Cost Structure and Financial Analysis of a Startup Real EstateBusiness To further elaborate on the mentioned above, I will be explainingthe financial costs and overall business approaches to fund and operate thefirst two years of a startup real estate business- further detailing themarketing expenses, financial requirements, and the anticipated revenues.
Tobegin the startup, one would have to bear in mind the cost structures thatwould be associated with the said business, and the relative proportions of thefixed and variable costs. In order to have a properestimate for the beginning of this real estate business, one must include thefirst year expenses such as legal, stationary, sales literature, and the designof the overall structure of the company. These costs would accumulate beforethe opening date, as they are the fundamentals of the startup. The saidbusiness would also need to have an asset in the bank to support the beginningmonths before generating proper income.
To clarify more on the costs, I will addressthe fixed and the variable costs that would inevitably be associated with thebusiness. The wages, utilities, sales literature, stationary, insurance, rentand marketing would all fall under the category of fixed- uninfluenced inchange-by the outside fluctuations of production rates and sales. Elementsinvolving sales commissions and shipping expenses fall under the classificationof variable costs, due to the easily influenced fluctuations associated withthose expenses. Although, fixed costs can change overa period of time, the change will not be related to production.
Variable costs,on the other hand, are dependent on production output. The variable cost ofproduction is a constant amount per unit produced. As volume of production andoutput increases, variable costs will also increase. (Variable Cost Ratio,2018) And finally, to further elaborate with a numerical estimate, onemust include the following tasks and actions allocated to the business. Tobegin, an aesthetically pleasing office in a city, such as Los Angeles, wouldbe around three thousand dollars a month, utilities including internet andtelephones would be around seven hundred, depending on of course, the space ofthe facility as well as many other factors.
A fully operational staff groupwould be of huge importance for a business such as real estate, including areceptionist, office administrator, managing broker and an accountant. Theworkers would be vital in the functionality of the business, especially amanaging broker, who would be responsible for budgeting finances and to offerrecruitment for potential realtors. The total cost of this would also vary, butone would gauge this to be at twenty thousand dollars a month, and of course a businesssuch as real estate would need proper insurance, which would cover faults inagents’ contracts; therefore, with a general coverage, the price would be aminute thirty dollars a month. In order to fully operate, the business wouldneed a business license, the price of which would also depend, however, onewould estimate it to be perhaps three hundred a month. The last few items to address would be realtor training and officeequipment, both vital for a fully operating real estate business. It would becritical for agents to have necessary information concerning laws andcontracts, thus, realtor training and ongoing education would be a part of thevital monthly costs, totaling up to perhaps two hundred dollars a month. Andlastly, office equipment, essential for both staff and potential clients.
Thiswould include copiers, printers, scanners, computers, telephones, desks andchairs, coming up to at least ten thousand dollars. However, this would be aonetime cost. Thus, to tally up a numerical total, one would presume it wouldrange between thirty to thirty five thousand dollars. The total startup costappraisal would be highly dependent upon variable environmental factors, mostnotably, property value and the proportional increase in rent, as well asmandated worker compensatory rates.
These costs are obviously quite inordinate therefore, one mustconsider how to remain solvent until the business was properly generating fundsthat would be greater or equal to expenditure, and an example of that would beto reduce fixed costs, as that would help in the general financial wellbeing ofthe business to remain solvent. For example, moving to a less expensivefacility in a more secluded location, or reducing the number of staff that maynot be needed during this expense saving period. However, it is important tonote that such moves to reduce financial expenditures could also potentiallylead to a reduction of output in the mitigation of ones’ ability to access alarge client base, as the first two years of every startup business are themost financially grueling. Thus, one would consider the required fees tomaintain business, until cash flow appeared to cover extra costs. The necessarypayments required to stay at a status quo would be the lease, and wages for thebasic administrative staff, the utilities, and lastly, the insurance. Duringthis time, in order to remain solvent, the real estate business would be fullydependent on paying for only the necessities required to maintain thefacilities, as well as being fully reliant on other sources of income. Forexample, the commissions from sales, desk fees as well as technology fees. Tofurther elaborate on the mentioned above, the commission splits are the largestsource of income, as the firm will take ten percent from an estate agent withextensive experience, and forty percent of revenue from an agent with lessworking experience in sales.
Obviously, the estate broker would be moreinterested in a realtor with more skill and background in selling, as theywould generate more income, but the broker would have to be thoughtful abouthow much lower of a commission one would charge in exchange for more workingexperience. Another good source of income for the estate firm would be thecontract with the realtor. To clarify further, in order to be associated withany broker, a realtor must pay a desk fee. This means that the realtor would belinked to the name of the firm, in order to work independently, but under theprotection and the coverage of the said business. The desk commission also doesnot vary with the commission the realtor may be bringing in, it is a pricebetween seven hundred and two thousand dollars, but this price would obviouslybe contextually dependent.
Deskfees could possibly vary, but in general tend to be fixed at a set amount, anagreed upon rate for operating either in the broker’s office or under thebroker’s license or both. They may be higher or lower if an agent wants aprivate office or if they work from home and do not have a physical desk at thebroker’s office (Weintraub, 2007).The realtormust also pay the estate business a technological fee, as previously stated,the equipment such as printers, scanners, computers, internet and telephonesare included in the firm, however, a realtor working for the firm will pay a monthlyfee for access to the technological resources. The price that would be chargedto a prospective realtor would be about fifty dollars a month, thus, bringingin a good source of revenue for the firm, as these are continues chargesregardless of sales commissions. In essence, the overall viabilityinvolved in opening a real estate business would depend on the financialresources one would have to begin with.
As the estimated cost would be aroundthirty thousand dollars, and in order to have enough financial assets to coverliability, one would have to be cautious to sustain a fixed capital. Theoverall objective would be to start off with sufficient funds to properlymaintain financial resources for the first year before estimated cash flow, andthen to have the necessary staff to launch the success of the said business. Asa good broker who would be able to recruit successful agents who would closemore sales would be vital for the proper revenue and achievements.
To sum up,if all these requirements were met, then the overall viability of thisparticular real estate startup would be very possible. Of course, The aforementioned monetary amounts would vary on a variety of factors, but if thebusiness generated enough income to sustain long-term survival and maintain itsability to sustain profits over a period of time (Murray, 2017) then theviability given the circumstances would be sufficient. The chart below is anumerical detailing of the figures mentioned throughout, and will offer morecontent, further detailing the variable and fixed costs, revenue, and the costsneeded to maintain solvent for the startup of the business.
Cost Revenue Facilities $3,000.00 Sales Commission 10-40% of X Utilities $700.00 Desk Fee $700.00-1,000.00 Staff $20,000 Technology Fee $50.00 Equipment $10,000 Total: ~$35,000 Works cited(n.d.)Retrieved from https://www.investopedia.com/terms/v/variable-cost-ratio.aspElizabethWeintraub (2017, October 29th) https://www.thebalance.com/under-desk-fee-arrangement-1798536 Jean Murray (2017, April 3rd) https://www.thebalance.com/what-is-business-viability-3884327