For owners who are not selling yet
How self storage facilities are valued.
A self storage facility is worth its net operating income divided by a capitalisation rate. Everything else on this page is detail, but the detail is where owners lose money, so it is worth twenty minutes.
We underwrite facilities for a living. This is the same arithmetic we run before we ever pick up the phone, written out so you can run it yourself.
The formula
A facility earning $120,000 a year, valued at an 8.5 percent cap rate, is worth about $1,412,000.
Two numbers, and almost every argument about price is really an argument about one of them. Most owners overestimate the first and have never been told the second.
Step one: what actually comes in
Start with gross potential rent, which is every unit rented at today's asking rate, twelve months a year, as if the place were full. Then subtract what you do not actually collect.
- Vacancy. Empty units, at the rate you would actually get for them today.
- Concessions and discounts. The first month free, the long-term tenant you never raised, the friend paying 2016 rates.
- Bad debt. Units occupied by somebody who stopped paying in March and whose lock you have not cut.
Then add the income most small facilities never collect at all: late fees, administrative fees, tenant protection insurance, lock and box sales, and outdoor or RV parking. On a well run facility these can be five to ten percent of revenue. On most of the facilities we look at, they are zero.
That gives you effective gross income. Not what the sign says. What lands in the bank.
Step two: what it really costs to run
This is where owner-operated facilities get valued wrong, in both directions. If you manage it yourself, mow it yourself, and answer the phone yourself, your books show almost no expenses. A buyer cannot use those numbers, because a buyer has to pay somebody to do what you do for free.
A buyer will rebuild your expense line from scratch, and it will include:
| Expense | Typical range | Note |
|---|---|---|
| Property tax | Varies widely | Reassessed on sale in many counties, often upward |
| Insurance | $0.10 to $0.25 per sq ft | Has risen sharply in the last few years |
| Management | 5 to 6 percent of revenue | Charged even if you manage it yourself |
| Repairs and maintenance | $0.15 to $0.35 per sq ft | Doors, gates, asphalt, roofs |
| Utilities | Varies | Lighting, gate power, climate control if you have it |
| Software and payment processing | $1,500 to $6,000 a year | Zero today if you take checks, not zero after a sale |
| Marketing | 1 to 3 percent of revenue | Mostly online listings and search |
Added up, a realistic expense ratio for a small facility runs 35 to 40 percent of effective gross income. We underwrite at 35 percent as a base and stress it at 40. If someone shows you a valuation built on a 20 percent expense ratio, they are either valuing your labour at nothing or they are not being straight with you.
Effective gross income minus operating expenses is your net operating income. Note what is not in that list: your mortgage, your depreciation, your income tax. NOI is the property's performance, not yours.
Step three: the cap rate, and why nobody will tell you theirs
A capitalisation rate is the annual return a buyer expects on the purchase price, unleveraged. Divide NOI by the cap rate and you have a value. A lower cap rate means a higher price, which is why everybody argues about it.
Cap rates are set by the market, not by opinion, and they move with interest rates. When money cost three percent, buyers accepted low cap rates because they could still make the payment. When money costs seven, they cannot. This is the single reason a valuation from 2021 does not survive contact with 2026.
What pushes your cap rate up, meaning a lower price: a small or shrinking town, a single employer economy, low occupancy, no climate control, deferred maintenance, no online rentals, paper records, a gravel drive, or a new competitor within three miles.
What pulls it down, meaning a higher price: a growing population, stabilised occupancy above 85 percent, professional management already in place, clean financials, climate control, and land you could build on.
A worked example, start to finish
A 240 unit facility, roughly 28,000 net rentable square feet, in a town of 9,000 people.
| 240 units at $78 average asking rent | $224,640 gross potential |
|---|---|
| Less 14 percent vacancy and discounts | ($31,450) |
| Plus fees, insurance, late charges | $0, none collected |
| Effective gross income | $193,190 |
| Less operating expenses at 38 percent | ($73,412) |
| Net operating income | $119,778 |
| At an 8.0 percent cap rate | $1,497,000 |
| At a 9.5 percent cap rate | $1,261,000 |
That spread, $236,000 on the same facility, is entirely the cap rate. Nothing about the buildings changed. This is why the argument is always about the cap rate and never about the arithmetic.
Now notice the third line. Add a tenant protection insurance program and modest late fees and that facility might collect another $14,000 a year. At an 8.5 percent cap rate, that single change is worth about $165,000 in value. It is the cheapest money on the property and most owners have never been shown it.
The number most owners have never calculated
Physical occupancy against economic occupancy
Physical occupancy is how many doors are full. Economic occupancy is how much rent you actually collect against what the place could collect if every unit paid today's asking rate.
A facility can be 92 percent physically full and 74 percent economically full. That gap is the tenant from 2017 still paying 2017 rates, the unit rented at half price to a friend, and the three people who have not paid since spring.
A wide gap is not a problem, it is unclaimed money. It is also the clearest signal to a buyer that a facility is under-managed rather than under-performing, which are two very different things and are worth very different amounts. If you do nothing else after reading this page, calculate those two numbers for your own facility.
What raises the value, in rough order of return
Raise existing rents
Not new tenants, existing ones. Most small facilities are ten to twenty percent under market on tenants who have been there for years. Costs nothing but a letter.
Tenant protection insurance
A program that pays you a share of every policy. On 240 units this is often $10,000 to $15,000 a year of nearly pure NOI.
Late fees, collected
You probably have them in your lease and do not enforce them. Enforcement is worth more than the fee, because it changes payment behaviour.
Online rentals
Not for convenience. Because a facility a buyer can run remotely is worth a lower cap rate than one that needs somebody physically present.
Clean records
A twelve month rent roll and a simple profit and loss will move a buyer's number more than a new coat of paint ever will.
Expansion land
If you own dirt you could build on, that is separate value on top of the income, and it is frequently left out of a valuation entirely.
Two things worth knowing before anyone quotes you a number
A price per square foot is not a valuation. It is a sanity check. Two facilities of identical size in the same county can differ in value by half, because one collects fees and the other does not. If someone leads with a per square foot number, they have not looked at your income.
A broker's opinion of value is a marketing document. It is not dishonest, it is a different job. A broker's number is what they believe the property could fetch in a competitive process, sometimes with an optimistic expense assumption, and it is how they win the listing. A buyer's number is what somebody will actually wire. The gap between the two is normal, and knowing it exists is what stops you feeling insulted by a real offer.
Want this run on your facility?
We will do exactly this arithmetic on your numbers, in writing, with a market report for your county, and show you every assumption so you can argue with it. It costs nothing and there is no obligation of any kind.