So you turn on the TV and you see a NFL game that’s half way through. How do you know which team is winning? You look at the score, of course. But how can you tell a good self-storage deal from a bad one? It’s the same way – by looking at the score of how that deal can perform financially. So how does the scoring system work in self-storage facilities? There’s two basic ways to score them.

## The Cap Rate

The “Cap Rate” is a slang term for the “capitalization rate”, which is the projected return on the total cost of the project. The best way to look at it is as a fraction in which the top part of the fraction is the net income and the bottom part is the total cost of the self-storage facility. You then divide the top part of the fraction by the bottom, and that gives you the “cap rate”. At its most basic, self-storage facilities are typically found at a “cap rate” range of 7% to 9%. This is higher than apartments, office, retail and industrial sectors. And higher is a good thing, as the higher the cap rate, the better the deal. If you see two deals, one at a 8% cap rate and the other at a 9% cap rate, then the 9% is better financially.

## The Cash-on-Cash Return

The other way to “score” a self-storage deal is through the “cash-on-cash” return. Unlike the cap rate, which reflects the total return on the entire cost of the project, the “cash-on-cash” number simply shows what the return level is on the down payment on the property. For example, if the net income of a self-storage deal is $50,000 after debt service, and you paid $200,000 as a down payment, then the cash-on-cash return is 25%. Since most people are more interested in the cash-on-cash return than the overall cap rate, you will find that what powers the cash-on-cash return is what’s called the “spread” – the difference between the loan interest rate and the cap rate – and the percent of down payment. In most cases, a 3 point spread between the loan interest rate and the cap rate yields a 20%+ cash-on-cash return. But a deal with zero down payment and 100% financing has an infinite cash-on-cash return.

## Conclusion

If you can decide the winner in a football game, you can do the same with a self-storage deal. You just need to understand what a winning score is, and how to derive the standard units of measure.