Value self-storage facilities by looking at the income they produce.
Self-storage is an attractive commercial real estate investment. As the owner, you don't have to deal with live-in tenants. That cuts down on the amount of maintenance and the cost of upkeep of a building. When evaluating a self-storage facility for purchase, the most effective way of determining if this investment will be worthwhile, is to look at the amount of income the property produces compared to the cost it takes to run the business.
Instructions
1. Request actual operating numbers from the current owner. These figures will include how much is paid yearly for services such as utilities, maintenance and advertising as well as the actual revenue that the property generated. Subtract one year's costs from that year's gross profits, and you'll come up with the Net Operating Income.
If the owner refuses to provide actual figures, move on to another property. You need to know the true numbers to find out if the business is failing or prospering.
2. Determine an acceptable capitalization rate, also called a cap rate. The cap rate describes a return on investment. In a popular area that has a solid tenant, an investor might accept a lower cap rate --- five percent, for instance. His profits from that particular property won't be astoundingly high, but it's a sound investment. In a less popular area, or for an older building, an investor might want a cap rate of 10 percent to make sure the investment can pay for any vacancies or repairs. The cap rate is often fairly stable in a given area. Ask a commercial broker what the typical cap rate is for the area the self-storage facility is located in.
3. Plug your numbers into the following formula: NOI / cap rate = market value. If the Net Operating Income is $68,492, and the cap rate for the area is 8 percent, you would divide 68,492 by .08 The market value would be $856,150.
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