CAP Rate, or capitalization rate, is a measure used to determine the value of a commercial real estate asset based on its Net Operating Income (NOI). Appraisers calculate it by dividing NOI by the asset value. For example, if a facility generates $350,000 in NOI and the market CAP Rate is 7%, the property would be valued at $5,000,000. The problem in self-storage is that CAP Rates are often misrepresented in marketing materials. Brokers sometimes use inflated or manipulated numbers to justify high prices. Smart investors never rely on the CAP Rates shown in an Offering Memorandum (OM). Instead, they should calculate their own projected NOI using realistic expenses. CAP Rates are useful for projecting future values, but rarely determine what smaller investors should pay for a facility.
