CRE 101 · deweyluong.realtor

Exit Cap Rate Explained: How the Rate You Assume at Sale Decides What a Georgia Commercial Deal Is Worth

Most of a commercial deal's projected value sits in one number nobody can observe: the price a future buyer will pay. The exit cap rate is where that guess lives — and a half-point of optimism there can invent six figures of value that will never exist. By Túy “Dewey” Luong, CCIM — Founding Broker, SERHANT. Atlanta · 318 closed sales / $281.2M career volume · 678-707-2498

When you underwrite a five-year hold, the rent checks along the way are only part of the story. The terminal value — the projected sale price at exit — is usually the largest single cash flow in the model, and it comes from one division: the next buyer's first-year NOI divided by the exit cap rate. This page walks through that formula, the sensitivity table every investor should demand, the conservative rule for choosing the rate, and the two traps (the wrong NOI year, and quoting the gross price as if it were cash) that quietly inflate projected returns. The worked example uses made-up, rounded numbers to teach the mechanics. This page is general education, not financial or investment advice.

The exit cap in one line

• The formula: terminal value = NOI of the first year AFTER your hold ÷ exit cap rate. Sell at the end of year 5 and you capitalize year-6 NOI — the income the next buyer is actually buying.
• Going-in vs exit: the going-in cap rate is observed (today's NOI ÷ today's price). The exit cap is forecast. Same math, completely different certainty.
• Direction: a higher exit cap means the next buyer demands more yield, so the price is lower. A lower exit cap inflates the projected price — which is exactly why it is the favorite lever for making a weak deal look strong.
• It drives everything downstream: the terminal value feeds IRR and the equity multiple, so an aggressive exit cap does not just flatter the sale price — it flatters every return figure printed above it.

Worked example. The numbers below are made up and rounded to teach the mechanics. This is not a real property.

• The building: bought for $1,200,000 with year-1 NOI of $72,000 — a 6.0% going-in cap rate. NOI grows 2% a year: $73,440 / $74,909 / $76,407 / $77,935, reaching about $79,494 in year 6.
• Terminal value at a 6.0% exit cap: $79,494 ÷ 6.0% ≈ $1,324,900.
• The sensitivity table — same building, same NOI, four assumptions: 5.5% → about $1,445,300; 6.0% → about $1,324,900; 6.5% → about $1,223,000; 7.0% → about $1,135,600. Each 50 basis points costs roughly $100,000. Nothing about the building changed — only the guess.
• Net, not gross: take 3% selling costs off the 6.0% case and $1,324,900 becomes about $1,285,200 — before any loan balance is repaid. That net figure, not the headline terminal value, is what belongs in a return calculation.

The conservative rule, and why it exists

• Exit cap at or above going-in: the standard discipline is to set the exit cap 50–100 basis points above the going-in cap. On this example, bought at a 6.0% cap, that means underwriting the exit at 6.5%–7.0% — a terminal value of about $1,223,000–$1,135,600, not $1,324,900.
• Why: at sale the building is five years older, its leases are five years shorter, its roof and systems are five years closer to replacement, and interest rates and buyer appetite are unknowable. The next buyer prices all of that. Assuming they will pay today's multiple for an older asset is not a forecast; it is a hope.
• Exit below going-in needs evidence: durable rent growth below market, a submarket with documented cap-rate compression, or credit tenancy added during the hold can justify it. “The spreadsheet needed a higher IRR” cannot.
• Stress it both ways: run the exit at your base case and at +50 and +100 basis points, and look at the break-even case before you look at the brochure case.

Four traps in exit-cap underwriting

• The wrong NOI year: capitalizing year-5 NOI ($77,935) instead of year-6 ($79,494) at 6.0% gives about $1,298,900 — roughly $26,000 low. Small here; on a larger building the same slip is six figures. The buyer pays for the year AFTER closing.
• Quoting gross terminal value: returns computed before selling costs (and before the loan payoff) overstate what equity receives. Always trace the net reversion through to the equity line.
• One heroic scenario: a single-point IRR built on one exit cap hides the range. If the deal only works at a 5.5% exit, you do not have a deal — you have a bet on cap-rate compression.
• Exit cap detached from the lender's math: the buyer's lender will run DSCR and debt yield on the same income; if the financed price cannot clear those tests, the theoretical terminal value is not a price anyone can actually pay.

Cho nhà đầu tư người Việt

Exit cap rate (tỷ lệ vốn hóa khi bán) biến thu nhập tương lai thành giá bán ước tính: giá trị khi bán = NOI của năm đầu tiên sau khi bán ÷ exit cap rate. Trong ví dụ trên trang này, tòa nhà mua $1.200.000 với NOI năm đầu $72.000 (going-in cap 6,0%), NOI tăng 2%/năm đến khoảng $79.494 ở năm 6. Cùng một tòa nhà: exit cap 5,5% cho giá khoảng $1.445.300; 6,0% khoảng $1.324.900; 6,5% khoảng $1.223.000; 7,0% khoảng $1.135.600.

Quy tắc thận trọng: đặt exit cap bằng hoặc cao hơn going-in cap từ 50 đến 100 điểm cơ bản, vì khi bán tòa nhà đã cũ hơn và hợp đồng thuê ngắn lại. Hai cái bẫy phải tránh: dùng nhầm NOI của năm bán thay vì năm sau năm bán (sai khoảng $26.000 trong ví dụ này), và coi giá bán gộp là tiền mang về — trừ chi phí bán 3%, $1.324.900 còn khoảng $1.285.200, chưa kể phần nợ vay còn lại. Bản tiếng Việt đầy đủ: bài exit cap rate trên NhaDat Duluth. Đây là thông tin giáo dục chung, không phải tư vấn tài chính.

Frequently asked questions

What is the exit cap rate in commercial real estate?

The exit cap rate (also called the terminal or going-out cap rate) is the capitalization rate you apply to a property's projected NOI in the first year after your holding period to estimate its future sale price: terminal value = next-year NOI ÷ exit cap rate. If you sell at the end of year 5, you capitalize year-6 NOI. It is a forecast, not an observation — the going-in cap rate is measured from today's price and income, while the exit cap is your disciplined guess about what the next buyer will pay for the same income years from now.

How do you choose an exit cap rate?

Start from evidence, then add humility. Anchor on the cap rates similar buildings in the same submarket trade at today, then apply the conservative convention: set the exit cap at or above your going-in cap rate, commonly 50 to 100 basis points higher, because the building will be older, leases shorter, and the forecast less certain at sale. An exit cap below the going-in cap claims the market will pay more per dollar of income in the future than it does today — that can happen, but it needs evidence, not optimism, and any model that needs it to work is telling you the deal does not work.

How much does the exit cap rate move the sale price?

A lot — it is usually the most sensitive single assumption in the model. On this page's worked example, year-6 NOI is about $79,494. At a 5.5% exit cap the terminal value is about $1,445,300; at 6.0% about $1,324,900; at 6.5% about $1,223,000; at 7.0% about $1,135,600. Each 50 basis points costs roughly $100,000 of projected sale price. That is why serious underwriters run the exit at several rates and look at the worst case they can still live with, instead of defending one heroic number.

Is the terminal value the money I actually receive at sale?

No. Terminal value is the gross projected price. Selling costs — brokerage, closing, and legal, modeled at 3% in the worked example — come off the top: $1,324,900 gross becomes about $1,285,200 net. Any loan balance still owed also comes out before equity is paid. Models that quote returns off the gross terminal value overstate what reaches the investor.

Exit cap rate là gì, nhà đầu tư người Việt cần lưu ý gì?

Exit cap rate (tỷ lệ vốn hóa khi bán) dùng để ước tính giá bán tương lai: giá trị khi bán = NOI của năm đầu tiên sau khi bán ÷ exit cap rate. Ví dụ trên trang này: NOI năm 6 khoảng $79.494; exit cap 6,0% cho giá khoảng $1.324.900, exit cap 6,5% chỉ còn khoảng $1.223.000 — chỉ 50 điểm cơ bản đã làm chênh khoảng $102.000. Ba lưu ý: (1) quy tắc thận trọng là đặt exit cap bằng hoặc cao hơn going-in cap 50–100 điểm — đặt thấp hơn là đang giả định thị trường tương lai trả đắt hơn hôm nay mà không có bằng chứng; (2) phải dùng NOI của năm sau năm bán — dùng nhầm NOI năm 5 thay vì năm 6 làm sai khoảng $26.000 trong ví dụ này; (3) giá trị khi bán là giá gộp — trừ chi phí bán 3% còn khoảng $1.285.200, và còn phải trả nợ vay trước khi đến phần vốn của nhà đầu tư. Đây là thông tin giáo dục chung, không phải tư vấn tài chính.

This page is general education, not investment, legal, tax, lending or financial advice. Every figure in the worked example is made up and rounded to teach the mechanics. Túy “Dewey” Luong, CCIM — Founding Broker, SERHANT. Atlanta · 678-707-2498 · dewey.luong@serhant.com