What is a Cap Rate?
If you’re considering investing in self storage facilities, you’ve likely come across the term “cap rate.” A cap rate, or capitalization rate, is a metric used to determine the potential return on investment (ROI) of a commercial property. It’s calculated by dividing the net operating income (NOI) by the property’s value.
For example, if a self storage facility has an NOI of $100,000 and is valued at $1 million, the cap rate would be 10% ($100,000/$1,000,000).
Why are Cap Rates Important?
Cap rates are important for a few reasons. First, they can give investors an idea of how much they can expect to earn on their investment. A higher cap rate generally means a higher potential ROI. Second, cap rates can be used to compare different investment opportunities. For example, if two self storage facilities have similar NOI but different values, the one with the higher cap rate may be a better investment.
Factors Affecting Self Storage Cap Rates
Several factors can impact self storage cap rates. These include:
Location
Self storage facilities located in desirable areas with high demand and limited competition may have higher cap rates than those in less desirable areas.
Occupancy Rates
Facilities with high occupancy rates may have higher cap rates than those with low occupancy rates, as they generate more income.
Age and Condition of the Facility
Newer and well-maintained facilities may have higher cap rates than older, poorly maintained ones.
Competition
Facilities located in areas with high competition may have lower cap rates, as they may need to lower their prices to remain competitive.
Trends in Self Storage Cap Rates
In recent years, self storage cap rates have generally been declining. This is due to a few factors, including increased competition and oversupply in some markets. Additionally, interest rates have been low, which has led to more investors entering the market and driving down cap rates.
However, there are still opportunities for investors to find self storage facilities with attractive cap rates, particularly in underserved markets or those with strong demand.
Conclusion
When considering investing in self storage facilities, it’s important to understand cap rates and the factors that can impact them. While cap rates have been declining in recent years, there are still opportunities for investors to find attractive ROI in this growing industry.
By carefully researching potential investments and considering factors such as location, occupancy rates, and competition, investors can make informed decisions and potentially earn significant returns.
