How to Set the Reversion (Exit) Cap Rate

Then the reversing cap rate that we’re using is 6.25, using a 6.25. But what are assets trading here with low fives,

yeah, five, and even under five, depending on where it is,

we’ll get into that in a bit.

Going back to the reversing cap rate, we’re using a 6.25, or version cap rate. I’ve kind of got to this a lot of times, but it’s still good worth repeating, took me a long time to find a grasp this concept. But this number that we plug in here at 6.25, is one of the biggest factors in coming up with all these projections. this number right here is the assumption of what kind of market we’re going to sell in, say, five years. So now, we want to assume that, you know, when you’re being conservative, you want to assume that you’re selling in a worst market. So we’re going to expand the version cap rate higher. So 6.25, is what we’re using. And that is how we you know, we put in 6.25 like how we are that’s how we’re getting the projected onto 2% return in five years. Now the question is like, well, what did you guys are less conservative or don’t expand your version Capri as much? Well, if we went to five and a half percent reversion cap rate, you know, we’ll be we would be putting this deal out at onto 58% return in five years, which would look awesome. But no, we like to over promise under develop under deliver. Poppy raised a lot of money and fill up this deal really quickly. But

yeah, no, that’s a that’s a good education point for people who, you know, if they are looking at other deals by other operators, you know, that’s a common that’s a that’s an easy change to make that really makes the returns go one way or the other, as you can see here. So if you if you ever see something that looks too good to be true in that range, you know, may dig a little deeper and ask what their assume reversion cap rate is that they’re using for the deal.

Right, and you know, the 6.25 con, I kind of go back and forth several days deciding on this number plus or minus a quarter point to have a point where we’re about what we’re going to use. If this this is again, a more of a Class B type of asset in a good area, a minus area. So that’s why you 6.25 but say it was more of a class C 1960s 1970s build, we probably would have used what like a 6.5% reversion cap. So you can’t just you can’t just compare the reversion cap rates for two deals, because the assets might be different, the locations might be different. The geographic locations might be different. I think we’ve used like for Huntsville, we’ve use 6.25

Also give us 6.25 to six and a half. And even on some of our earlier deals, we use seven but we use a little bit too conservative.

But the thought there was you know, Houston is a little bit more major market. You know if you compare that with your cap rates out in like Los Angeles or San Francisco, which is in the twos and threes, that’s kind of where we come up with some educated guesses and you know, if there were if the cap rates stay the same Tibet it is today at 5.25. You know, that means this deals looking like it’s gonna be 180% return in five years. But let’s keep expectations low because life is hard enough.