Exit cap rate: how to pick the number that sets your sale price (2026)
Jul 8, 2026 · 11 min read
Every projection of what a rental returns five or ten years out rests on a number most investors pick in about four seconds and never revisit: the exit cap rate. It's the cap rate you assume a future buyer will pay when you sell, and because your projected sale price is exit-year net operating income divided by that rate, it quietly sets the biggest line in any multi-year return — the proceeds from the sale. Miss it by half a point and the sale price moves tens of thousands of dollars. Miss it by a full point and it can flip a deal from a double-digit return to a loss, without changing a single thing about how the property actually operates. Here's what the exit cap rate is, why it deserves more scrutiny than any other assumption in the model, a worked 2026 example, and how to pick a number you can defend.
What the exit cap rate is
Start with the cap rate you already know. The going-in cap rate (or entry cap rate) is year-one net operating income divided by the purchase price — what the property yields the day you buy it. The exit cap rateis the same idea pointed at the future: the cap rate you assume the market will pay when it's your turn to sell. You don't compute it from data you have today; you assume it, and then you use it to turn a future year's NOI into a sale price:
Projected sale price = Exit-year NOI ÷ Exit cap rateIt goes by several names that all mean the same thing — terminal cap rate and reversion cap rateare the two you'll see most in a pro forma or a lender's model. One refinement the pros build in: a buyer on your exit date is really pricing next year's income, so a careful model divides the forwardNOI (the year after you sell) by the exit cap, not the trailing number. For a clean example we'll use the exit-year NOI, but keep the nuance in your pocket — at a big denominator, even that one-year difference is real money. If you want to see how the cap rate and NOI move together on today's side of the trade first, the cap rate calculator and the guide to calculating cap rate walk the going-in version step by step.
Why it matters more than any other input
On a buy-and-hold deal, the money comes from two places: the cash flow you collect each year, and the lump sum you net when you sell. For a typical five-to-ten-year hold, that sale — the reversion — is usually 60% to 80% of the entire return. And the sale price runs entirely through the exit cap rate. So the one assumption you can't check against any real data is also the one that controls most of your profit.
It gets worse, because the relationship isn't gentle. Value is NOI divided by the cap rate, so the sale price moves with the reciprocal of the rate — a small change in the denominator levers into a large change in the price, and the effect accelerates as caps fall. Going from a 7.0% to a 6.5% exit cap (half a point) lifts value about 7.7%; going from 6.5% to 6.0% lifts it about 8.3%. Compare that to the inputs investors actually obsess over. A quarter-point on your mortgage rate or five points of vacancy moves cash flow by a few dollars a month. The exit cap moves the biggest check the deal will ever cut. It deserves the most scrutiny and usually gets the least.
A worked example: the $300K duplex
Take a $300,000 duplex bought with 25% down ($75,000) plus about $9,000 in closing costs, so $84,000 of cash in. The $225,000 loan at 7% over 30 years runs $1,497 a month, or $17,963 a year in debt service. Assume a 6.5% going-in cap rate, which puts year-one NOI at $19,500 and year-one cash flow at $1,537. Let NOI grow 3% a year, a reasonable rent-and-expense drift. By the time you sell at the end of year five, NOI has climbed to $21,947 — up 12.6% from where it started — and the loan has amortized down to about $211,796.
Now hold everything about the property fixed and change only the exit cap rate. Here's the sale price, the net proceeds after a 7% cost of sale and the loan payoff, and the five-year internal rate of return on your $84,000:
| Exit cap rate | Sale price | Net proceeds | 5-yr IRR |
|---|---|---|---|
| 6.0% (compression) | $365,790 | $128,389 | 11.5% |
| 6.5% (held flat) | $337,653 | $102,221 | 6.9% |
| 7.0% (mild expansion) | $313,535 | $79,791 | 2.3% |
| 7.5% (real expansion) | $292,632 | $60,352 | −2.6% |
Read down that table slowly, because it's the whole point of the article. The property is identical in every row — same rent, same expenses, same 12.6% of NOI growth, same loan. The only thing that changes is the number you guessed for the buyer's cap rate years from now. If you assume the cap rate holds flat at your entry 6.5%, you net $102,221 and earn a 6.9% IRR — a real but modest return that leans on $37,653 of appreciation the NOI growth produced. Let the market compress half a point to 6.0% and the IRR jumps to 11.5%. Let it expand a full point to 7.5% and the sale price actually lands below your $300,000 purchase price despite NOI growing almost 13%, and your five-year IRR goes negative. That's a $73,000 swing in sale price and a 14-point swing in IRR — all of it riding on a single assumption you can't look up.
The equity multiple tells the same story in one figure: 1.69x of your cash back at a 6.0% exit, 1.38x at 6.5%, 1.11x at 7.0%, and 0.88x — a loss — at 7.5%. If you want to feel how the going-in side of this drives the exit, rebuild the NOI line in the NOI calculator and watch the exit-year number move.
What actually moves exit cap rates
If the exit cap is that important, it's worth knowing what pushes it around. Three forces do most of the work. First and biggest, interest rates: cap rates loosely track the cost of debt, so when the ten-year Treasury and mortgage rates rise, buyers demand higher yields and cap rates drift up. The 2022–26 rate climb is exactly why so many deals underwritten on 2021 compression assumptions disappointed. Second, the building ages: a property that's five years older at sale has five more years of wear and a shorter remaining life, which argues — all else equal — for a slightly higher exit cap than entry. Third, the local market and cycle: rent growth, employment, supply, and where you sit in the cycle all feed the cap rate the next buyer will accept.
The honest conclusion from that list is humbling: you cannot forecast the biggest driver. Nobody reliably predicts where rates sit in five years. So the disciplined move isn't to guess precisely — it's to refuse to assume the market bails you out.
How to pick a number you can defend
Three rules keep you honest. One: exit cap ≥ going-in cap.Make your default assumption that the cap rate you sell at is at least the one you bought at. A widely used convention is to add about 0.1 percentage point of exit cap for each year of the hold — a 6.5% entry over five years becomes a ~7.0% exit. That isn't pessimism; it's declining to assume a rally you have no way to predict. Two: never underwrite compression to make a deal pencil.The instant a marginal deal only clears your return hurdle because you typed a lower exit cap than your entry cap, stop — you've stopped analyzing a rental and started speculating on interest rates. Three: stress-test the exit.Run the deal at your entry cap, entry + 0.5, and entry + 1.0, and make sure it survives the middle case and doesn't become a loss at the top. A deal that only works at your rosiest exit cap is fragile by construction.
This is the same discipline that separates a real underwrite from a seller's pro forma. When a marketing package advertises an 18% projected IRR, the first thing to check is the exit cap buried in the assumptions. If it's lower than the going-in cap, the model is quietly baking in a market rally, and the headline return is a forecast of rates dressed up as a forecast of the building. The reversion is where that sleight of hand hides, which is also why exit cap sits at the heart of the difference between cash-on-cash and IRR — cash-on-cash ignores the sale entirely, while IRR lives or dies on it.
The residential caveat that matters
One honest wrinkle for TrueCap's core audience. Cap-rate pricing is really a commercial and 5+ unit convention. When you sell a single-family rental or a 2–4 unit, the buyer is usually an owner-occupant or a small investor, and their lender appraises the property on comparable sales and price per square foot, not on a cap rate. So for small residential, treat the exit-cap reversion as one useful lens on resale value — and cross-check it against straightforward comp-based appreciation, the kind you can reason about in a cash-flow-versus-appreciation frame. For a 5+ unit building the exit cap isn't just a lens, it's the lens: that's exactly how the next buyer's appraiser and lender will set the price, so the discipline above applies with full force.
Five ways people get the exit cap wrong
- Assuming compression to hit a target.Typing an exit cap below your entry cap so the IRR clears your hurdle is the cardinal sin. It converts a rental analysis into a rate bet you didn't mean to place.
- Dividing the wrong NOI. The exit cap applies to a forward-looking income figure. Using a lowball or a stale NOI at that huge denominator throws the sale price off by thousands.
- Forgetting the costs of selling.A projected sale price isn't proceeds. Net out 6–8% for commissions and closing plus your loan payoff before you call it a return.
- Applying a commercial cap to small residential.A duplex that will actually resell on comps doesn't take a strict cap-rate reversion at face value. Sanity-check against price per square foot.
- Letting a low exit cap paper over weak cash flow. A deal that loses money every month but "wins on the exit" is betting the whole thesis on the one number you can't control. Make it stand up on cash flow first.
FAQ
What is an exit cap rate?
The exit cap rate — also called the terminal or reversion cap rate — is the cap rate you assume a future buyer will pay when you sell. You use it to project the sale price: exit-year net operating income divided by the exit cap rate. If a property throws off $22,000 of NOI in the year you sell and you assume a 7% exit cap, you're modeling a sale price of about $314,000. It's a forward-looking assumption about the market on your exit date, not something you can calculate from today's numbers.
Should the exit cap rate be higher than the going-in cap rate?
As a default, yes. The building is older and more depreciated on your exit date than the day you bought it, and you cannot forecast that interest rates will be lower when you sell — so assuming the market pays a lower cap rate (compression) is optimistic. A common, conservative convention is to add roughly 0.1 percentage point of exit cap for every year you hold: a 6.5% going-in cap over a five-year hold becomes about a 7.0% exit cap. If a deal only works when you assume the exit cap compresses below your entry cap, you're underwriting a bet on rates, not a rental.
What is a good exit cap rate assumption for 2026?
There's no universal number, because cap rates are local and move with interest rates. The defensible approach in 2026's higher-rate environment is to start from your going-in cap rate, add 0.5 point or so for a typical five-year hold, and then stress-test the deal at your entry cap, entry + 0.5, and entry + 1.0. If the return survives the middle case and doesn't turn into a loss at entry + 1.0, the deal stands on its own. Assuming compression to hit a target IRR is the most common way pro formas flatter a mediocre deal.
Does the exit cap rate matter for a single-family or small multifamily rental?
Less directly than for commercial property. A 2–4 unit or single-family home is usually resold to an owner-occupant or a small investor who prices it on comparable sales and price per square foot, not on a cap rate — cap-rate pricing is really a 5+ unit and commercial convention. Use the exit cap as one lens on resale value for small residential, and cross-check it against comp-based appreciation. For a 5+ unit building, the exit cap is the lens, because that's exactly how the next buyer's lender and appraiser will value it.
The bottom line
The exit cap rate is the highest-leverage guess in any hold model — a number you can't look up that nonetheless controls most of your return. Treat it with the respect it deserves: default to an exit cap at least as high as your going-in cap, add a tenth of a point per year of hold, stress-test the deal a full point wider, and never let a compressing exit cap rescue a deal that doesn't work on its own. Do that and your projected return becomes a statement about the building instead of a bet on interest rates. Let the TrueCap analyzer carry your NOI, financing, and cap-rate assumptions straight through to cash flow, DSCR, and the projected sale — so the exit you assume and the verdict you get always come from the same set of numbers. None of this is investment advice; confirm the actual rents, expenses, and comparable sales on any specific property before you rely on a projected exit.