Reversion value is the estimated future sale price of a property at the end of a defined holding or investment period. It reflects the projected value of the asset when it is expected to be sold or revalued.
Why It Matters
Reversion value plays a key role in real estate investment analysis. It helps estimate:
- Total return on investment
- Potential capital gains at exit
- Key metrics such as IRR (Internal Rate of Return) and NPV (Net Present Value)
How It’s Calculated
The most common formula is:
Reversion Value = Projected Net Operating Income (NOI) ÷ Exit Cap Rate
Where:
- NOI is the income expected in the year after the holding period ends
- Exit Cap Rate is the estimated market cap rate at time of sale
Use in Investment Models
Reversion value is typically used as the terminal value in a discounted cash flow (DCF) model. It is combined with interim cash flows to evaluate overall investment performance and often makes up a significant portion of total projected returns.
Risks and Limitations
- Highly dependent on assumptions about future rents, expenses, and market conditions
- Sensitive to cap rate changes and overall market volatility
- Estimates are not guaranteed and are only realized if and when the property is sold
Also Known As
- Terminal value
- Exit value
- Residual value (in some contexts)
