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What in the World is a “CAP RATE”

Updated: Apr 30

by Kevin Harless



Anyone who has ever spent two minutes in the world of self-storage investing, has heard one key term repeatedly, and that’s Cap Rate, which stands for “capitalization rate” for those who always wondered.  If you're new to the game, fear not—we're here to break down this critical metric in a way even a novice investor would understand.


Cap Rate Crash Course

Think of Cap Rates as the cool kids' club of real estate investing. It's all about the relationship between a property's income and its price tag. Picture it like this: you're at a garage sale (fitting, right?) and you want to know if that dusty old storage unit is worth the asking price. Cap Rate swoops in to save the day, telling you just how much bang you'll get for your buck.


Cap Rate is all about the money. It's the ratio of a property's income to its price tag, expressed as a percentage. Think of it as the ROI (Return on Investment) for your potential purchase. So, when you're sizing up that storage unit, Cap Rate tells you just how much cash flow you can expect relative to what you're shelling out.


To calculate Cap Rate, you'll need two key ingredients:


  1. Net Operating Income (NOI): This is the total income generated by the property after subtracting all operating expenses (like maintenance, utilities, and property management fees). Essentially, it's the money left in your pocket before factoring in mortgage payments or taxes.

  2. Property Value: This is the current market value of the property, typically determined by recent sales of similar properties in the area or through professional appraisal.

Once you have these numbers in hand, calculating Cap Rate is a piece of cake:




Self-Storage Shenanigans


Now, let's talk about self-storage specifics. These bad boys are like the superheroes of real estate—they stand tall even when the economy takes a nosedive. Why? Because let's face it, people will always need a place to stash their stuff, recession or not. This stability means lower risk, which often translates to lower Cap Rates.


But don't let that fool you—self-storage properties can still pack a punch in the profit department. With smart management and a keen eye for opportunity, you could be sitting on a goldmine.


Navigating the Maze

Before you dive headfirst into the self-storage pool, remember: Cap Rates don't tell the whole story. Sure, they're a crucial piece of the puzzle, but you'll want to peek behind the curtain and check out other factors like location, competition, and market trends. It's like solving a puzzle—every piece (or metric) counts!


Bottom Line


So, there you have it—Cap Rates demystified, and self-storage investing made simple. Armed with this knowledge, you're ready to conquer the world of real estate like a pro. Just remember to do your homework, trust your gut, and never underestimate the power of a good Cap Rate!


Happy investing!


Kevin Harless is Development Director with Storage Authority Franchise, he is a resident of Dallas, Texas where he has spent the last fifteen years of his career in self-storage construction, management, and acquisition. Contact Kevin at kevin@storageauthority.com or on Linkedin at www.linkedin.com/in/kevinharless, or read more of Kevin’s articles and blogs at www.storageauthorityfranchise.com.


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