How do you figure the cap rate?

I have the opportunity to purchase a storage facility. How do I figure if it is a good deal? It seems good on the surface. 195 Units, 80% Rented, $12,000 monthly revenue. Tax value is at $780,000.
In Buying Property - Asked by Eric J. - Mar 3, 2009
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Jude C.
Appraiser
Bronx, NY

You should call a local appraiser who has experience valuing self storage facilities; call your local banker and they can furnish you a list. according to Korpacz, cap rates for self storage ranged from 7-10%, but your market may vary.

Mar 3, 2009
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Nicholas D.
Broker/Agent
Pompano Beach, FL

First of all, you need to figure out the NOI (Net Operating Income) that is the Income after ALL expenses. And then divide that number by .08 (8% cap rate). Obviously any price lower will increase your cap rate and is in your benefit. Go for 10%.
But make sure you read the expense column well. Especially if they leave out any mention of a Mangement Fee. Then they may be lying about other expenses to increase their NOI.
8% is a rule of thumb cap rate only. It all depends on the location, future prospects etc.
Owning storage seems to be a good idea in this environment. Just realize you have extremely short term tenants and they are most likely the same people who just lost their homes to foreclosure!

Mar 3, 2009
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Kevork D.
Broker/Agent
Des Plaines, IL

Clearly you were asking "how to figure" the cap rate - not what to do with a known cap rate. The link below is the most comprehensive answer I have found.

Mar 3, 2009
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Karen H.
Developer
Beverly Hills, CA

Here is the formula but if you want more detailed information, this is the bets article I have seen on the topic.
http://ezinearticles.com/?Commercial-Property-Value---How-to-Determine-What-Its-Worth&id=1080236
Cap Rate = NOI/Price
To learn what NOI is and how to figure if it is a good deal, go to wwww.cieinst.com and take the free online course. It was immensely helpful to me. I would up taking their 2 day intensive course and have since bought 2 great properties! Good luck

Mar 18, 2009
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Paul S.
Broker/Agent
Glendora, CA

Eric
Cap rate is a very popular gauge for evaluating the relative value of a property. Quite simply it is the relationship of the price to the income expressed as a percentage. Cap rate= NOI/Price. NOI does NOT include debt. So treat the net income as if you paid cash for the property. Cap rate only looks at 1 year and not multiple years of cash flows.
A much better measure of how a property is going to perform is IRR (internal rate of return). IRR takes into account all expenses, including debt, and all income flows for as many years as you wish to project. It is far more difficult to calculate but a much more complete picture. Something that has a good cap rate may have a lously IRR and therefore be a poor investment.
The most telling calculation as to the relative value of different investments is capital accumulation. It takes into account everything IRR does but tells you what you really want to know and that is, how much money will I accumulate if I hold a property for X amount of time?
If you have any more questions please feel free to call me at 626 485-5163 or e-mail me at paulsylvester@remax.net
Paul Sylvester, CCIM

Mar 26, 2009
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Tai L.
Broker/Agent
San Diego, CA

Congratulations on the purchase! What is the unit mix? What are the rents in the area like? Any deferred maintenance? Climate control?

May 22, 2009
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