What is a typical exit cap rate?

Exit cap rates vary by asset class, market, and hold period, but most underwriters assume an exit cap rate 25 to 75 basis points above the going-in cap rate. For example, if you acquire a multifamily property at a 5.5% going-in cap, a reasonable exit cap assumption would be 5.75% to 6.25%. This spread accounts for the uncertainty of future market conditions and the natural aging of the asset.

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

The going-in cap rate is based on the purchase price and current NOI at the time of acquisition. The exit cap rate is applied to the projected forward NOI at the time of sale to estimate the disposition price. Going-in cap rate reflects today's market pricing. Exit cap rate is a projection about future pricing, which introduces uncertainty.

Why is the exit cap rate usually higher than the going-in cap rate?

Three main reasons: the property will be older at the time of sale (more deferred maintenance risk), future market conditions are uncertain (risk premium), and the buyer at exit will apply their own discount for these unknowns. Using the same or lower exit cap rate implies that the property will be worth more per dollar of NOI in the future, which is an aggressive assumption that most lenders and investors will scrutinize.

How does exit cap rate affect IRR?

The exit cap rate has an outsized impact on IRR because the sale proceeds typically represent 60% to 80% of total investment returns. A 25-basis-point increase in exit cap rate can reduce projected IRR by 100 to 200 basis points, depending on the hold period and leverage. This sensitivity makes exit cap rate one of the most important assumptions in any pro forma.

How do I choose the right exit cap rate for my pro forma?

Start with the current market cap rate for comparable properties and add a spread of 25 to 50 basis points for a 5-year hold, or 50 to 75 basis points for a 7 to 10 year hold. Cross-reference with historical cap rate trends from CBRE or NCREIF data. Always run sensitivity analysis with a range of exit caps (plus or minus 50 bps from your base case) to understand downside exposure.

What is a reversion cap rate?

Reversion cap rate is another term for exit cap rate. Both refer to the capitalization rate used to estimate the property's sale price at the end of the hold period. The term 'reversion' refers to the reversion value, which is the projected sale price of the property when it reverts (is sold) to a new owner.

What Is an Exit Cap Rate? (Reversion Cap Rate Explained)

The exit cap rate is the capitalization rate used to estimate a property's sale price at the end of the hold period. It is applied to the property's projected forward NOI to calculate the reversion (disposition) value, and it is typically assumed to be 25 to 75 basis points higher than the going-in cap rate.

Exit Cap Rate Formula

The exit cap rate connects projected income to estimated sale price. It works in two directions depending on what you are solving for.

Solving for exit cap rate

Exit Cap Rate = Forward NOI / Sale Price x 100

Solving for sale price (reversion value)

Sale Price = Forward NOI / Exit Cap Rate

Example: A property with projected Year 6 NOI of $750,000 and a 6.0% exit cap rate.

$750,000 / 0.060 = $12,500,000 estimated sale price

Going-In Cap Rate vs Exit Cap Rate

The going-in cap rate reflects today's purchase price relative to current NOI. It is a known quantity at the time of acquisition. The exit cap rate, by contrast, is a projection about market conditions years into the future.

Attribute	Going-In Cap Rate	Exit Cap Rate
When applied	At acquisition	At projected disposition
NOI used	Current / trailing NOI	Projected forward NOI
Certainty	Known (market-derived)	Assumed (projection)
Typical level	Market rate at purchase	25-75 bps above going-in

Why the Exit Cap Is Usually Higher Than Going-In

Most institutional underwriters add 25 to 50 basis points for a 5-year hold and 50 to 75 basis points for a 7 to 10-year hold. Three factors justify this premium.

Asset aging: The property will be older at disposition, with greater deferred maintenance risk and a shorter remaining useful life on major systems.
Market uncertainty: Interest rates, supply/demand dynamics, and capital flows may shift over the hold period. A higher exit cap hedges against unfavorable conditions.
Buyer's discount: The next buyer will apply their own margin of safety, especially if the property has been operated for several years without major capital investment.

Using the same exit cap as going-in implies the property will trade at the same NOI multiple years later. While this happens in strong markets, most LPs and investment committees view it as an aggressive assumption. Using a lower exit cap than going-in is almost never defensible.

Impact on IRR Sensitivity

The exit cap rate has a disproportionate impact on projected returns because the sale proceeds typically represent the majority of total profit. Small changes in exit cap produce large swings in IRR.

Exit Cap Rate	Implied Sale Price	Projected IRR
5.50%	$13,636,364	18.2%
5.75%	$13,043,478	16.8%
6.00% (base case)	$12,500,000	15.5%
6.25%	$12,000,000	14.1%
6.50%	$11,538,462	12.8%

Illustrative example: $10M acquisition, $750K forward NOI, 5-year hold, 65% LTV. IRRs are approximations for directional comparison. Data sources: CBRE Cap Rate Survey and NCREIF property index data.

In this example, a 100-basis-point swing in exit cap (5.50% to 6.50%) produces a 5.4-point swing in IRR. This is why sensitivity analysis on the exit cap is standard practice in any institutional presentation.

How to Choose an Exit Cap Rate

Start with current market cap rates for comparable sales and add a spread for asset aging and market risk. Validate against historical trends to ensure your assumption is defensible.

Pull recent comp sales to establish the current market cap rate.
Add 25 to 50 bps for a 3 to 5-year hold, or 50 to 75 bps for a 7 to 10-year hold.
Cross-reference with historical cap rate trends from CBRE or NCREIF.
Run sensitivity analysis at your base case plus and minus 50 bps.
Present the base case and downside scenario to the investment committee.

If the deal only pencils at an aggressive (low) exit cap, that is a warning sign. The best deals underwrite well even at the conservative end of the sensitivity range.

Common Exit Cap Rate Mistakes

Several errors can distort exit cap assumptions and lead to overvalued acquisitions.

Using the same cap as going-in. This assumes the property will be worth more per dollar of NOI in the future, which is optimistic for a property that will be older and have more deferred maintenance.
Applying exit cap to trailing NOI instead of forward NOI. The exit cap should be applied to the projected NOI for the year following the sale, not the year of sale. Using the wrong year understates the sale price.
Ignoring selling costs. Disposition costs (brokerage, legal, transfer taxes) typically total 2% to 3% of the sale price. Deduct these from the gross reversion to get net sale proceeds.
Not testing sensitivity. Presenting a single exit cap scenario without a range gives LPs and investment committees false precision. Always show the base case flanked by downside and upside scenarios.