27 Mar 2019
A valuation of a self storage property can be necessary for a variety of scenarios: buying, selling, refinancing, estate planning or challenging the real estate assessment. Fortunately, the methodology for determining the property value is the same in all scenarios. When determining the value of a property, there are generally three approaches that are considered: Cost Approach, Sales Comparison Approach, and the Income Capitalization Approach.
The Cost Approach is based on the premise that market participants relate value to cost. Appraisal concepts relating to this approach include substitution, supply and demand, contribution, externalities, and highest and best use.
The downside of the Cost Approach is that the depreciation estimates used are highly subjective, which can limit the reliability of the approach.
Using the Sales Comparison Approach, an opinion of market value is determined by analyzing similar, recently sold properties and comparing them to the subject property.
The Income Capitalization Approach first determines the income-producing capacity of a property by using contract rents on existing leases and by estimating market rent from rental activity at competing properties for the vacant space.
In today’s market, the Income Capitalization Approach is the most utilized method to determine the value of a self storage property.
Originally published as part of the Self Storage Almanac.
