Capitalization rates or cap rates are usually the main consideration for both sellers and buyers in the self-storage market. Although cap rate for self storageunits is a thing that you should know when delving into the real estate industry, a lot of current owners and prospective investors don’t have a clear understanding of the significance of this quantifier in appraising a property.
Most new entrants into the self-storage market need to have a good grasp to recognize that the cap rate is an important part of the basic math of income property ownership and selling.
This article is meant to help both buyers and sellers in the self-storage industry gain more insight into the cap rate’s role in getting the right property valuation.
What Is Cap Rate
The cap rate is useful for self storage appraisal. It is the ratio of a property’s net operating income (NOI) to the value of the property’s assets. So, if a property has been sold for around $2,000,000 and its NOI was $200,000, it’s cap rate will be 10% ($200,000/$2,000,000).
To put it simply, cap rates are helpful for income property investors who want to know how much they can expect to earn if they decide to acquire the property using cash. Basically, you can expect a 10% return on your cash investment if it has a cap rate of 10%.
How Does Cap Rate Reflect the Value of a Business
Having a high cap rate for self storageunits means that your property has a lower value. On the other hand, a lower cap rate means your self-storage property’s value is higher. By dividing your NOI with the cap rate, you’ll get the value of your property.
This number also reflects your income stream, which is a very important factor that determines the sale price of your property.
Why Is Cap Rate Used to Determine a Business’s Value
Real estate valuation and self storage analysis require a highly complex range of factors. For the past several years, real estate professionals have been using cap rate since it is a simple tool to make quick calculations to compare property values in a specific market.
But using cap rate is only one of several ways real estate appraisers determine the value of a property. Still, it’s the method that most investors are concerned about. A lot of people prefer this approach since it’s been proven to be a highly efficient way of comparing a specific market’s property prices. It can also be helpful when making comparisons between different markets.
What Assumptions Must Be Applied in NOI Calculations
Cap rates are useful in determining the comparable value of different properties in a specific market. But the NOI should be calculated consistently first for all properties. One of the factors that you should look out for is that the operating expenses between your prospect properties must be similar in nature and standard.
Most assumptions related to expenses are not generally applied compared to those regarding issues about income. You should keep this in mind as a lot of sellers and other parties involved in the sale of self-storage properties can be confused about these.
Here are some of the important assumptions that you need to make when calculating NOI:
Assumptions Related to Income
- All revenues that are included in the calculation should be from recurring operations of the property, like rental revenues, instead of from the sale of the property or insurance reimbursement.
- Depreciation and debt service haven’t been deducted from revenues that are included in the NOI calculations. These costs are considered as tax and capital matters that are not relevant to the generation of revenue.
Assumptions Related to Expenses
- Property taxes have already been adjusted to take into account the amount of the new valuation when the time for selling comes.
- The property already has appropriate insurance.
- The property’s advertising is done properly.
- Expenses should reflect the current market rates in taking into account the cost of labor to operate a self-storage facility. But if the owner is personally managing the property instead of an onsite manager without pay, the estimated salary amount should be included in the computation.
- Another factor that should be assumed is the operating expenses, and it should have a fee for an off-site management company aside from the expenses for onsite management. Based on the size of the property, this fee is usually assumed to be around 4% to 6% of gross revenue.
Some property owners may feel that these cursory assumptions don’t apply to their self-storage facilities because of some exceptions that they think should apply. However, it’s the opposite because there are almost no exceptions in the real estate market. Eventually, not being able to apply these basic assumptions can gravely impact the ability to acquire financing or sell the self-storage property.
So, if you have the time, you should consider taking a self storage valuation and acquisition course to have a deeper understanding of this concept.
Why Do Cap Rates Vary Between Properties
Since there are inherent differences between self-storage properties, cap rates also vary. They usually fall around the range of 6.5% to 8%. The rate normally reflects the condition of the self-storage facility and the level of risk that it poses for a buyer.
Although the cap rates vary, the main assumptions about NOI do not and self-storage valuation is subjective to a certain degree. But most industry professionals know very well that experienced real estate investors and sellers have an understanding of NOI quality and the risk variances that may be present within the range of cap rates.
The most important choice that should be made in the property buying and selling process is determining the right value of the property. This article about cap rate for self storage properties has tackled the simplest information about how they are determined and how they can alter valuation. Nonetheless, it brings a broader perspective of the value of your existing property or potential investment.
Being engrossed in factoring the expenses and income, and comparing your property to others in your market to determine the right cap rate, can be difficult. So, you need to consult an industry expert if you want to get more accurate self-storage valuations, especially those who solely focus on the sale and purchase of properties in the self-storage industry. There are a lot of deeper concepts about this topic that only experts can give you an in-depth analysis and explain to you since they have the breadth of experience. For more news, tips, and information on real estate, browse our site!