What this calculator answers

For real estate investors, the exit cap rate is the single biggest unknown in a five- or ten-year hold. A 50 basis point shift in the exit cap can swing your projected sale price by 10 to 15 percent and turn a winning deal into a mediocre one. This tool runs a sensitivity grid across plausible exit cap rates so you can see exactly how much your terminal value depends on cap rate assumptions versus net operating income growth.

How the math works

A commercial property's value is its stabilized net operating income (NOI) divided by the cap rate. If a property generates 250,000 dollars of NOI and similar properties trade at a 6 percent cap, its value is roughly 4.17 million dollars. Shift the cap to 6.5 percent and the same NOI is worth only 3.85 million dollars, a 320,000 dollar swing. This tool projects NOI forward at your growth assumption, then divides by a range of exit caps so you can see the spread of plausible outcomes.

When to use it

• You are underwriting a real estate acquisition and want to pressure-test the exit assumption in your pro forma.
• You are presenting a deal to investors and need a sensitivity table that shows the range of possible outcomes, not just the base case.
• You are deciding whether to sell now or hold longer and want to see how cap rate trends would affect different exit timing.
• You are evaluating whether to refinance versus sell and need a realistic terminal value for the sell scenario.

Common mistakes

• Assuming exit cap will equal entry cap. The market you exit into is almost never the market you bought in. Most disciplined underwriters add 25 to 75 basis points to the entry cap for the exit assumption.
• Using trailing NOI instead of stabilized forward NOI. A buyer in year five will underwrite based on forward NOI, not the historical number.
• Forgetting transaction costs. Brokerage fees, transfer taxes, and legal costs can eat three to six percent of the gross sale price.
• Modeling cap rate compression as a base case. Cap compression is a hope, not a plan. Underwriting that depends on it is fragile.

A worked example

You buy a small apartment building for 5 million dollars at a 5.5 percent cap rate on 275,000 dollars of in-place NOI. You project NOI to grow to 340,000 dollars by year five. If you exit at the same 5.5 percent cap, the sale price is 6.18 million dollars. If exit caps widen to 6.25 percent (a common base case for a five-year hold), the sale price drops to 5.44 million dollars. That 75 basis point shift erases roughly 740,000 dollars of value, which is more than the entire NOI growth was supposed to deliver.

Frequently asked questions