When you underwrite a multifamily deal, you’ll see dozens of inputs: rent growth, vacancy, expenses, renovations, and debt. But the exit cap rate—the cap rate you assume at the time you sell the property—quietly controls a huge chunk of your projected return. If you get it wrong by even 0.5%, your profits can shrink dramatically.
First: what is a cap rate?
A capitalization rate (cap rate) is a simple ratio:
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Cap Rate = NOI ÷ Purchase (or Sale) Price
Rearranged for value at exit: -
Sale Price = NOI ÷ Exit Cap Rate
If your property’s NOI (Net Operating Income) at sale is $1,000,000:
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At a 5.5% exit cap:
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5.5% = 0.055
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Sale Price = 1,000,000 ÷ 0.055 = $18,181,818.18
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At a 6.0% exit cap:
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6.0% = 0.060
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Sale Price = 1,000,000 ÷ 0.060 = $16,666,666.67
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Difference = 18,181,818.18 − 16,666,666.67 = $1,515,151.51
A tiny cap-rate shift changed the sale price by ~$1.5M. That flows straight into your IRR and equity multiple.
Why exit cap assumptions matter so much
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Small percent, big dollars
Buyers and lenders will forgive a 0.25%–0.50% “miss” in rent growth. They won’t forgive a 100-basis-point miss on exit cap. -
Market cycles
Caps compress in hot markets (prices up), and expand when rates rise or risk rises (prices down). Assuming today’s compressed cap will stay forever is risky. -
Investor protection
Conservative exit assumptions create “downside cover.” If the market softens, your projections still hold up.
“Stupid-proof” definitions
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Basis points (bps): 100 bps = 1.00%. So 50 bps = 0.50%.
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Cap compression: Cap rate goes down → prices go up.
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Cap expansion: Cap rate goes up → prices go down.
Practical rules of thumb
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Add 50–100 bps to today’s entry cap for your exit cap if your hold is 5–7 years.
Example: Buy at 5.0% cap today → underwrite exit at 5.5%–6.0%. -
Align to interest-rate regime. If rates are rising or sticky-high, exit caps should trend higher, not lower.
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Match to asset & location. Class A in a primary market behaves differently from Class C in a tertiary market.
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Stress test everything:
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Base case: Exit cap +50 bps
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Conservative: Exit cap +100 bps
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Bear: Exit cap +150 bps
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Simple scenario walkthrough
You project year-5 NOI at $1,200,000. Test three exit caps:
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5.5%: 1,200,000 ÷ 0.055 = $21,818,181.82
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6.0%: 1,200,000 ÷ 0.060 = $20,000,000.00
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6.5%: 1,200,000 ÷ 0.065 = $18,461,538.46
That’s a $3.36M spread between 5.5% and 6.5%—on the same NOI.
Mistakes to avoid
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Copy-pasting broker exit caps. Brokers sell; you protect investor capital.
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Using today’s cap during a hold when rates are rising. Don’t underwrite yesterday’s world.
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Ignoring submarket data. Downtown infill ≠ outer-ring workforce. Use local comps.
Quick checklist
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Exit cap ≥ entry cap (usually by 50–100 bps)
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Three scenarios modeled (base / conservative / bear)
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Justification documented (rates, supply pipeline, comps)
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Sensitivity table in your memo
Bottom line: Exit cap is the tiny lever that moves gigantic dollars. Respect it, model it conservatively, and your future self (and your investors) will thank you.
