What does the exit cap rate typically compare to the entry cap rate?

The exit cap rate is generally higher than the entry cap rate, often reflecting the difference in expected risks, market conditions, and potential changes in property performance over time. This higher rate is typically an indication of the expected increase in market cap rates due to various factors such as economic trends, property aging, or shifts in demand.

The chosen answer reflects a common range observed in the market, where the exit cap rate is frequently 25-50 basis points higher than the entry cap rate. This range acknowledges that as properties transition through their life cycle, increased uncertainty regarding future cash flows and market conditions could lead to a higher expectation of returns, justifying a higher cap rate at the time of exit.

In assessing the other options, the first one suggesting a 10-25 basis point increase is generally considered too conservative as it doesn’t capture the typical market frustrations adequately. The option indicating that the exit cap rate might occasionally be equal to the entry cap rate overlooks the typical trends in property investment, where changes in valuations and risk perceptions usually affect the exit rate. Lastly, the notion that the exit cap rate is always lower than the entry cap rate contrasts with fundamental finance principles that anticipate a premium demanded by investors for increased risk at exit.