Cap Rates Explained for Self-Storage Buyers

The three cap rates in every deal

• Going-in cap: actual in-place NOI ÷ purchase price. The only one based on facts.
• Stabilized cap (yield-on-cost): projected NOI after your improvements ÷ total cost including capex. This is your business plan in one number.
• Exit cap: the rate you assume a buyer pays when you sell. Small changes here swing your returns more than almost anything else.

How sellers play the game

• Quoting a cap rate on pro forma NOI — future income at today's price. You're buying their plan and paying them for executing it.
• Quoting NOI without a management fee or with last decade's tax bill.
• Comparing their deal to trades in stronger markets or better asset quality.
• The fix is always the same: compute the going-in cap on YOUR rebuilt NOI.

What actually moves cap rates

• Interest rates: debt cost sets the floor — buyers can't pay 6% caps with 7.5% debt forever (negative leverage).
• Market quality: population growth and supply constraints compress caps; tertiary markets trade wider.
• Asset quality: new climate-controlled product trades tighter than 1980s drive-up.
• Deal size: institutional-sized deals attract cheaper capital and tighter caps.

Using cap rates like a buyer

Demand a spread: your stabilized yield-on-cost should sit comfortably above the market cap rate — that spread is your compensation for doing the work and taking the risk. And assume your exit cap is higher than your entry cap; if the deal only works with cap compression, it's a bet on the market, not the deal.