Exit Cap Rate, Explained

The going-in cap rate prices the deal you buy. The exit cap rate prices the deal you sell. One assumption, years in the future, decides your entire return. Here is how it works and how to set it.

The exit cap rate (terminal cap rate) is the cap rate a future buyer is assumed to apply when you sell: sale price = future NOI / exit cap rate. With $100,000 of stabilized NOI, a 6% exit cap implies a $1,666,667 sale price, while 6.5% implies $1,538,462, so half a point of movement shifts the sale price by $128,205.

What the exit cap rate is

Every multi-year investment model ends with a sale, and the model needs a sale price. The exit cap rate supplies it. It is the cap rate you assume the next buyer will demand, applied to the property's projected NOI in the sale year. Terminal value = stabilized NOI at sale / exit cap rate. Where the going-in cap rate describes the yield you buy at, the exit cap rate describes the yield you sell at, and the difference between them is where most investment theses live or die.

A worked example

You buy a property, hold it for ten years, and project $100,000 of stabilized NOI in the sale year. If you assume a 6% exit cap rate, the terminal value is $100,000 / 0.06 = $1,666,667. If you assume 6.5% instead, the value is $100,000 / 0.065 = $1,538,462. The difference is $128,205, from half a percentage point of assumption. No other input in a typical model moves the outcome that much with that little justification, which is why experienced investors scrutinize the exit cap first.

Going-in vs exit: the spread

The exit cap is usually set 0.25 to 1.0 percentage points above the going-in cap rate. Three reasons: the building is older at sale, interest rates may be higher, and forecasting a decade out deserves a humility premium. If you bought at a 7% going-in cap rate, underwriting a 7.5% to 8% exit cap is standard conservative practice. Assuming the exit cap will match or beat today's rate is a bet that rates fall, the market strengthens, and your renovations genuinely de-risk the asset, a bet you should make explicitly, not by accident.

How to pick a defensible number

Start with today's market cap rate for comparable properties, then add the cushion above. Cross-check against history: what have similar properties in this market actually sold at in past cycles? Ask what the property will look like at sale: a value-add deal that stabilizes a rough building can justify a tighter exit spread than a stabilized deal that simply ages. And run the sensitivity: model the return at your base case, then at plus and minus 50 basis points. If the deal only works at the optimistic end, the deal does not work.

The mistake that kills returns

The classic error is back-solving: picking the exit cap that makes the target return appear, then calling it an assumption. The exit cap is the input you control least and the one that matters most, so it deserves the most conservative treatment, not the most convenient. A close second is ignoring transaction costs: the terminal value is a gross sale price, and brokerage fees, closing costs, and any remaining loan balance come out before you see a dollar.

Practice the underlying math

The exit cap formula is the same cap rate formula in reverse. Get comfortable with both directions on our free calculator: cap rate from NOI and price, or price from NOI and a target rate.

Try the free cap rate calculator

Exit cap rate questions

What is an exit cap rate?

The exit cap rate (terminal cap rate) is the cap rate an investor assumes a buyer will apply when the property is sold in the future. It converts the projected NOI at sale into a terminal value: sale price = future NOI / exit cap rate. It is the key assumption in any multi-year investment model.

Should the exit cap rate be higher than the going-in cap rate?

Usually yes, by about 0.25 to 1.0 percentage points. The property will be older at sale, interest rates may be higher, and buyers will demand compensation for the uncertainty. Assuming the exit cap equals or beats today's cap rate is optimistic unless the business plan genuinely de-risks the asset.

How does the exit cap rate affect the sale price?

Enormously, because value = NOI / exit cap. With $100,000 of stabilized NOI, a 6% exit cap gives a $1,666,667 sale price; a 6.5% exit cap gives $1,538,462. Half a percentage point of difference moves the sale price by $128,205.

What is the difference between going-in cap rate and exit cap rate?

The going-in cap rate is today's NOI divided by today's price: it describes the deal you are buying. The exit cap rate is the future buyer's assumed cap rate: it describes the price you will sell for. The spread between them reflects aging, rate risk, and the uncertainty of forecasting years ahead.

Can the exit cap rate make a deal unprofitable?

Yes. Because the exit cap sets the sale price, a higher-than-expected exit cap can erase years of cash flow gains. Conservative underwriting adds a cushion to the exit cap precisely because it is the single most sensitive assumption in the model, and it is the one you control least.