What is goingin cap rate versus exit cap rate in real estate?
Going-in cap rate refers to the capitalization rate at the time of property acquisition, while exit cap rate refers to the rate expected at the time of eventual sale, both used to assess investment returns at different points in the holding period.
Key Differences
- Going-in cap rate: calculated using current net operating income and purchase price
- Exit cap rate: projected rate used to estimate future sale value based on expected income
Why the Comparison Matters
- A rising exit cap rate assumption typically reduces projected investment returns
- Investors often model multiple exit cap rate scenarios to assess risk
Practical Relevance
- Comparing both rates helps assess whether a deal's return projections are realistic
In summary, going-in cap rate reflects current acquisition economics, while exit cap rate estimates future sale conditions. Comparing both helps investors evaluate the realism and risk profile of return projections.
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