Don’t Let Bull Sh*t Cap Rates Trick You Into Paying Too Much For A Self-Storage Facility.

By Marc Goodin, CEO of Storage Authority Franchising.

Not too long ago there was only one cap rate: current true net operating income (NOI)/current real value.? So if your facility’s real Net Operating income was $200,000 over the last 12 months and you bought the facility at a 6 cap rate the value or purchase price would be? $3.3 million.

Let’s compare at 6 cap rates and the different facility values they represent for a current Net operating income (NOI)before interest expense and taxes of $200,000.? Don’t forget the lower the cap rate the higher a facility value is.

Type of cap rate????????????????????????????? ??????????????????????????????Facility Price

Offer price cap rate 4%? ????????? $200,000/0.040 = $5,000,000

Adjusted cap rate 4.5%? ????????? $200,000/0.045 =? $4,444,444

Year-end cap rate 5%????????????????? $200,000/0.050 = $4,000,000

Selling cap rate 6%?? ????????????????? $200,000/0.060? = 3,333,333 Real Facility value

Sellers cap rate 7%??????????????????????$200,000/0.070 = $2,857,142

Proforma cap rate 8%????????? ??? $200,000/0.08 =? $ 2,500,000?

The tricky one is the Seller’s cap rate because you have to determine which expenses they did not include because they did themselves such as accounting, maintenance, marketing, management, etc.? They may even work the facility full-time or on the weekends without pay. One quick initial check on the seller’s cap rate is to compare the expenses to the income.? A large facility expenses are typically 30 – 35% of the income and are 40% plus for a small facility.? If the expenses are low the cap rate is too high and the offering price is too high.

Confirm the current property market property Value: Most of the time you can determine the real property buy/sell value consensus by confirming the real current income and expenses, repairs required, and the current cap rates for similar self-storages that sold recently.?

Why are there so many cap rates: Simple because sellers want to sell high and buyers want to buy low. . Brokers have gone a bit overboard by expecting you to pay for future income increases, that the owner did not implement/obtain and that may or may not come true and for income. The brokers entice you to buy at lower cap rates (higher facility price) by providing projections that give you a feeling you are getting a great deal because of the future (possible) cap rate.

Do not get tricked into paying too much for your self-storage facility by accepting projected high cap rates.?

The Moral of the Story is you should know in advance how much cash you have to invest, the facility size range, and the maximum Cap (rate or range) you are willing to pay before you search for a facility and spend too many hours on unacceptable propertied or worse buy a facility and don’t make a profit.

Pro Tip: Cap rates are before mortgage payments and taxes.?

If you buy a facility at a 7 cap rate with an SBA loan, 15% down with a 7 percent interest rate you will have a negative cash flow situation until you increase the NOI substantially.

One great alternative is to build a facility for less than the cost of an existing facility because you get the development credit and credit for filling the facility

Cheers

Marc

Are you ready to consider the best real estate investment?

Let’s set a time to talk this week.

Marc CEO of Storage Authority? www.StorageAuthorityFranchise.com

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