What Is Exit Cap Rate?
The exit cap rate — also called the terminal, reversion, or going-out cap rate — is the capitalization rate used to estimate a property's resale value at the end of a projected holding period, applied to the year-following-sale NOI.
Exit Cap Rate in plain English
The exit cap rate is the cap rate you assume a buyer will pay when you sell. Dividing the NOI for the year after the sale by it estimates the sale price.
It is a forecast, so it is usually set a little higher than the going-in rate to allow for an older building and an uncertain future market. Small changes in it move the projected sale price, and the IRR, a lot.
Formula
Estimated Sale Price = Year-Following-Sale NOI ÷ Exit Cap Rate- Year-Following-Sale NOI
- Projected NOI for the 12 months after the sale - the income the next buyer is paying for.
- Exit Cap Rate
- The cap rate assumed for the sale, as a decimal.
Selling costs are deducted from the estimated sale price before returns are calculated.
Worked example
Going-in and exit cap rates on a five-year hold
Illustrative example - round numbers, not current market data. Calculated with Reaixo's calculator engines.
Assumptions
- Purchase price
- $1,000,000
- Year 1 NOI
- $60,000
- NOI growth
- 3% a year
- Exit cap rate (half a point above going-in)
- 6.5%
| Step | Calculation | Result |
|---|---|---|
| 1. Going-in cap rate | $60,000 ÷ $1,000,000 × 100 | 6.0% |
| 2. Year 6 NOI (the year after the sale) | $60,000 × 1.03⁵ | $69,556 |
| 3. Projected sale price | $69,556 ÷ 6.5% | $1,070,099 |
Projected sale price: $1,070,099. Even with NOI up about 16%, assuming a higher exit cap rate holds the projected sale to $1,070,099. At a 6.0% exit cap the same NOI would be worth $1,159,274 - the exit cap rate is often the single largest assumption in a projection.
What this calculation leaves out
- The convention is to capitalize the NOI of the year after the sale, because that is the income the next buyer is paying for.
- Selling costs are deducted from the sale price before calculating returns.
Why it matters
Since it's a forecast years into the future, the exit cap rate is typically assumed to be somewhat higher than today's going-in cap rate, reflecting the uncertainty of predicting market conditions that far out.
When Exit Cap Rate is used
- Projecting sale proceeds in a multi-year investment model.
- Stress-testing IRR against a higher exit cap rate.
- Reviewing a sponsor's projections for aggressive sale assumptions.
Common mistakes
- Assuming an exit cap rate below the going-in rate without a strong reason.
- Capitalizing the sale-year NOI instead of the following year's.
- Forgetting selling costs.
Going-In Cap Rate vs. Exit Cap Rate
The cap rate at the moment of purchase — first-year projected NOI divided by the purchase price.
The cap rate assumed at the end of the holding period, used to estimate resale value from projected future NOI.
Exit cap rates are typically assumed somewhat higher than going-in cap rates, building in a margin of safety for the uncertainty of forecasting years ahead.
Exit Cap Rate: frequently asked questions
How do you choose an exit cap rate?
Start from the going-in rate or current market rates for similar properties and add a margin for age and uncertainty, then test higher values.
Why does the exit cap rate matter so much?
Because the sale is often the largest cash flow in a projection. A half-point change in the exit cap rate can change the sale price by several percent.
Is the exit cap rate the same as the terminal cap rate?
Yes. Exit, terminal, reversion and going-out cap rate all describe the rate used to estimate the future sale price.
Where it fits
- Commercial, Operations & Disposition: before this, Absorption Rate; next, Reversion Value.
More Investing Terms
Recommended next step
See how the sale assumption changes total return and IRR.
Investment ROI calculator →Apply it to a specific property: Five-Year Investment Projection.
Sources and review
No regulator defines this term; the page follows common industry practice.
Where this applies: Not regulated. Investment and valuation ratios are industry and appraisal conventions; lenders, appraisers and analysts may define inputs differently, so check how a figure was calculated.
Last reviewed: · Updated:
Examples use illustrative figures; rules of thumb are labelled as such. Rates, limits and program rules change - confirm current figures with your lender or a qualified professional.
This definition is provided for general educational purposes and is not financial, legal, tax, or real estate advice. Verify important decisions with appropriately qualified professionals.
Understand a property's costs and risks before you make an offer
Use the free calculator for your own numbers, or analyze a specific home before you commit.
Or analyze a specific property: Essential Property Analysis, $19 · Property Decision Analysis, $49 · Professional Property Analysis, $99. You choose the depth before you pay.