The city and state you are opening your brokerage in will also affect the cost of payroll for your brokerage. Even the cost of a receptionist can vary significantly between a city like Chicago and a rural town like Wichita. To get an accurate estimate of the costs to hire in your area, you’ll need to research average salaries in the area.
QuickBooks Payroll is an online, easy-to-use payroll management software that works for small to midsize businesses. It’s accessible from anywhere you have an internet connection (so you can do payroll while you’re on vacation). It’s available with a monthly subscription plan.
Remember to factor in additional employee benefits like health insurance, life insurance, PTO (vacation), family leave, 401(k) contributions, and bonuses. If overlooked in your budget, these expenses can surprise you later and throw off your profitability. Decide now what your policy is for vacation days, paid time off (PTO), family leave days, and if you are contributing to a 401(k) on behalf of your employees.
Employer Payroll Tax
The most common expense new broker-owners overlook is the additional taxes required to be paid by the employer. Let me tell you, the IRS doesn’t take kindly to businesses that fail to pay employment taxes. In addition to the hourly wage or salary that you agree to pay your employees, you, the employer, must also pay employer payroll tax, which is an additional 7.65% that your brokerage pays to Medicare and Social Security.
Workers Compensation Insurance
Most states also require employers to provide workers’ compensation insurance. Failing to do so may result in significant fines or even closure. Workers’ compensation insurance protects the employee and you in the event that your employee gets injured on the job and isn’t able to work.
Payroll Servicing Company
If all this gives you a headache, you can hand off all your payroll worries to a payroll servicing company. These companies will handle all the state and national requirements for hiring and managing employees, including legal requirements, tax withholding, and workers’ compensation insurance. Just be sure to count the additional expense for payroll servicing into your budget.
Or you can use QuickBooks Payroll, which integrates seamlessly with a broader suite of products offered by Intuit. Many small business owners find their monthly plan solutions a much easier and more affordable option than outsourcing their bookkeeping and accounting needs. QuickBooks payroll is easy to fold into your routine, with an easy-to-use interface. Best of all, they offer a free trial so you can test drive their products.
Outsourced Transaction Coordination, File Review & Other Expenses
Estimated cost: $18,000-$24,000/year
Ideal percentage of revenue: 3%-5%
To keep your employee costs low, consider outsourcing as much as you can from the beginning. Fortunately, you can easily outsource brokerage tasks like transaction management and brokerage file review.
Transaction coordinator companies charge between $150 and $300 a file, depending on the volume you’ll be sending them. If money is tight, you might consider paying a detail-minded, experienced agent in your brokerage to do it on the side for less.
While you’re at it, consider outsourcing other agent services like photography, marketing, or sign installation and storage.
Estimated cost: $13,000-$36,000/year
Ideal percentage of revenue: 3%-6%
Gone are the days of having four to five employees to run your real estate brokerage. Today many of the services brokerages provide are managed with software, allowing you to run your brokerage with as few as just one employee.
Since there are so many options for brokerage software available today, estimating these expenses can be tricky. For a detailed breakdown of the software choices available for brokerages today, see my earlier article, Real Estate Brokerage Software: 27 Essential Tools.
For now, here is a quick breakdown of rough estimates for software pricing in common categories you will likely need:
|Software||Estimated Annual Cost|
|Showing Service||Set and coordinate showings, manage feedback||$240-$540/agent or $20/listing|
|MLS||Managing Broker Multiple Listing Service access||$240-$480/year|
|CRM or All-in-One Solution||Contact management software or all-in-one CRM/website solution||$180/agent/year|
|Websites||Brokerage website and individual agent websites||$144-$2,400/year|
|Digital Marketing Suite||Software to assist agents or the Marketing Coordinator in creating and managing agents and listing marketing||$168/agent or $2,400/year|
|Transaction Management||Collects and manages required documentation and signatures on behalf of the brokerage||$85/agent or $2,400+/year|
|Financial Management||Manages and tracts agent fees and caps, manages brokerage expenses and revenue, and prepares documentation for tax preparation||$2,400-$3,600/year|
|Paperless Contract Software||Paperless real estate contact software||$120/agent|
|Agent Recruiting Software||Measures and tracks agent performance through the MLS and CRM with proven recruiting templates||$2,400-$3,600/year|
|Total Annual Cost||$13,000-$36,000|
Office & Office-related Expenses
Estimated cost: ($0 virtual) $80,000-$260,000/year
Ideal percentage of revenue: (0% virtual) 20%-30%
Unless your real estate brokerage operates virtually (without an office), your office will likely take up a large chunk of your expenses. Still on the fence about the benefits of a brick-and-mortar versus a virtual office? See my previous article Are Brick & Mortar Real Estate Offices a Waste of Money?
Since there are so many factors to consider, choosing the right office can be challenging. Some factors are obvious, but many are not so obvious and only reveal themselves after you’ve signed the lease. So if you haven’t settled on a space yet, read my article to learn How to Select the Right Office for Your Real Estate Brokerage.
For expense purposes, you can break down the costs associated with a brick-and-mortar real estate office into four categories: base rent, CAM, utilities, and maintenance.
Estimated cost: $36,000-$66,000/year
The base rent is the amount your brokerage must pay each month for the use of the space. In a city like Boulder, Colorado, typical office space can range from $25 to $50+ per square foot. To calculate your base rent on a commercial lease space, you need to multiply the total square footage of the portion of the building you are leasing by the cost per square foot.
For example, if you’re looking at an office space that is 3,000 square feet and the landlord is asking $22 a foot for base rent, then your cost would be $66,000 a year in annual base rent.
(3,000 sq ft X $22/sq ft = $66,000)
Divide the annual base rent by 12, and you will have your monthly base rent.
($66,000/12 = $5,500 monthly base rent)
Common Area Maintenance
Estimated cost: $15,000-$30,000/year
Common area maintenance (CAM) fees are additional expenses associated with the property passed through to the tenant. These additional expenses include costs directly related to the space you occupy PLUS the costs associated with the rest of the property, such as parking lots or common areas.
Common CAM expenses are cleaning, repairs, building maintenance, utilities, internet, insurance, security, parking lot maintenance, snow removal, landscaping, trash, and taxes.
CAM fees can add $7 to $12 per square foot to your lease, and you can even be charged retroactively if the CAM was underestimated. So, before you sign that lease, make sure you understand your potential liability and what you can afford.
Estimated cost: $3000-$13,000/year
If your lease or CAM doesn’t include utilities, you’ll need to budget for them as well. When you budget for utilities, you may think only of gas, electricity, water, and sewer. However, if you plan to make calls and go online, you’ll need to budget for communication utilities such as phone and internet. These can add up quickly.
Estimated cost: $1,500-$3,000/year
If everything goes as planned with your brokerage (and why shouldn’t it?), you’ll have lots of wear and tear from busy agents using your office. To keep things ship-shape, you will want to budget for common maintenance. This can include services like cleaning, trash removal, recycling, and paper shredding.
If you are renting a standalone building or building maintenance isn’t covered in your lease or CAM, then you’ll want to budget for additional building maintenance to ensure your agents and their clients aren’t turned off by a poorly maintained office.
Estimated cost: $4,800/year
Of course, you or your staff can take the time once a week to clean your office, but in time it will be seen by your employees more as a punishment than a required task. The cost of hiring a cleaning service will give you an instant return on investment (ROI) from a happier team.
Buyer & Seller Lead Advertising Costs
Estimated cost: $20,000-$100,000/year
Estimated return: $40,000-$400,000
Percentage of revenue: Excluded from operational budget
While providing buyer and seller leads isn’t required to operate a brokerage, many brokerages today provide some brokerage referred leads or lead programs.
To help manage this, many tech-savvy brokerages use all-in-one customer relationship management (CRM)/website and lead management software platforms like Real Geeks to generate leads. The cost of systems like these ranges from $500 to over $2,500 a month, excluding advertising costs. The advertising spend necessary to generate a consistent return starts at $1,000 a month, and can quickly exceed $10,000 a month.
If you’re looking for a more hands-off approach, you can buy leads directly for your agents from services like Zillow or BoldLeads.
To maximize your ROI from leads you buy for your agents, you might want to consider hiring a Leads Manager to manage the system, track leads, and keep agents accountable. This one hire can increase your ROI from paid leads up to 300% or 400% of your investment made in lead buying.
Separate Profit & Loss Statement
Instead of including the cost of the system, advertising, and Leads Manager in your brokerage’s operational budget, I recommend having a separate profit and loss (P&L) statement for the leads program. This P&L will combine the expenses of running the program with the revenue received as referral fees. Your agents will pay a portion or referral fee at the close of any transaction referred from the leads program. This P&L will quickly show you if the program is operating profitably.
Associations, Professional & Insurance Expenses
Estimated cost: $12,000-$18,000/year
Ideal percentage of revenue: 2%-4%
Some expenses to run your real estate brokerage are necessary but are far less exciting than renting a flashy office. Unavoidable expenses like insurance, banking, and legal costs come to mind.
Additionally, expenses like membership dues, licensing fees, and tax preparation can easily be overlooked because they only occur once a year. To create a comprehensive budget, you will need to remember to include each of these, as the costs can be significant.
Here is a quick breakdown of the expenses associated with licensing, insurance, bookkeeping, and other professional costs. You may prefer to manage your own books, and there are plenty of online tools and resources to help you on your way.
Check out QuickBooks Accounting Software for Small Business, available with a monthly subscription plan. You can manage your brokerage budget from anywhere with an internet connection and save on bookkeeper expenses. QuickBooks accounting products help you to track your business expenses, revenue, and profitability, making it super-easy to handle these tasks on your own.
|Brokerage license fees (state)||$550/year|
|Business license (city)||$300/year|
|Use taxes and fees (city)||$150/year|
|Errors and omissions insurance|
(group policy < 25 agents)
|Property and casualty insurance||$600/year|
|Association of REALTORS||$600/year|
|Chamber of Commerce||$900/year|
|Real estate attorney||$1,200/year|
|Total Annual Costs||$10,600|
Recruiting, Advertising & PR Costs
Estimated cost: $6,000-$60,000/year
Ideal percentage of revenue: 5%-10%
Recruiting, advertising, and PR expenses will also take a significant chunk of your revenue each month. Here are some quick estimates of common costs associated with recruiting, advertising, and PR:
Agent Recruiting Ads
Estimated cost: $3,000-$6,000/year
Even if you do no other advertising, if you wish to grow your brokerage rapidly, you’ll want to budget for agent recruitment ads on websites like Indeed, ZipRecruiter, and Craigslist. These websites charge between $25 (Craigslist) to $400+ a month to run help wanted ads.
Newspaper Display Ads & Press Releases
Estimated cost: $0-$24,000/year
Yes—the newspaper IS still an effective way to promote your brokerage and your listings. This is especially true in high-traffic tourist destinations, small towns, and areas where the average population is older. To save money, negotiate your display ads for 6-12-month agreements instead of weekly ads.
When your agents feel appreciated, they will stay. The best way to welcome a new agent aboard or celebrate an agent’s accomplishments is to do paid press releases. Most newspapers will do these for a few hundred dollars. Take my word for it—it’s totally worth it!
Signs, Swag & Business Cards
Estimated cost: $1,000-$8,000/year
Printing, storing, and managing your brokerage’s listing signs and open house signs will not only make your agents happier, it will help you maintain your brand image and standards. Contract with a sign company for a volume discount.
Physical swag like custom pens, coffee mugs, shirts, hats, or umbrellas can also go a long way to helping you promote your brand and make your agents feel part of a team.
Another outstanding way to maintain your brand while standing out from the brokerages that make agents pay for evvvvverything is to provide business cards for your agents. It is a low-cost and simple gesture that agents will cherish.
Social Media & Google Remarketing
Estimated cost: $3,000-$22,000/year
Build your brand awareness by having a solid remarketing campaign on both Google and Facebook. A remarketing campaign will advertise your brokerage to visitors who landed on your website. This will not only build your brokerage brand with the community, but with new potential agents as well.
Also, don’t miss the opportunity to set up your Google My Business and Yelp for Business accounts. Both of these will help consumers find your brokerage quickly.
Meals & Event Expenses
Estimated cost: $9,000-$24,000/year
Ideal percentage of revenue: 2%-5%
Unless you want to be personally footing the bill each time you meet a potential recruit or have a team meeting (guilty!), you will need to include meals and events in your expenses. Here is a quick breakdown of estimated expenses for meals and events for a small brokerage:
|Recruiting and Retention: Coffee and lunches with recruits or your agents||Twice a week||$20-$50/each|
|Team Meetings||Weekly||$75-$150/each (consider getting sponsors)|
|Training Events: CE Classes, Software Training, Contract Classes, and so on||Monthly||$150-$250/each (consider getting sponsors)|
|Large Events: Speaking Events, Award Ceremonies, Recruiting Events, Client|
|Quarterly||$1,000-$4,000/each Includes: event space, speaker, coffee, and snacks (consider getting sponsors)|
|Holiday Party||Annually||$2,500-$7,000 |
Includes: event space, catering, entertainment, and drinks
|Total Annual Cost||$9,000-$24,000 (including 50% sponsorship)|
Find Sponsors for Your Events
Consider finding sponsors to assist with the cost of your events, especially intimate gatherings or meetings where your team may need to discuss confidential information. Most states allow mortgage and title companies to pay a small portion depending on the number of agents in the room, or they may allow them to pay for a booth or an opportunity to speak to your group.
Other vendors, like property inspectors, solar companies, and movers, are less regulated and are happy to help with the cost for an opportunity to meet your busy agents.
Just don’t expect to make money on your events or even to get 100% of the costs covered by sponsors. A good practice is to estimate that you will have up to 50% of the costs covered by sponsors.
Office Supplies & Other Office Expenses
Estimated cost: $12,000-$24,000/year
Ideal percentage of revenue: 3%-8%
The expenses related to office supplies have decreased dramatically this year, but they can still be significant. Yet, if you are building a full-service brokerage, you still want to be prepared to support the busy agent that needs their marketing and presentations professionally printed and bound.
You will also have some costs related to your part-time and full-time employees working at the office each day.
Coffee & Filtered Water
Estimated cost: $1,500/year
Truth be told, I love coffee, and I am a coffee snob. Brokerages that don’t provide their employees and agents quality coffee and filtered water may be saying, “We actually don’t want you here!”
Do yourself and your team a favor and spend a little extra on the small things that matter. Coffee and water service companies like Lavazza will keep you stocked up and prevent you from having to run to the store for coffee five minutes before the team meeting.
Office Supplies & Paper
Estimated cost: $1,200/year
The cost of pens, paper, and Post-it notes adds up, and if not managed, these can quickly eat up your profits. To keep office spending under control, set a monthly budget so everyone knows where the spending limit lies.
Copy Machine & Ink
Estimated cost: $3,600/year
You may find this shocking, but a top-of-the-line copy machine today can cost as much as a well-equipped Honda Civic! Copy machine companies will do their best to tie you into a long-term lease on a new machine for $600 to $900 a month.
They will tell you that you will save money over time. They don’t tell you that the lease cost usually doesn’t cover the total cost of the ink. They will say things like, “Ink is only 3 cents a page.” What they don’t say is that a color page uses four ink colors per page. In reality, each color page costs 12 cents a page, and this is in addition to the cost of leasing the copier.
To keep your budget within reason, I suggest you find a used copier for $3,000 to $5,000 and then pay for a maintenance contract for $200 to $300 a month, including ink for a limited number of copies.
Estimated cost: $480/year
With identity theft at an all-time high, shredding confidential printed documentation is a must.
Profit as an Expense
Most people don’t think of profit as an expense. But if you wish to build an accurate budget for your real estate brokerage, you will need to factor in the profit you want to make.
Think of it this way: If you sold a bushel of apples for $10 at the local farmers market, that $10 is your revenue, not your profit. You are bound to have expenses related to growing, acquiring, picking, cleaning, transporting, presenting, and then selling the apples, right?
Say the cost of buying the apples from a local organic farmer costs you $5, and then you spend $2 on cleaning them and placing them in a bushel. Your cost of goods is $7, right? However, you also have other expenses like gas and the rent on your space at the farmers market to consider. These two expenses run you an additional $60 a month.
So What’s Your Profit?
Well, your profit will depend on how many bushels of apples you sell. To determine how many apples you must sell each month, you must first determine how much profit you wish to make.
Let’s say you wish to make $300 a month in profit selling apples at the market. Knowing that the cost of goods is $7 a bushel and our monthly expenses are $60 a month, we can now calculate that you must sell 120 bushels each month to make $300 in profit.
Creating your budget for your real estate brokerage is no different. Decide on an amount or percentage of profit you wish to achieve each year and add it to your expenses before estimating your revenue.
Now, you’re ready to estimate your expenses. Once you complete that, you can move to the fun part: estimating your real estate brokerage revenues and finalizing your real estate brokerage budget.
Further Reading for Aspiring Broker-owners
If you are building or considering starting your real estate brokerage, check out our growing list of industry insider articles on starting, running, and growing your brokerage.
3 Foolproof Team Models: Hiring, Splits, Lead Gen + More
The Ultimate Guide to Recruiting Agents for Your Team or Brokerage
How to Create an Inspiring Mission, Vision & Values for Your Brokerage
How to Select the Right Office for Your Real Estate Brokerage