Reversion Value
Also called: Residual value, Terminal value, Sale proceeds
Reversion value is the projected gross sale price of a property at the end of the hold period, calculated by dividing the final year's net operating income by the assumed exit cap rate.
Reversion is typically the largest single cash flow in a real estate model, often representing 60% to 80% of total investor proceeds on a five year hold. Net sale proceeds are reversion value less selling costs and the outstanding loan balance.
Because it dominates the return, the two inputs that produce it deserve disproportionate scrutiny: the final year NOI, which compounds every rent growth and expense assumption made along the way, and the exit cap rate, which is a pure assumption about a future market.
How to calculate reversion value
Net Sale Proceeds = (Final Year NOI / Exit Cap Rate) - Selling Costs - Loan PayoffRules of thumb
- Underwrite selling costs at 1.5% to 3% of gross sale price depending on market and broker structure.
- Check what share of total profit comes from reversion versus operations. Above 80% means the deal is a bet on exit pricing rather than on cash flow.
Related terms
- Exit Cap Rate
The exit cap rate is the capitalization rate assumed to apply when a property is sold at the end of the hold period, and it converts projected final-year net operating income into an assumed sale price.
- Internal Rate of Return (IRR)
The internal rate of return is the annualized discount rate at which the present value of a deal's cash flows equals zero, making it the time-weighted compound annual return on invested equity.
- Net Operating Income (NOI)
Net operating income is a property's effective gross income minus all operating expenses, excluding debt service, capital expenditures, depreciation, and income taxes.