The other week I published an article on the BiggerPockets blog which dealt with the question of whether it’s helpful or necessary to get real estate license for someone aiming to be a real estate entrepreneur. There are many angles to this subheading and predictably the article received a lot of comments.
This conversation is very much a matter of perspective and individual experiences. At the core of the issue is the specific technique you adopt within the sphere of RE entrepreneurialism – license is more useful to do some things than others.
Having said this, regardless of specific approach or technique there are some fundamentals that must underpin our thinking process, and this is what I’d like to focus on in this article.
This article is specifically aimed at those of you in the beginning stages of carving out a niche in real estate. I am going to share with you some of my perspective – take it or leave it; either way, you’ll gain a wider scope of vision.
When we talk about money in real estate, the essence of the conversation can, and should be grouped into these 3 categories:
- Financial Independence
Income is a function of the Income & Loss Statement and your capacity to earn more than the cost of living. There are many ways to earn income in real estate, and they differ substantially in action and intent. One thing is for sure – regardless of how income is earned, it has nothing to do with wealth.
Wealth is represented not by your Income & Loss Statement, but by your Balance Sheet and your Net-Worth, which is a function of the value of your assets exceeding the value of your liabilities. Ownership of appreciating assets, therefore, is at the heart of wealth generation.
Finally, financial freedom is a function of free time. Let me say this again:
Financial Freedom is not a matter of money – it is a matter of free time!
Financial Freedom requires you to earn income passively; earn income in some way which doesn’t occupy your time, leaving you with the ability and to spend time doing the things that are truly important.
There is a definite relationship between Income, Wealth, and Financial Freedom. Understanding this relationship causes specific action. So – let us discuss this further, and take a look at how the notion of licensure figures into this conversation.
Everyone needs income – stuff costs money. When a suggestion is made that a license is a good thing, the main thrust of the rationale is that a license allows you to earn additional revenue via selling property.
First of all, any presumption that this is easy is just wrong. New agents have to work extremely hard to establish any kind of deal flow. In hot markets this may be easier, but on balance you’ll be working 40 hours per week or more and there is no guarantee of success.
I live in a town of 40,000 population. Here, we have 5 or 6 truly successful agents. One specializes in REOs and essentially has the entire market cornered. She works very hard and she is brilliant at what she does, and as such she earns a nice fix-figure income. Six-figure income in a market with median home-price of $70,000 – $120,000 is big deal. Her REO deals are a fraction of that, so you can do the math relative to how many deals per month she does and her time commitment…
The other agents who make big money in this town were born and bred here – they know everyone and everyone knows them! They sell pretty houses to pretty people, and they know all of them…
Then, there are about 15 agents that earn $30,000 – $40,000 annually working 40+ hour weeks. If this is not the definition of bouncing on shit, then I don’t know what is. The rest of the licensees should not even be mentioned here…
OK – who am I to judge; if you want to run yourself rugged over $30,000/year, God Bless…?! But, even if you succeed, there are a few things to be aware of:
- You are trading dollars for hours. Financial Independence does not live in this neighborhood.
- If you get sick – you don’t earn!
- If the economy tanks – you don’t earn!
- Every time regulatory or banking conditions change, you have to “jump” – they’ll tell you how high…
- If you want to spend time with your family – tough…
In short, if you ever want to achieve more financial success than being a rat in the race, license is not the answer. Why – because you are earning money instead of creating it… This is a problem! Let me explain:
3 TYPES OF INCOME
The IRS qualifies income into 3 categories:
- Earned Income – trading dollars for hours.
- Portfolio Income – income from paper investments.
- Passive Income – Cash Flow from business and Real Estate.
While I don’t mean to discuss the finer points behind the three, what you need to understand is that Commission income via license falls into the category of Earned Income. One problem with it is that it’s very highly taxed, forcing you to earn more in order tow keep more – not good. If you are able to earn $200,000 as an agent, this might make sense, but for the rest, not so much. Besides, your focus should be on earning LESS, but keeping MORE – this is the secret that most people don’t understand! Why – because earning more takes a lot of time away from those things that are truly important…
Another problem is that if you do happen to earn more, you’ll likely end up spending it on bling-bling – that “stuff” is why you wanted more money in the first place. All of that is unnecessary clutter. The big houses, the fancy cars, the $5,000 bottles of wine; all of these attributes of wealth sound good, but YOU CAN’T BUY HEALTH! How much will any of those things matter if tomorrow you get a call from a doctor telling you that you are sick; really sick…
There is no problem with owning attributes of wealth – if you are financially free. However, if you have to sell houses in order to afford these things, then you are setting yourself up for a big and painful fall. Trust me!
Financial freedom is not actually defined in terms of money, but in terms of time – free time, to be exact. The essence of financial freedom resides not in how much money one can earn, or the most money one can earn, but how easily one can earn enough to sustain life. Financial Independence is a function of being able to earn the minimum required to sustain one’s life style without, and this is the key – without putting forth much (or any) effort. In short, financial independence comes from:
Stable Passive Cash Flow
I don’t care how you set up your cash flow mechanism; it can be real estate, or it can be another business. However, the process is simple enough:
Step 1: Create income – do not earn it! Define success in terms of how little time you’ve had to spend to generate income and not in terms of how much.
Step 2: Live a simple, frugal life! Control your expenses! The people who have big money usually do not look the part – be one of them!
Step 3: Earn enough passively through buying and building assets to cover the cost of living – DONE!
What if you were to get real estate license? Well, here’s the thing – all income generated with a license is considered Earned Income. Whether you sell someone a house, list someone’s house, or simply sell your own flip, what you are doing is work; you are ultimately trading dollars for hours. As such, a real estate license ultimately does not bring us closer to financial independence.
Unlike Financial Independence which is a function of ease with which we attain positive cash flow on our Income & Loss Statement, wealth of a function of the Balance Sheet. This can be a confusing thing for a lot of people, because while all assets store intrinsic value which shows up on the balance sheet, not all assets create value on the income statement.
This means that it is possible to attain a high Net-Worth without ever attaining financial independence! Done properly, your Net-Worth needs to throw-off cash flow onto your income statement – passive income.
If you get real estate license, will this license contribute to your net worth – no, no in and of itself. At best it will provide an avenue for earning dollars…
SO – SHOULD YOU GET REAL ESTATE LICENSE
In my understanding, everything we do in our financial lives has to drive toward the goal of financial independence whereby we are not tied to job or a boss, and are only minimally tied to the economy at large. Fundamentally, a real estate license does not accomplish this. And the bigger issue is that as you spend a lot of time and energy establishing revenue as an agent, you will necessarily be steeling time from yourself as it relates to learning the knowledge and skills necessary to achieve the ultimate objective of financial independence.
It’s your call, but certain realities just are what they are. There are only 24 hours in a day. Are you going to spend them going after income or financial freedom…?