HIG Staff | August 30, 2024
In the world of real estate private equity investing, gas stations (AKA truck stops) can be an appealing asset class due to their consistent cash flow and essential role in transportation infrastructure. One key metric for assessing the potential profitability of investing in gas stations is the capitalization rate, commonly known as the cap rate. In this article, we will explain what a cap rate is in the context of gas station investments and offer insights into how investors can use this metric to evaluate their investment opportunities.
WHAT IS A CAP RATE?
The cap rate is a measure of an income-producing property's potential return on investment (ROI). It is calculated as the ratio of a property's net operating income (NOI) to its current market value or purchase price. For example, a “Buc-ees” or “Maverik” gas station would have a lower cap rate because they have a history or reliability. A no-name gas station would have a higher cap rate because it lacks the reliability associated with big-chain gas stations, but has the potential to create higher returns.
Cap Rate = (Net Operating Income / Market Value) × 100
A higher cap rate indicates a potentially higher ROI, while a lower cap rate suggests a safer, but potentially less profitable, investment.
“When considering investing in a truck stop, it’s important to understand what a cap rate is and how it can affect your investment.” — Jason Harris, Founder and CEO of Harris Investment Group
CAP RATES AND GAS STATIONS
Gas stations can offer unique benefits to investors, such as:
Stable Cash Flow: Gas stations often provide steady income from fuel sales, convenience store revenue, and other ancillary services like car washes and ATMs
Strategic Locations: Many gas stations are situated in high-traffic areas, providing them with a consistent customer base
Tenant Quality: Gas stations may be operated by well-established brands, which can reduce tenant risk and ensure a stable income stream
When assessing gas stations using cap rates, investors should consider the following factors:
Location: Gas stations in prime locations, such as major highways or busy intersections, tend to have lower cap rates due to higher demand and lower risk
Lease Terms: Gas stations with long-term leases and strong tenants (e.g., major fuel brands) may also have lower cap rates, as they offer a more predictable income stream
Age and Condition: Older gas stations or those in need of renovation may have higher cap rates to compensate for potential maintenance costs and lower tenant demand
Market Trends: Regional trends in gas station demand and competition can influence cap rates. Investors should stay informed about local market dynamics
Jason Harris recently spoke about gas stations and cap rates on the HIG Podcast. Click here to listen!
DETERMINING THE RIGHT CAP RATE
When evaluating a gas station investment, finding the appropriate cap rate involves comparing the property's cap rate to those of similar properties in the market. This can give you an idea of whether the property is priced appropriately relative to its potential ROI.
A few tips for determining the right cap rate include:
Researching Comps: Look at recent sales of comparable gas stations in your target market to get a sense of the typical cap rate range
Considering Risk: A higher cap rate might indicate a higher level of risk (e.g., older property, less desirable location), while a lower cap rate might indicate lower risk and potentially steadier income
Factoring in Market Conditions: Economic conditions, fuel prices, and changes in consumer behavior (e.g., the rise of electric vehicles) can impact the cap rates of gas stations
HOW TO MAXIMIZE RETURNS WITH TRUCK STOPS
Much like our value-add approach with multifamily property investments, Harris Investment Group maximizes our investment dollar in truck stops by running a similar value-add strategy. Put simply, we purchase no-name gas stations and truck stops that reside in prime locations (think interstates and highways), with a considerable distance from competitor truck stops, and convert/update them into big-brand stations with exceptional reputations. Converting a no-name gas station into a Travel America Truck Stop drastically increases business revenue and property value, which means we are able to sell the investment property at a price much higher than what we initially purchased it for.
FINAL THOUGHTS
Investing in truck stops can be a lucrative endeavor if approached thoughtfully. By understanding cap rates and how they relate to gas station investments, you can make more informed decisions about your potential returns and risk levels. Take the time to research the market, compare cap rates, and consider the unique aspects of each property to find the best opportunities for your investment portfolio.
LEGAL INFORMATION AND DISCLOSURES
This memorandum expresses the views of the author as of the date indicated and such views are subject to change without notice. Harris Investment Group has no duty or obligation to update the information contained herein. Further, Harris Investment Group makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss. This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to buy any securities or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. Harris Investment Group LLC believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.
This memorandum, including the information contained herein, may not be copied, reproduced, republished, or posted in whole or in part, in any form without the prior written consent of Harris Investment Group.
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