When assessing a self-storage investment, understanding key financial metrics is crucial. Two primary indicators—Capitalization Rate (Cap Rate) and Cash-on-Cash Return—serve as essential tools in evaluating potential deals.
Capitalization Rate (Cap Rate)
The Cap Rate provides insight into the expected return on an investment based on its net operating income (NOI) relative to its purchase price. It's calculated by dividing the NOI by the property's total cost. For instance, if a facility generates an NOI of $62,000 and is purchased for $1,000,000, the Cap Rate is 6.2%.
As of early 2025, self-storage Cap Rates have been in the range of 7% to 10%, reflecting a large increase from previous periods. This uptick indicates a shift in investor expectations and market dynamics, and is additionally fueled by the highest interest rates in 40 years due to the policies of the Fed and Jerome Powell.
Cash-on-Cash Return
Cash-on-Cash Return measures the annual pre-tax cash flow relative to the total cash invested, offering a perspective on the efficiency of the invested capital. For example, if an investor places $400,000 as a down payment and receives $48,000 in annual cash flow after expenses and debt service, the Cash-on-Cash Return is 12%.
In the current market, achieving a Cash-on-Cash Return between 8% and 12% is considered favorable. Returns can vary based on factors such as financing terms, operational efficiency, and market conditions.
Cash Flow
The Cash-Flow metric measures how much cash flow is created from the investment after the payment of the mortgage. Many people don't realize that you can have a successful investment and still go bankrupt if the principal payment schedule on the note is too accelerated. While the cash-on-cash return is the main one that investors watch, make sure that you have positive cash flow from the deal or you will be stuck “feeding” it every month.
Conclusion
Evaluating self-storage investments requires a thorough analysis of Cap Rates, Cash-on-Cash and Cash Flow Returns. By understanding these metrics, investors can make informed decisions, aligning their investment strategies with market realities and financial goals.