Going-In vs. Exit (Terminal) Cap Rate

The going-in cap rate is the cap rate at purchase — year-one NOI divided by price. The exit (or terminal) cap rate is the cap rate you assume the next buyer will pay, applied to the exit-year NOI to estimate the sale price.

How it's used: the exit cap drives the terminal value in a discounted-cash-flow model, which is usually the single largest cash flow in the whole hold. Conservative underwriting assumes the exit cap is higher than the going-in cap (cap-rate expansion) to account for an aging asset and uncertain future markets.

Why it matters: small changes in the exit cap move the IRR enormously because the exit value is divided by it. If you buy at a 5.0% cap and exit at 6.0%, you need substantial NOI growth just to break even on value — cap-rate expansion can quietly destroy equity even when operations go well. Brokers almost always model a flat or compressing exit cap; flip it to expanding and re-check the deal.

Formula: Exit value = Exit-year NOI ÷ Exit cap rate

Be sure both NOIs use the same basis — see true cap rate for the broker-vs-true distinction. Stress the exit on the cap rate calculator and the cap rate guide.