The self-storage industry is one of the most sustainable industries to start a business in. Over the last few years, we have seen the industry grow steadily as more facilities are being built and purchased by new owners. The market is good for first-time buyers and seasoned buyers. There are three key financial projections to help determine if and when a self-storage facility purchase will be profitable. We will go over those three items and some of the misconceptions around these projections.
CAP Rate
First, let us discuss the CAP Rate. The CAP rate is the capitalization rate. There are many misconceptions surrounding this equation. While the CAP rate is important, many first time buyers rely heavily on, or even solely on, this number to make their decision. Keep in mind these few things when looking at the CAP rate.
1) CAP rates can be calculated differently. Different CAP rate calculations will define "operating expenses" differently and thus Net Operating Income (NOI) will be different. One of the reasons for looking at the CAP rate is to compare one investment to another. When comparing, make sure each CAP rate formula is taking into consideration all operating expenses so you are comparing apples to apples.
2) A "good" CAP rate may vary from investor to investor. It all depends on what your investment strategy is. It is important to keep in mind the CAP rate doesn't tell you everything you need to know to make a purchase.
3) Complete your own CAP rate calculation to ensure you feel comfortable with the purchase. The seller may calculate the CAP rate based on their own operating expenses. There may be ways for you to step in and increase the NOI by lowering expenses or doing price increases. Even small changes can change the CAP rate significantly.
The CAP rate only will show you a snapshot of how a facility is doing at that point in time. Many have been led to believe that if the CAP Rate is in X and X% that it will be a good investment. This is not always the case. It all depends on why you are purchasing the property and what your growth plans are. However, this doesn’t mean that the CAP Rate isn’t an important factor in making a final decision. The CAP rate allows you to better negotiate a price with the seller. As an example, based on the seller’s financials you find that the CAP Rate is 5.5%. However when you run a price increase of $5.00 on all the units, the CAP Rate increases to 7%. This now allows you to negotiate a lower purchase price.
Return on Investment (ROI)
For our second point, let us talk about the Return on Investment (ROI). One drawback of the CAP rate formula is that does not take into consideration and debt financing you may need to purchase your facility. ROI measures Net Income over your investment amount and answers the question, "how long will it take for me to make my money back?"
Breakeven Estimate
Finally, for our third point, let’s talk about the Breakeven Estimate. This equation will be most helpful in the early stages of deciding to buy a storage unit. However, it may also be useful after you have purchased the facility. Using the breakeven estimate, you can evaluate your prices. This allows you to see if you need to raise prices or plan for expanding your facility.
By utilizing these three financial projections, you are now equipped to plan for your future in the self-storage industry. CAP Rate, Return on Investment, and the Breakeven Estimate are all useful in determining if a self-storage facility purchase will be profitable. These financial projections can help guide you in many aspects of buying, selling, and maintaining the success of your facility.
Already own a facility and need help with accounting? Easy Storage Solutions offers an Accounting, Tax, & Consulting service to help you with the financials of your business. For more information visit us.
About the Author:
Ty Meinhardt is the Director of Accounting at Easy Storage Solutions, one of the world's top-rated self-storage management software companies. He was co-owner of TruView Advisors before joining the Easy Storage Solutions team. Ty has over five years of experience in accounting specifically related to the self-storage industry, and several years of accounting experience in other areas. Ty graduated from Dixie State University with his master’s in accounting and is continuously furthering his education.
