CTW 068: Reversion Cap Rates in Today's Market


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As a passive investor, one of the most important areas to look at when analyzing deals to invest in is the reversion cap rate, or in other words, the cap rate at exit.

If, for example, the property is being acquired at a 6% cap rate and the reversion cap rate is 6% as well, there's a good chance the sponsor(s) on that deal is being too aggressive.

In today's market and environment, it's a good idea to be conservative. I would even go further and mention it's a must. A good "rule of thumb" is to project a reversion cap rate that is a point or 1% higher than the acquisition cap rate.

If the reversion cap rate is lower than the acquisition cap rate, the sponsor is being overly aggressive and you should be extremely cautious.

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