Exit Cap Rate: Formula, Example and How to Pick Your Assumption

The exit cap rate is the cap rate you assume a buyer will pay when you sell the property. Divide the NOI expected in the year after your sale by the exit cap rate and you get the projected sale price. Exit cap rate, terminal cap rate and reversion cap rate are three names for the same assumption, and in most deal models it moves the final return more than any other single input.

Exit cap rate formula

Sale price = NOI in the year after the sale / exit cap rate.

The NOI is the year after the sale because that is the first year the next owner receives. A buyer prices the income they are buying, not the income you already collected. In a discounted cash flow model, this sale price is the terminal value.

A five-year exit cap rate example

Start with the standard $500,000 house: $28,892 of NOI and a 5.78% going-in cap rate. Assume NOI grows 3% a year. After five years of ownership, year-six NOI is about $33,494.

At an exit cap rate of 6.28%, 50 basis points above the going-in rate, the sale price is $33,494 / 6.28% = about $533,340. Take off 5% for selling costs and the net is about $506,673.

Exit cap rate sensitivity

Hold everything else still and move only the exit cap rate:

Exit cap rate	Sale price	Net of 5% selling costs
5.28%	$634,351	$602,634
5.78%	$579,477	$550,503
6.28%	$533,340	$506,673
6.78%	$494,008	$469,308
7.28%	$460,079	$437,075

Two points of exit cap rate swing the sale price by about $174,000, more than a third of the original price. Five years of 3% NOI growth added only about $4,600 of annual income. The exit assumption matters more than the rent forecast.

How to pick the exit cap rate

Start from the going-in rate. Then add a cushion for age and uncertainty. Common practice:

• 25 to 50 basis points above going-in for a five-year hold
• About 10 basis points per year of hold as a rough check on longer holds
• More if you bought in a period of unusually low cap rates or cheap debt

Do not assume a lower exit cap rate than going-in unless you have a specific reason, like completing a lease-up that makes the building less risky. Falling cap rates were the main source of profit for many owners in the 2010s, and the compression and expansion guide shows how fast that can reverse.

Exit cap rate and IRR

The sale price is usually the largest cash flow in a holding-period model, so the exit cap rate drives the internal rate of return. The cap rate vs discount rate guide explains how the two rates connect: roughly, the discount rate equals the cap rate plus expected income growth.

Run your return at three exit cap rates, not one. If the deal only works at the lowest, it does not work.