Your commission is the raw material
Selling real estate is a job, even when you run a team. It turns your effort into cash, and cash is the raw material that can make you wealthy. What you do with it decides whether it does. You can spend it, save it, give it away or invest it.
There are other ways to grow a net worth, like using other people's money. Here is how I did it.
“The fastest and best way you can do it and the way I've done it in my life was to grow my income. And I was self-funding my entire life through my income, taking my cash, investing in the assets of the rich to become wealthy.”
Step one: make the business keep 30 cents of every dollar
Before you buy anything, make sure the business works. In a real estate sales business I want 30 cents of net profit on every dollar of income. On $1 million of commission income, that's $300,000. Every month, check three numbers on your P&L: net margin, expense ratio and cost of goods sold.
Two changes keep that number honest. First, pay yourself a salary equal to what you would pay someone else to do your work in the business. Around $1 million in commissions, $50,000 to $60,000 makes sense to me. Second, have your accountant show the deals you close yourself as if you had paid someone else to sell them. If the margin isn't near 30% after that, hiring will hurt. A team that shows 30% only because the owner sells for free goes negative once it has to pay someone else to sell. How you pay agents is your call; this is just my margin check.
I have watched teams grow to $3 million in GCI and make less money than they did at $1 million, all because they started with bad math.
Step two: buy assets, then let the assets buy your things
When the job throws off extra cash, most people buy a car, a vacation or some other thing. Those are all fine.
“I would prefer you bought the assets and then let the assets buy the things.”
Here is the simple version. Put $50,000 down on a leveraged rental that nets $350 a month, and let that $350 make your car payment. Your tenant's rent pays the mortgage and the expenses, then pays for the car. When the car is paid off, you still own the rental.
Be careful with upgrades. Once you try a luxury, like flying first class everywhere, it starts to feel like a need, and it's really hard to go backward financially.
Look at your biggest expenses too, because some of them can turn into income. One of my coaching clients, an agent, was spending $3,000 to $4,000 a month on listing photography. He bought part of the photographer's business and helped it win work from other agents he knew. He went from paying about $3,000 a month for photos to being paid about $1,000 a month. That is one client's result, not a typical one.
Step three: buy rentals that clear a strict model
Most people start with what they know: a single-family rental, a duplex or a small multifamily. That's a fine place to start, as long as the deal clears a model. Mine is a 2% spread over my borrowing rate, at least 20% down and a 45% expense ratio. At today's investor loan rates, that means the rental has to perform at about 9.5% after management, vacancy and repairs. That's very hard to find today, so you will look at a lot of deals.
I used to model 35%, and that worked across my portfolio until COVID. Taxes, insurance and repair costs have all gone up a lot since then, and my average turn now runs about $4,500 to $5,000.
Even a good rental is a holding place. If the average rental pays you $250 a month, it takes 400 houses to make $100,000 a month, and closer to 500 once you add the managers to run them. I got to 130, and nothing about it felt wealthy. In the last year I've bought one or two when the math worked, and I hold them until I have enough to move them all up.
Step four: trade small things for a few big ones
Rentals mostly build net worth on paper. When I went back and analyzed all my rentals, over half of the return came from appreciation. The next move is to trade a group of small assets for a few bigger ones you control, usually through a 1031 exchange.
For passive income I target a 6% to 7% plus cap rate on triple net leases with high-credit tenants like Starbucks, Discount Tire and Circle K, where the tenant pays the taxes, insurance and repairs. When I run a real estate business myself, like our golf course, I want 15% to 20%, because active work should earn more than a passive return.
Put simply, there are two steps to get right. The first is turning your commission into something you own. The second is trading those small things for a few big things you control. Before you buy the next thing, check which box your bank statement says you are in.
The numbers on this page are Brett's own results and individual examples from specific deals at specific times. They are not typical and not a promise of what you will earn. This page is education, not financial, tax or legal advice. Talk to your own CPA, attorney and advisors before you act.