If you’re running a real estate business, you’re in it to make a profit and build something that looks after your family and your team. 

The quickest way to get there is to know your gross profit formula: the simple set of numbers that tells you when you’re breaking even, when you’re making money, and exactly what you need to hit each month to reach your goals. 

 

what is a profit formula? 

 

Your profit formula connects 3 things: 

  1. Your break-even point [the moment you stop losing money and start making it] 
  2. Your cost of generating sales revenue [agent splits and other variable costs] 
  3. Your profit target [how much you actually want to keep] 

Once you map these out, you can translate your annual goal into monthly, measurable targets for property management and sales. 

Watch this video or follow the steps below to know your profit formula!

 

 

1. know your break-even

 

Start by understanding where your fixed revenue covers your fixed costs. 

For many combined real estate businesses, your recurring property management [PM] revenue does a lot of the heavy lifting. Add to that the contributions from sales [after agent splits and other variable costs], and you’ve got your total engine to cover fixed costs like salaries, office rent, technology and overheads.

At break-even: fixed revenue + gross profit from sales = fixed costs 

Beyond that point, every incremental dollar of contribution turns into profit. 

 

2. know your cost of sales

 

In sales, the big variable cost is usually your agent commission split. The contribution to the business after paying the agent is what helps cover fixed costs and once you’re past break-even, becomes profit. 

 

 3. convert your annual goal into monthly targets

 

Work backward from your profit target to a monthly sales number above break-even. 

A simple example: 

  • Break-even: You need $50,000 of gross commission income [GCI] per month to break even [after agent splits and including your PM contribution toward fixed costs]. 
  • Profit goal: You want $500,000 profit for the year, which is about $42,000 per month. 
  • Required GCI above break-even: With a 50/50 split, you need roughly double the profit you want. So, to make about $42,000 profit in a month, you’ll need about $84,000 of GCI above break-even. 
  • Monthly sales target: $50,000 [break-even GCI] + $84,000 [above break-even] = about $134,000 GCI per month. 

Round the numbers to suit your business but keep the logic. If your split is different, adjust the math: required GCI above break-even = monthly profit target ÷ business share of GCI. 

 

 4. track it and tune it

 

  1. Decide on your break-even and monthly targets. 
  2. Review performance monthly, including your PM contribution, GCI, agent splits paid and profit
  3. Adjust quickly… if you’re under target, decide whether you need more listings, more productive agents, higher average fees or righter costs. 

 

the bottom line 

 

Too many principals want more profit but aren’t clear on the exact numbers that get them there. Once you know your break-even, your cost of sales and your monthly target above break-even, you’ve got a simple and repeatable profit formula for your business. 

 

we’re here to help 

If you’d like help mapping this for your agency, our accounting team of real estate specialists does this every day. Feel free to get in touch with us at oneplace@businessdepot.com.au or give us a buzz on 1300BDEPOT.  

 

want more insights for real estate business owners?

Sing up to our mailing list below!