Going Out Cap Rate Calculator
Estimate your exit capitalization rate based on projected sale price and net operating income.
Understanding the Going Out Cap Rate
The Going Out Cap Rate, also known as the Exit Cap Rate or Terminal Cap Rate, is a critical metric used by real estate investors to estimate the resale value of a property at the end of a specific holding period. While the "Going In" cap rate tells you the yield at purchase, the "Going Out" rate helps you forecast your eventual return on investment (ROI) and internal rate of return (IRR).
The Formula for Going Out Cap Rate
The calculation is straightforward but relies heavily on accurate projections of future income and market conditions. The formula is:
Why It Matters in Real Estate
In most professional underwriting, the exit cap rate is assumed to be higher than the entry cap rate (a "cap rate expansion"). This is because a building is typically older at the time of sale, and investors want to build in a margin of safety for potential market shifts. If your going out cap rate is lower than your entry cap rate, you are banking on "cap rate compression," which is a riskier strategy reliant on market appreciation.
Practical Example
Imagine you purchased a multifamily complex. After a 5-year hold, your financial projections show:
- Projected Year 5 NOI: $150,000
- Expected Sale Price: $2,500,000
Calculation: 150,000 / 2,500,000 = 0.06 or 6.00%. This 6% is your Going Out Cap Rate.
Key Factors Influencing Exit Cap Rates
| Factor | Impact on Rate |
|---|---|
| Interest Rates | Rising rates generally push exit cap rates higher. |
| Property Age | Older assets typically trade at higher cap rates due to higher maintenance risk. |
| Market Growth | High-demand areas may see lower exit cap rates (compression). |
| Lease Terms | Properties with long-term, stable tenants often command lower cap rates. |
Pro-Tip: The 10-20 Basis Point Rule
A common conservative underwriting practice is to add 10 to 20 basis points (0.10% to 0.20%) to the entry cap rate for every year of the holding period to arrive at a realistic Going Out Cap Rate.