Terminal Capitalization Rate
Candlefocus EditorThe terminal capitalization rate consists of two parts: the going-in cap rate and the terminal capitalization rate. The going-in cap rate is the property's projected first-year NOI divided by the purchase price of the property. The NOI is the net operating income of the property, which is the income after any operating expenses - such as taxes, insurance and utilities - have been taken into account. The terminal capitalization rate is the rate at which the property is expected to be sold at the end of the holding period.
To calculate the terminal capitalization rate, take the property's projected NOI after all expenses have been taken into account, and divide it by the estimated sale price. The result of this calculation is the terminal capitalization rate.
The terminal capitalization rate is a reliable way to gauge the success or failure of an investment. If the terminal cap rate is lower than the going-in rate, it usually indicates that the investor has realized a profit. If the cap rate is higher than the going-in rate, it usually indicates that the investment was less than successful.
Terminal capitalization rates also serve as a way to compare investments and decide which property is a better long-term investment. Investors should look for investments with low cap rates and high NOI, as this is a strong indicator of a successful real estate investment.
Overall, the terminal capitalization rate is an important metric for investors to consider when evaluating a real estate investment. It can provide insight into whether an investment was successful or not, and can be used to compare potential investments. Investors should be sure to do their research to ensure they are making smart decisions when it comes to their investments.