Originally published in 2013.

Because we are in the business of helping our clients buy and sell self-storage properties all around the country, it is often difficult to answer the fundamental question that seems to come up at the end of almost every conversation: What are cap rates today? A cap rate is a property's annual net operating income divided by its price. Unfortunately, most people don't understand the impact this one simple number has on the overall value of a self-storage property and, more importantly, what goes into arriving at an appropriate cap rate for a property. I will go one step further and suggest that cap rates may not be the best tool in valuing self-storage properties because, in the yield-hungry investment market of 2013, I find that investors are more concerned with the cash-on-cash return (the annual cash flow after loan payments, divided by the cash the investor put in) than with the actual cap rate. Obviously, if you are an astute real estate investor you understand that the cap rate is one component in arriving at the cash-on-cash return. A more appropriate question a buyer or seller may consider asking is: What are the terms of the debt one can obtain on this property? The aggressive debt market of 2013 has pushed cap rates for self-storage properties down to historically low levels, which means higher prices. However, I have recently found myself asking the question: is the property making the investor money, or is the debt making the investor money?

Read the full article: Fact Vs. Fiction: Today's Cap Rates (PDF)