Exit cap rate
The cap rate an investor assumes will apply when they sell the property years from now. Used to project the future sale price. Small changes in exit cap rate can swing projected returns a lot.
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Part 1 of 4
Why a seller cares
The exit cap rate is what an investor assumes the market will pay when they sell years from now, and it drives their whole projected return. A buyer who assumes a low exit cap can justify paying more for your building today.
Part 2 of 4
A simple example
A buyer projects your building's NOI at $60,000 in five years. At a 6% exit cap that is a $1,000,000 sale; at 7% it is about $857,000.
| The assumption | The projected sale |
|---|---|
| Exit cap of 6% | $1,000,000 |
| Exit cap of 7% | About $857,000 |
| The difference | $143,000 of projected return riding on one percentage point |
The exit cap is a guess about the future, and the return depends on it more than on anything else.
Part 3 of 4
What people get wrong
That the exit cap is the cap rate today. It is the buyer's assumption about a market years away, and it is usually optimistic.
Part 4 of 4 · where to read next
Where it appears in the sale
What a definition is, and what it isn't
Keighbor is a software company, not a law firm, brokerage, or tax adviser. This is general information, not legal, tax, financial, or real estate advice about your sale. Your situation may differ. Before acting on a contract, disclosure, title, tax, or pricing question, ask an appropriately licensed professional in your state.
Written and researched by Keighbor Research · drawn from the reference glossary · how we research and check what we publish
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