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Determining Self-Storage Facility Value: Understanding Income, Expenses and Cap Rates

Bill Alter Comments

You may be wondering how to put a value on your self-storage facility and if recent events in the financial markets have affected what your property is worth. Perhaps you’re considering selling or refinancing, or simply want to know the value for estate-planning purposes. Regardless of the reason, the methodology of determining your property’s value is the same.

The first concept to understand is value is based on cash flow, not on how much you paid for the property, how long you’ve owned it or how much it cost to build. Hopefully, your property is worth more today than it was when you bought or built it, but time alone doesn’t cause income property to appreciate. There are only two factors that affect property value: net operating income (NOI) and the capitalization rate (cap rate). NOI is calculated the same way now as it has always been, but recent turmoil in the financial markets and economy have pushed cap rates higher.

NOI is the money left after all operating expenses are paid, excluding debt service and depreciation. The accompanying charts show a typical self-storage facility’s unit mix and rents. You can see that monthly potential rent flows into annual potential rent, to which is added other income and from which is subtracted economic vacancy. The resulting figure is effective gross income (EGI). Operating expenses are subtracted from EGI resulting in NOI.

It’s important that NOI be calculated for all self-storage facilities using industry-standard parameters for other income and operating expenses. The hypothetical example displayed in the charts uses those industry standards.



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