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4317 Chester Avenue
Cleveland, OH 44103
George H. Henshaw
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Page last updated 11/14/14
What’s A Self Storage Business Worth?
Income producing real estate is valued based upon the income it brings to a buyer before any loan payments. Period. The buyer (and his bank) want to know two things:
1. Can the property generate enough income to pay the loan?
2. Can the buyer make more money by purchasing the property than with other investments?
These two fundamental questions are answered with:
1. Loan coverage percentage—that is, the ability of the business to generate sufficient funds to pay the loan and leave a surplus for profit or uncertainty. Banks typically want to see profits (cash flow) equal to at least 125% of the annual loan payment.
2. Capitalization Rate or Cap Rate—that is an industry standard way of determining the profitability of the storage business. This is a percentage which is calculated by dividing the profits (cash flow) by the purchase price. For facilities under $2,000,000 buyers will typically want the percentage to be 10% to 12%. For larger facilities, this percentage may dip to 9%.
For a quick and free calculation of these two vital numbers, Click here.
The key to a quick and profitable sale is to set a price that’s neither too low nor too high. Your brother-in-law can’t tell you, the barber doesn’t know and your accountant doesn’t know, either.
The value of your property is a function of interest rates, the real profits of your business (not just those reported on your tax return), the sale price of similar storage businesses, and, most importantly, includes all of the items that are profits to you but don’t show up on the records you give your accountant. For example, does your business pay for your vehicle? How about vacations that are coupled with trade shows and are expensed to the business? There are many items that affect true profitability and the only way to find them is to “re-cast” the financial statements to show those items.
You also want to be sure that when you value your business you properly consider ways to enhance earnings and present this data to potential buyers as “pro forma” earnings.
1. Can the property generate enough income to pay the loan?
2. Can the buyer make more money by purchasing the property than with other investments?
These two fundamental questions are answered with:
1. Loan coverage percentage—that is, the ability of the business to generate sufficient funds to pay the loan and leave a surplus for profit or uncertainty. Banks typically want to see profits (cash flow) equal to at least 125% of the annual loan payment.
2. Capitalization Rate or Cap Rate—that is an industry standard way of determining the profitability of the storage business. This is a percentage which is calculated by dividing the profits (cash flow) by the purchase price. For facilities under $2,000,000 buyers will typically want the percentage to be 10% to 12%. For larger facilities, this percentage may dip to 9%.
For a quick and free calculation of these two vital numbers, Click here.
The key to a quick and profitable sale is to set a price that’s neither too low nor too high. Your brother-
The value of your property is a function of interest rates, the real profits of your business (not just those reported on your tax return), the sale price of similar storage businesses, and, most importantly, includes all of the items that are profits to you but don’t show up on the records you give your accountant. For example, does your business pay for your vehicle? How about vacations that are coupled with trade shows and are expensed to the business? There are many items that affect true profitability and the only way to find them is to “re-
You also want to be sure that when you value your business you properly consider ways to enhance earnings and present this data to potential buyers as “pro forma” earnings.
A valuation tells you and your prospective buyers what your property is really worth.
Tip:
When interest rates increase, property values decline because the buyer will earn less.
Right now interest rates are lower than they’ve been in several years.