Sensitivity Analysis
How changes in the Exit Cap Rate affect the Sale Price.
| Exit Cap Rate | Valuation | Difference |
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What is an Exit Cap Rate?
The Exit Cap Rate (or Terminal Capitalization Rate) is a metric used in real estate financial modeling to estimate the resale value of a property at the end of a holding period. It represents the projected yield an investor would expect to receive on the property based on its income at the time of sale.
This figure is critical for Discounted Cash Flow (DCF) analysis, as the "Terminal Value" often accounts for a significant portion of the total projected return on a commercial real estate investment.
How the Calculation Works
The calculator uses the direct capitalization formula applied to future income:
Terminal Value = Projected Net Operating Income (NOI) / Exit Cap Rate
For example, if a property is expected to generate $150,000 in Net Operating Income (NOI) in year 5, and the market Exit Cap Rate is estimated at 6.5%, the projected sale price would be:
$150,000 / 0.065 = $2,307,692.
Exit Cap Rate vs. Entry Cap Rate
The Entry Cap Rate (Going-in Cap Rate) is the yield at the time of purchase. Financial models typically assume the Exit Cap Rate will be higher than the Entry Cap Rate. This difference is known as the spread.
- Risk Premium: A higher exit cap reflects the uncertainty of future market conditions and the aging of the building.
- Typical Spread: Investors often add 50 to 100 basis points (0.5% to 1.0%) to the Entry Cap Rate to determine a conservative Exit Cap Rate.
Why "Selling Costs" Matter
While the Gross Terminal Value is determined by the Cap Rate, the Net Proceeds (what you actually pocket) are reduced by broker commissions, closing costs, and transfer taxes. This calculator allows you to input a percentage for selling costs to see your true net exit value.