Exit cap rate and IRR

[Dave Halevi]

Good evening guys, Thanks for all your help here!

There's a couple of things that I can't wrap my head around

1. When we buy a MF we can calculate the cap rate using the PP and NOI. But how cap I project what it would be selling for in 5 years?

also, it seems like I need to low my projected cap rate when selling so the building price would go up accordingly

2. How do I use the IRR to Project the sell price?

Thank you in advance for the patience! 

[Senate Eskridge]

This is going to take time and experience!  

The exit cap rate is an estimate or more of an art than a science, you have to know your market and your product.  Specifically, a Class A product in Austin is going to change at a different rate than a class C product in Oklahoma City.  As a basic rule of thumb, I INCREASE or decompress the caprate on my properties 15 basis points for each year I hold the property.  so if I buy at a 5 cap and hold it for 5 years then my exit cap rate would start at 5.75 and then I tweak it based of specific factors of the property market and location.  

As for IRR if you have a specific target in mind you can work backward to get the variables to hit that target but I don't think this is the best approach. you want to make sure you can execute the business plan first.