How to Calculate Overhead for Real Estate Companies
Managing a real estate business comes with many responsibilities. From networking with clients and monitoring market trends to maintaining good accounting, owners have a lot to juggle. Calculating overhead for your business can become just another item on the to-do list.
Despite how many figures there are to track, calculating overhead is something you can’t afford to skip. If you don’t feel equipped to handle the math, be encouraged. Calculating overhead becomes a simple equation when you know what to include and how to handle the numbers.
In this guide, we’ll cover the basics of calculating overhead so you can rest easy when it comes to managing business costs.
Here’s What We’ll Cover:
What Is Overhead?
The term overhead describes the expenses that a business or individual owner incurs regularly with the goal of moving the functions of the business forward. Overhead isn’t associated with the actual product or service that a business provides. Instead, these costs go towards supporting business efforts in other ways.
Why Is Calculating Total Overhead Important?
Real estate professionals should consider themselves business owners and handle expenses accordingly. The reasons for this are:
- Your total overhead is an indicator of financial health in your business
- Overhead costs reveal where you’re spending and what you could trim
- Overhead can impact your bottom line and alter income totals
Examples of Overhead Costs in Real Estate
Examples of overhead costs vary based on the type of work you perform. For instance, the expenses of an agent will be different than that of a property manager. Likewise, a commercial property developer will face unique costs.
The list below summarizes six of the most common overhead costs that agents could maintain throughout their careers.
Before you become a certified agent, you must take the required training courses to prepare for licensure. Many of these courses are mandated by state requirements. Keep track of tuition and other payments in order to report them in your first year of business.
Licensing and Exam Fees
To become a licensed agent, you must take an official exam and pay for your official license. Additionally, there may be other licensing fees depending on your state. Any time you take or retake an exam or pay a licensing fee, this counts as an overhead expense.
Local Brokerage Firm Payments
Most new agents operate under the umbrella of a local broker. The benefits of this setup include work experience, mentorship, and having the broker keep up with administrative costs. In return, you may be expected to pay a fee or percentage of each sale, which is considered overhead.
Dues for Professional Associations
Other direct costs include the dues you pay for memberships and other professional organizations. Whether these are monthly or yearly charges, be sure to keep track of them as professional development expenses.
Marketing and Advertising
As a professional, the bulk of your overhead costs may involve marketing and advertising. These outlets help you communicate your value to new clients, generate new leads, and support the efforts of your business as a whole. Many agents invest heavily in this particular overhead cost in order to establish themselves in the local market.
Direct Costs vs. Indirect Costs
Real estate companies may accrue both direct and indirect costs when it comes to staying in business, serving clients, etc. Some direct costs include labor, marketing materials, and transportation. Some indirect costs may include property taxes, utilities, and tax-related business expenses.
To calculate your total overhead, you will want to add up all overhead costs, tax-related expenses, administrative business expenses, time-related expenses, or any other overhead cost you’ve accrued in your business.
Calculating Overhead for Real Estate in 3 Easy Steps
If you’re wondering how to calculate overhead in your business, there’s good news—the process doesn’t have to be overwhelming. In fact, you can easily break it down into three simple steps to get an accurate picture of your unique overhead situation.
1. Track and Categorize Your Expenses
The first thing you must do is list your necessary expenses. This list should include anything that you require on a regular business to maintain your business. Consider the above list for common overhead costs and look for these items within your normal spending.
Once you have a comprehensive list, begin to categorize. You might realize that some things are more personal than business-related.
2. Add Expenses to Determine Aggregate Overhead Costs
Next, add up the essential expenses only. This provides a baseline aggregate cost of what it takes to maintain your business each month. Your aggregate cost is the minimum amount that you need to keep your business moving forward.
3. Calculate Your Overhead Rate
Finally, calculate your overhead percentage rate by dividing the aggregate cost (monthly) by the total of your expected monthly revenue. For instance, if you have a monthly overhead cost of $1,000, and you expect to receive $10,000 in commission or revenue for the month, you would divide and multiply by 100. The result would be a 10% overhead rate.
Calculate Overhead Costs With Less Stress
Learning how to calculate overhead costs can be a game changer for your business. In real estate, you may not have to manage things like labor or production, but it’s still essential to keep a pulse on how your business is performing.
Knowing your overhead percentage allows you to visualize where every dollar goes in terms of supporting your end goals. By accurately tracking, categorizing, and doing some quick math, you can take back control of your business spending and move the needle forward.