Nobody buys income that goes home when you do

Nobody buys income that goes home when you do

Scott E. FlemingBusiness Member
CPA · United States · Member since 2026 · 17 posts · 15 votes

Your self-managed portfolio is worth less than you think it is, because a buyer doesn’t get your labor with the keys.

Say your portfolio grosses $1.2M in rents and nets $600k after operating expenses. If you collect the rents, screen the tenants, run the turns and take the 2 a.m. calls yourself, that $600k is not net operating income. Part of it is your wages.

The first thing a buyer's underwriter does is charge a market management fee against your NOI, because the next owner has to pay someone to do that job. At 10% of gross rents, that's $120k a year, and your $600k becomes $480k.

At a 6.5% cap rate, $600k of NOI supports a value of $9.2M, and $480k supports $7.4M. That $1.85M difference is what your own labor costs you at the closing table, and it shows up nowhere on your rent roll. Every $10k a year you don't charge yourself for management comes off the price at roughly $154k.

Hold instead of sell, and the same math follows you into retirement. The day you hand the keys to a property manager, $120k a year of your income leaves with you, and that fee rises every year with the rents.

The gap closes in one place: a portfolio that runs without you. That means a manager (in-house or third-party) whose cost is already in your numbers, documented leasing, maintenance and collections procedures, vendor relationships that don’t run through your cell phone, and books clean enough to hold up when a buyer’s lender and underwriter go through them line by line. Underwrite your own holdings as if you’ve already been replaced, and plan your retirement on the numbers that survive it.

Build a portfolio a buyer will pay full price for, years before the sale.

Because nobody buys income that goes home when you do.

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  • Specialist · I give advice - [email protected] - I focus on states where investing is profitable, reasonably safe & secure · Member since 2026 · 185 posts · 65 votes
    16h
    Quote from @Scott E. Fleming:

    Your self-managed portfolio is worth less than you think it is, because a buyer doesn’t get your labor with the keys.

    Say your portfolio grosses $1.2M in rents and nets $600k after operating expenses. If you collect the rents, screen the tenants, run the turns and take the 2 a.m. calls yourself, that $600k is not net operating income. Part of it is your wages.

    The first thing a buyer's underwriter does is charge a market management fee against your NOI, because the next owner has to pay someone to do that job. At 10% of gross rents, that's $120k a year, and your $600k becomes $480k.

    At a 6.5% cap rate, $600k of NOI supports a value of $9.2M, and $480k supports $7.4M. That $1.85M difference is what your own labor costs you at the closing table, and it shows up nowhere on your rent roll. Every $10k a year you don't charge yourself for management comes off the price at roughly $154k.

    Hold instead of sell, and the same math follows you into retirement. The day you hand the keys to a property manager, $120k a year of your income leaves with you, and that fee rises every year with the rents.

    The gap closes in one place: a portfolio that runs without you. That means a manager (in-house or third-party) whose cost is already in your numbers, documented leasing, maintenance and collections procedures, vendor relationships that don’t run through your cell phone, and books clean enough to hold up when a buyer’s lender and underwriter go through them line by line. Underwrite your own holdings as if you’ve already been replaced, and plan your retirement on the numbers that survive it.

    Build a portfolio a buyer will pay full price for, years before the sale.

    Because nobody buys income that goes home when you do.

    Great point, now for those lurkers out there - what are you Scott, talking about? :-)

    Stepping out of your CPA bootys for a minute (most investors aren't CPAs of course)

    How would you compare, 

    take our average investors (not normal investors) who are using creative finance spending $25,000 to acquire a $400,000 house "off market" so no real estate agent costs, by assuming the sellers loan at various rates (3% - 6.5%) and various lengths of time remaining on a 30 year mortgage (depreciating usually 26 to 28 years remaining) to the "normal way of investing putting 20% to buy off the MLS at 7% on a 30 year mortgage including mortgage origination costs and in both cases a 10 year hold being managed by a third party who charges what 10%? At what point does it become worthwhile to change from buy and hold to sell on lease option with the buyer taking over all repairs and maintenance?

  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    3h

    I agree with the context of the post that a buyer for an NOI will deduct the management costs. Where I disagree is if the operator is sophisticated and can manage the property on their own and understands how to vet tenants, collect payments, and take care of their properties. I don't see why a property manager is required. The owner could save $120,000 a year and potentially may have hired somebody to manage that property for them for half that price. I'm a big fan of third-party management. If the operator is sophisticated enough to self-manage, I do not see why they wouldn't.

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    • Scott E. FlemingBusiness Member
      OP
      CPA · United States · Member since 2026 · 17 posts · 15 votes
      3h

      Agreed - but if their intentions are to sell the enterprise, then they’ll need to motive in the replacement labor, because that’s what a buyer will do. Make sense?

      S E Fleming CPA51 Review
  • Technology · Vancouver, BC · Member since 2026 · 156 posts · 31 votes
    3h

    Hello @Scott E. Fleming,

    This is a really useful way to look at it. Putting a number on the owner's own labor, roughly $154k off the price for every $10k a year of management you don't charge yourself, makes the point far better than any general advice about building systems could.

    I think the part most owners underestimate is the documented procedures. They usually live in the owner's head, and writing them down rarely makes it to the top of the list until a sale is already on the table. By then it's much harder to show a buyer's underwriter that the leasing, maintenance and collections really do run without you.

    Thanks for running the numbers so clearly,
    Lee

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