How Much of Your Profits Should Go Back Into Marketing?

Question

What percentage of your real estate profits should you be putting back into your marketing? I was told by someone 20% but I wanted to check with a few other investors to see if this was a right number or not.

J Scott · Answer

The big brokers (Re/Max, Century 21, Coldwell Banker, etc) are going to be more old-school and are going to be looking for people who more interested in being full-time real estate agents vs investors or part-time agents.

But, there are plenty of medium sized and small brokers who will be happy to have you -- they won't require office hours, they won't have a minimum number of deals you have to do, won't mind you wholesaling, etc.  Even some of the bigger ones (Keller Williams, for example), may be more open to working with investors.

Brandon Foken · Answer

J  Scott I'm a new investor looking to start wholesaling as a primary way to build up some cash reserves before I start my own rehabs/flips. I'm currently enrolled in my local community college (CCSF) for some RE classes with the end goals of getting more educated and getting my license.

My question is: Does your broker have any problems with you being an investor versus a full-time RE agent? In a few weeks I will be starting a direct mail campaign. The end goal after being licensed would be to wholesale houses from distressed/motivated homeowners and to list others that warrant full retail pricing that way I have multiple revenue streams. I'm wondering if a broker would have a problem with me wholesaling some houses while listing others. Would they want all of the action? Would there be some sort of conflict of interest? I know it may be hard to answer in specifics but am curious to know your general thoughts on the subject.

Marc Bodinger · Answer

Like Jon Klaus stated it all depends on your goals. If you generating solid cash flow and have enough for a rainy day with a repair or something else then your marketing budget can go up.

J Scott · Answer

We've kind of fallen into a pattern where we use the extra money we earn from having our real estate licenses as our marketing budget.  For example, our direct mail marketing budget comes from marketing for short sales -- the deals that don't make sense for us as short sale purchases, we refer to retail short sale agent and if she closes the deal, she gives us 25% of her commission.  The commissions we get from her on the referred sales covers our entire direct mail budget (which is about 5000 letters per month).

For short sales, we get a lot of our short sale deals by offering the listing agent our side of the commission.  So, we give up our commission in order to attract short sale deals.

And then the extra money we make by representing investor friends of ours covers our license costs (my wife, my project manager and I are all licensed now) and any other marketing that we do (like sending cookies and gifts to all the agents we work with a couple times per year).

In the end, we're using all our "extra" money coming from being licensed to cover all our marketing costs and extra costs associated with getting deals, so our rehab profits don't need to be used for this purpose.

The best part is that our commission income is about 3x what we spend on marketing, so much of that commission income is just extra profit -- or could be used if we wanted to expand our marketing.  This is why I generally recommend that new investors get licensed -- the extra income can be very useful when first starting, and even when you get more established.

Joel Owens · Answer

You FIRST have to determine what your bare minimum required return is on marketing and if it is working??

Example for every dollar spent you require a 2 to 1 , 3 to 1 , 4 to 1 ratio.

So for 50 cents you get back a dollar, 33 cents a dollar, 25 cents invested for a dollar etc. If you set the minimum and can meet that goal then you keep that marketing in place. You tweak it until you max your percentage of return and then set on auto pilot and then put another marketing campaign in place to add to it.

If after tweaking something over and over and it doesn't perform to your thresholds then you dump it. When you have XX amount of dollars you want them to work as hard as possible for you.

The biggest thing before putting back into marketing is living below your means.

So fi I make 200,000 a year I live like I make 50,000 a invest the rest. As money my grows and grows and I move up the ladder I can increase my lifestyle accordingly without overstretching myself.

Many people with marketing or lifestyle go too big too soon. You have to be patient and have self-control and it will pay off big rather than blowing through everything in the moment when you get a taste of success.

There is not a set percentage. Start small and tweak your message and when the return is really good then ramp up the volume. Many throw out a one shot deal mailing a ton with a wrong or weak message  or focused on the wrong target audience. This results in them losing money and going out of business. More is not better in the beginning.

Justin Silverio · Answer

I've heard that 9-12% is a good rule of thumb, however, as Jon Klaus suggested its more about your goals.

Here's a link to a topic where I posted a calc you can use to see how much you will need to spend to meet your goals.  http://www.biggerpockets.com/forums/93/topics/80333-first-marketing-attempt

Jon Klaus · Answer

There is no set rule. It depends on you and your goals.   For me, 20% would be too high. It would mean that I would be forced to work a lot more or hire staff, neither of which I want to do.

I'd start from your goals and work backwards. What do you want to accomplish in 2013?  What will it take to get there?  How much marketing?  What kind of marketing?  Write your marketing plan now and create a budget for it.  That's how much you should spend.