The exit cap rate is the capitalization rate assumed when a projection sells the property at the end of the hold. It converts the final year's income into a sale price, and because it is chosen rather than observed, it is an assumption doing more work than any other number in the model.
- Convention is to exit at or above the going-in cap, because buildings get older and the future is not owed to anyone.
- Any projection should be run at several exit caps. A return that only works at one of them is a bet on that one.
- It absorbs everything unknown about the exit: rates, capital availability, the asset's age, the submarket. One number carrying all of that deserves suspicion.
- Ask a seller what exit cap their return assumes. The answer says what is really being sold.
The same building, sold on unchanged income, at two exit assumptions half a point apart.
Nothing about the building changed. Half a point of an assumption nobody can observe moved the outcome by $123,000.
Related terms
All termsCap Rate (Capitalization Rate)
The capitalization rate is a building's net operating income divided by its price, expressed as a percentage.
InvestmentIRR (Internal Rate of Return)
The internal rate of return is the annual rate at which an investment's cash flows, in and out, exactly balance.
InvestmentProforma
A proforma is the projected income and expense statement for a property: what the next owner is being asked to believe.
Terms arrive with the writing.
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