The easiest way to get a snapshot of the overall value of a self-storage facility is to determine the capitalization rate. Simply put, the cap rate is the ratio of the facility’s net operating income over the value of the assets. For investors, this is the most important number you’ll use in making a purchase decision. This one percentage can determine the roundabout cash return you can expect on your investment.
Cap Rate = Net Operating Income/Value of Assets
For self-storage businesses, it’s important to keep a few things in mind for each calculation:
- When calculating income, all revenues should be from recurring operations like rental revenues rather than one-time collections.
- Expenses should include appropriate insurance as well as up-to-date property taxes and labor costs.
- Operating expenses should include the fees of both the on-site manager and the owner, even if one person is doing both jobs.
In the self-storage industry, it can be a lot easier to calculate the total value of your assets because there isn’t a great deal of equipment on hand. Rather than needing to value large equipment as you would for a car wash, you really only need to understand the bare bones of the facility itself. That is, the building, the land it sits on, and any other pieces of the puzzle that are essential to the business, like infrastructure, commercial air conditioning, and dehumidifiers, etc.
Prefabricated steel buildings are the most popular choice for existing self-storage facilities because of the protection they offer from a variety of elements. The initial cost of these buildings is quite low, but determining the value of the asset goes much further than just the startup cost. The durability of the steel and the reduced maintenance costs in the long term will all play a factor in the value of the building itself. Click here to see what can and will impact the cost of a metal building kit.
What if I’m looking to sell my self-storage facility?
If you’re on the other side of the equation, the cap rate is just as useful. By dividing your net operating income by the percent cash return you’ve received from your self-storage business, you can determine a sale price for your entire facility.
Sale Price = Net Operating Income / Cap Rate
Breaking down these numbers is the easiest way to show investors the true value in your business. The cap rate approach has long been used by appraisers as an efficient means of showing a market’s property values. The same rules apply across a variety of industries. Cap rates are particularly handy in self-storage businesses and other facilities where the income is largely passive and the property assets are relatively non-complex.
Which factors can increase the potential value of your storage facility?
A self-storage facility has greater potential profitability for future investors if you offer more ways to bring in cash other than the storage fees you charge. For example, moving boxes and long-term packing materials offer more potential income. Special upgrades such as RV and vehicle storage provide the chance to increase fees per square foot. You can even offer insurance for each storage unit to increase your passive income.
But the additional products and services you offer are only as good as your demographic. If you’re offering products and services that your potential customers don’t see value in, you’re only devaluing your facility. If you’re looking for a quick way to increase your facility’s value, research the needs of your demographic and check out your competition. Where can you fulfill a need or create convenience for your clients? What price are they willing to pay for that convenience? Is it enough to make a true difference in the value of your facility?
When is a good time to buy vs. sell a self-storage facility?
Everywhere you look, minimalism and tiny house living are on the up-and-up. But you may be surprised to know that it hasn’t had much of an effect on the self-storage industry. Rather than diminishing, our self-storage needs are just evolving. The demand for storage solutions for boats, RVs, wholesale inventory, industrial equipment, and more is still growing.
For buyers looking to invest in an existing self-storage business, you’ll want to look for a high cap rate. This means that the property value, or the purchase price you’ll ultimately end up paying, is low compared to the facility’s potential income.
But if you’re looking into selling your facility, a lower cap rate is your ideal. That means that you’re rocking your highest possible property value and selling price.
For more information on Prefabricated Buildings, CLICK HERE or give us a call 888-783-3535.
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