Joe Downs breaks down self-storage cap rates for 2025 across asset classes: Class A stabilized properties at 5.5-6.25%, Class B value-add at 6.5-7.5%, and Class C deep-value at 8-10%+. He introduces the Rule of 300, targeting a cap rate at least 300 basis points above the 10-year Treasury yield, roughly 7% in today's market.
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Hey folks, welcome back. Day 52 of the Storage 100 series. I am, of course, Joe Downs with the Storage Moguls Mastermind, and today we are tackling a question I get all the time: what's a good cap rate in 2025? Uh, it's not just the number, it's about understanding the market dynamics. So we're going to dive into the current landscape and what it means for your investments, because it's crucial to adjust your expectation to today's realities. Also, we're going to break down cap rates across different asset classes. And this will help you identify opportunities and avoid pitfalls. But first, let's start by looking at the broader economic picture. So last time we touched on market shifts, and now I want to zoom into 2025 and the landscape. The market has changed dramatically since 2021, for instance, and so have the numbers. So back in '21, we saw interest rates as low as 3% and cap rates at the 4% to 5% range. And that meant positive leverage was readily available, making deals easier to pencil out. You fast forward to 2025 and interest rates are sitting at 6 to 7%, and that creates a significant challenge for cap rates. And we're seeing a wide bid-ask spread. Some sellers still want 2021 prices, but buyers are facing 2025 financing costs. So that gap makes transactions harder to close. So understanding target cap rates is key. So with the market context or with that market context, let's talk about the Class A stabilized targets. These are your REIT quality properties. They're often climate control, multi-story, high-traffic locations. In 2025, we're going to target cap rates between 5.5% and 6.25% for those trophy assets, which is a significant shift from a few years ago, reflecting the increase in interest rates. And these, these properties typically attract institutional buyers like REITs and large funds, but they're also popular for 1031 exchange investors where they're just looking for stable assets and, you know, mailbox money. Don't expect the same cap rates you saw in 2021, though. The market has matured, and understanding these targets helps you evaluate deals realistically. All right, let's move on to Class B, which are amazing value-add opportunities. And, and often where many investors are targeting and where we find the sweet spot, these are typically older facilities in good locations, often managed by mom-and-pop operators. For 2025, we are looking at target cap rates of the 6.5% to 7.5% range. This a little higher cap rate reflects the opportunity to add value, though. Through improved management and upgrades. These properties offer a chance to increase revenue and force appreciation. That's why it's in the sweet spot. They do require more hands-on management usually, maybe even in just the beginning, but can yield amazing returns. And this is where many of you will actually find your best opportunities because it's about finding the potential and unlocking it. All right, let's also move on to and talk about Class C and rural properties, which offer a Deep value. These are typically secondary or tertiary markets with gravel driveways, non-climate-controlled drive-up units. So for 2025, we're targeting cap rates in the 8+% maybe 8 to even up to 10% for these facilities in this asset class. This higher cap rate reflects the increased risk and management intensity. And the investment profile here is the high cash flow with lower appreciation potential model. You're buying income, not necessarily significant property value growth, but you could see it depends on how, how below market the rates are. These deals can be very profitable, profitable if you're willing to put in the work, but they do require a different approach than the Class A or Class B properties. All right. So let's also talk about the rule of 300 today. And this is one of the golden rules, I think, for 2025 and moving forward. This rule is going to help you understand what a good cap rate looks like in the current market. I actually think it's good for any, it's a good discipline for any market. Here we're looking at minimum target cap rates in this market today of 7%. And this means you want to buy, and the way I back into that is you want to buy, if you use the rule of 300, 300 basis points above the 10-year Treasury yield, which is 4 and change right now. So if the 10-year Treasury is around 4, and again, it's 4 and change right now, I think you want to, You want to be aiming for around a 7% or higher cap rate. And this spread gives us a healthy margin and accounts for market fluctuations. Can you go a little below 300? Yeah, sure. But let's stay right around there. It's a critical metric and really is going to help you going forward evaluating these opportunities. All right. Moving on to new construction. A little different. While the rule of 300 applies to acquisitions, development has its own metric. Which is called yield on cost. And this is crucial for when you're thinking about building new self-storage facilities. For 2025, we're targeting a yield on cost between 9% and 10%. Why such a high target? Well, construction loans are a little more expensive. The last quote we got was, I think, was 7.5%, and we've been quoted higher. So you're— they're in that 7.5% or more range. And Development also carries significantly higher risk compared to buying an existing operating asset. So this higher yield compensates for those increased costs and risks. It's not a cap rate, but it is a measure of your return on the total cost of development. And understanding the distinction is key to making smart development decisions. So, all right, next let's look at the interest rates. And how they influence these targets. So because interest rates are a major factor influencing both acquisition cap rates and development yields, we need to consider how future rate changes could impact our investments. So if interest rates drop, we typically see cap rates compress, meaning property prices rise. Conversely, if interest rates stay high, cap rates expand and prices tend to fall. So our strategy should be to buy for cash flow today. Not to speculate on future rate movements. Don't rely on future drops in rates to make your deal work. That's just icing on the cake. Focus on the fundamentals and ensure the deal is strong in the current environment. This approach minimizes your risk and maximizes your chance of success. And that leads us to a crucial closing thought, which is simple but profound. The deal must work Today. This means your investment needs to generate positive cash flow from day one. Don't be a future refi to save a struggling deal, or don't bet on it to save a struggling deal. Refinancing can be a great tool, but it shouldn't be the foundation of your investment strategy. Cash flow is king in self-storage investing. So let's make sure your projections are conservative and your cash flow is robust. This mindset will protect you from market volatility and unexpected changes. Always prioritize immediate profitability and financial stability. All right, if you found this information valuable, please hit the like button and subscribe to the Storage Moguls Mastermind channel for more insights. It is much appreciated and will help us reach more investors and build a stronger community. Your engagement helps us continue to provide valuable content. So we appreciate your support and participation. And lastly, please share this video with anyone who needs to hear these crucial investment principles. You know, they will thank you later.
