Short answer: A capitalization (cap) rate is the market rate of return buyers expect from an asset type. Appraisers use it to turn net operating income into a value: value = NOI ÷ cap rate. Mark’s warning is that the “cap rate” in a marketing package is rarely a real one, so buyers should calculate their own NOI.[1]
How appraisers use it #
An appraiser calculates NOI from the last calendar year or trailing 12 months, then divides it by the cap rate buyers expect for that type of asset in that market.[1]
Illustration only: $350,000 of NOI at a 7% cap rate implies a value of $5,000,000 ($350,000 ÷ 0.07). At 6.5%, the same NOI implies about $5.38 million. A small change in cap rate makes a big change in value.[1]
Why it’s misunderstood #
- Offering memorandums often show cap rates built on income and expense numbers that won’t hold up. Mark never relies on them.[1]
- Buyers should work out their own NOI: start from current income, then set expenses based on how they will actually run the facility (advertising, staffing, likely property tax increases and so on).[1]
- Smaller buyers rarely make a stabilized facility work at market cap rates. Mark usually decides what he can pay based on returns after his value-add plan, using cash-on-cash and IRR, and uses cap rates mainly to project future value in his pro formas.[1]
Related answers #
- How is net operating income (NOI) calculated for a self-storage facility?
- What is the difference between cash-on-cash return (ROI) and IRR in self-storage?
- Why should you set benchmark returns before looking at self-storage deals?
Sources #
Each numbered note above links to the post of Mark’s it comes from.
- Cap Rates, ROI, IRR – Which Matters Most in Self-Storage?, Mark Helm, August 29, 2025
