Capitalization and Occupancy Rates

Your capitalization rate is basically your purchase price divided by your net operating income or vice versa. So if you have $1 million net operating income and you sell it for $10 million, then you have a 10% capitalization rate. Commercial real estate is typically valued based on cash flows, your NOI and what the market is typically showing for cap rates, so if you are buying a single-family house in a rural part of Ohio, you should probably expect to see 15 to 18% capitalization rates. If it's riskier you'll see higher rates, in major metros, there's something that just traded in Manhattan for a 2.75 cap rate. But international investors look at New York City as a bond.

They don't think that the market is going to move very much on them. You'll get appreciation over time. So they just saw a 2% cap rate. I would never buy something that's making me 2% on my money. But people are banking on appreciation, they're taking depreciation, they get some tax benefits. It's just the way to value your property. So REITs tend to pay compressed cap rates which just means that they tend to pay a little bit more for a property because they're holding it long term. Their strategy is to pay dividends to investors. They’re looking at more safe, stable, consistent returns than your individual investor that's trying to make 10% on their money.

The occupancy rates to make to break even are about 40 to 45% nationwide. We're spending a little bit more money into class A facility. We're doing some nice stone fences around the outside and we're doing some different things. Obviously, as your cost goes up, your break-even will go up a little bit too. But in comparison to other asset classes, it's pretty low. The reason that it's pretty low is because your expense ratio is the lowest of any other asset class. Maybe there's some industrial parks and stuff that have similar expense ratios, but you're talking about concrete and steel. There's not a ton to have expenses for. You're not breaking toilets; you're not ripping roofs off. It's concrete and steel. So expense ratios and the storage game are pretty low across the board. I think we're averaging about 22 and a half percent for expense ratios. When you know multifamily complexes, we're underwriting at 50 to 55%.

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