In the 1990s I worked with USWEST (now Qwest) Communications in a major effort to create better communications between management and union workers. At the outset, relations were hostile, distrustful, dysfunctional, and in many cases counterproductive. Management and the union, however, were seeking to form a mutually supportive partnership. But realizing even tiny steps toward that end seemed next to impossible. Our first task was to identify the “what’s in it for me” part of the assessment process. Our campaign— we dubbed it “Bridging the Gaps”—lasted about two years and shaped some of the material in this book. The key lesson was this: For this proposed partnership between management and the union to work, interdependence would be key. Having one group dominating the other would kill the relationship.
Management first had to find out what the union’s needs were. Through months of research—involving questionnaires, interviews, focus groups, feedback sessions, and so on—many needs were identified, clarified, and communicated. In the same way, union members learned more about the management side of the business—about dealing with economics, competition, regulation, and shareholders. Discovering what each party needed from the other was enlightening.
Capitalization rate? I know you’re thinking this is starting to sound complicated; definitely third-year college accounting. Well before you close the book, allow me to explain. First, it sounds way more complicated than it is. In numerical terms, the capitalization rate is the net operating income divided bv the purchase price:
Capitalization Rate = Net Operating Income -T- Purchase Price
So now you’re thinking, “Ken, how can I calculate the capitalization rate when I don’t have a purchase price yet? That’s what I’m trying to figure out through this whole exercise after all. Don’t tell me algebra is involved!” No, algebra is not involved. This is actually really easy. The purchase price here is actually the purchase price trends for a comparable building in your market. So this very complicated sounding word is actually something you can get very easily from brokers, real estate agents, or even the pro forma document for the property. The people in the business—your team members—will either know the capitalization rate for your market or help you calculate it, and that’s all there is to it.
Keep in mind, at this point in the process your goal is to get an idea of the ongoing services and repairs as well as upgrades the building may need. Later in the process, you’ll go into lots more detail. This is the time to put rough numbers on paper and analyze if the cost of the needed repairs will still allow you to be profitable. There is a real balancing act between spending enough to get the place in shape and overspending. Again, your property management representative can help you determine many of these costs.
The goal throughout this whole exercise is to get a picture of where your expenses are and try to find ways to do things better, smarter, and for less money. Those increase your net income and increase your profitability. So what are the expenses? To answer that question, we’ll turn to the pro forma expense table. It shows the seller’s anticipated expenses for the coming year (the pro forma column) and the actual expenses for the prior year.
Regardless of whether you will be using a property management company or not, calling one to visit the property and help you assess everything involved in running the place is a good idea, particularly if you are looking at a multi-unit building. Just call and say, “I’m looking at buying an eight-unit building, and I’m not sure if I want to run it myself or hire a company to do it. I’d like to show you the building and talk with you about it.” The hour or so you spend with the property management representative will be a good investment of time. And if you have to pay that person an hourly consulting fee, it’s worth it. Make the objective of the meeting twofold. First, you’ll want to learn what it will take to run the property, and second, you’ll want to get insight on how to minimize expenses.
0