The Most Dangerous Number in a Deal Memo Is the Exit Cap Rate
An exit cap rate can occupy one cell near the bottom of a deal model and still determine a large share of the equity return. When much of the upside is realized at sale, a small change in terminal pricing can undo years of operating gains.
The issue is especially relevant for assets bought in 2021 and 2022, when borrowing costs were far lower and tighter sale assumptions were easier to defend. The 10-year U.S. Treasury closed at 5.27% on October 6, 2026. Treasury yields do not set multifamily cap rates, but a higher risk-free rate changes the return buyers expect from real estate. An exit assumption carried forward from the last cycle therefore deserves a fresh explanation.
How 50 Basis Points Reprice the Equity
Suppose a property reaches $2 million of net operating income at sale. A 5.0% exit cap implies a $40 million valuation. At 5.5%, the same income supports about $36.4 million. The property has performed exactly as modeled, yet roughly $3.6 million of gross sale value has disappeared.
Leverage magnifies the difference because the loan is repaid before the remaining proceeds reach equity. A deal can be conservative on rents, occupancy, and expenses and still overstate LP returns through the value assigned to the asset at disposition.
The practical lesson is simple. Terminal value should receive the same scrutiny as the operating assumptions above it. A modest change in the sale yield can erase value that took several years to create.
Underwrite the Buyer You Will Need
The exit cap should reflect the asset a buyer will actually see at the end of the hold. If the business plan materially improves its income and reduces risk, a better valuation may be justified. But five years of ownership also change the asset itself, and any remaining weaknesses will be priced in at sale.
Current pricing makes that judgment harder to gloss over. CBRE's H1 2026 Cap Rate Survey found that the all-property average cap rate was roughly flat even as Treasury yields rose. About 60% of respondents expected cap rates to remain unchanged over the following six months, while a larger share than before expected expansion. Multifamily sentiment also became more cautious as higher rates and softer rent growth weighed on pricing.
A lower exit cap than the entry cap can still be justified when the business plan changes the quality of the asset. The important question is whether the improvement is substantial enough to support a lower required yield from the next buyer. If the answer rests mainly on the hope that capital will be cheaper in a few years, the model is asking external conditions to produce part of the return.
Pressure-Test the Terminal Value
The fastest way to test the assumption is to translate it into an actual sale price. If the model implies a per-unit value well above recent comparable transactions, the sponsor should be able to show how the completed business plan earns that premium.
The next step is sensitivity. Re-run the model with an exit cap 50 and 100 basis points higher and follow the effect through to the equity multiple and cash returned after debt repayment and selling costs. This makes clear whether the investment is resilient to a less generous buyer or whether the headline return depends heavily on terminal pricing.
A weak assumption usually reveals itself quickly. If a modestly wider exit causes the economics to deteriorate sharply, the sale price is carrying too much of the investment thesis. Forecasts that rely on lower interest rates several years from now deserve particular care because easier benchmark rates do not guarantee equally favorable financing or buyer demand.
At Gilberti Group, we want operating execution to create the return and exit pricing to realize it. For LPs, the useful test is whether a deal still produces an acceptable outcome when the property performs as planned, and the capital markets offer no extra help. If it does not, the exit cap may be carrying more of the thesis than the business plan itself.
To discuss how Gilberti Group approaches multifamily underwriting and downside protection, schedule a conversation with our team.
