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# What Exactly is a Self-Storage Cap rate?

By Garrett Byrd

A capitalization rate (also known as cap rate) is a metric used in real estate to estimate the value of income-producing properties. In the context of self-storage, the capitalization rate is a way to determine the value of a self-storage facility based on the income it generates.

The capitalization rate is calculated by dividing the net operating income (NOI) of the self-storage property by its market value or sale price. The NOI is calculated by subtracting the operating expenses from the gross rental income. The resulting cap rate represents the expected return on investment for the property. In other words, it's the percentage of the property's value that an investor can expect to earn in net operating income each year.

Cap rates can vary depending on the location, condition, and age of the self-storage facility, as well as market conditions and other factors. In general, higher cap rates indicate higher risk and lower value, while lower cap rates indicate lower risk and higher value.

So, for a basic example, if a self-storage facility makes \$100,000 per year after expenses, and it's worth \$1,000,000 on the market, the cap rate would be 10% (100,000 divided by 1,000,000).

The good news is in the above example would be a very small facility maybe 10,0000 sq ft which makes it a bit riskier.

The cap rate is important because it helps investors understand how much they can expect to earn from the property each year as a percentage of its value. Generally, higher cap rates mean higher risk and lower value, while lower cap rates mean lower risk and higher value.

Now let's look at an example a Storage Authority Franchise model would look for. Let's say we have a mature 70,000 sq ft net rentable facility in an area where we can command \$1.80 avg rate per sq ft.

Gross potential 70,000 sq ft X \$1.80 =\$126K per month X 90% (If you run 100% occupancy your revenue management is not good) =\$113,400

\$113,400 X 12 = \$1,360,800 -34% (Expenses) =\$898,128 before debt service.

To determine the estimated market value of a self-storage facility based on the given information, we can use the formula:

Market Value = Net Operating Income / Capitalization Rate

Given that the facility brings in \$900,000 a year after expenses and the capitalization rate is 4.5%, we can calculate the market value as:

Market Value = \$900,000 / 0.045 = \$20,000,000

So, a self-storage facility that generates \$900,000 in net operating income after expenses, and has a cap rate of 4.5%, would be estimated to have a market value of \$20,000,000. It's important to note that this is just an estimate, and the actual market value may vary depending on factors such as location, condition of the facility, and market trends.