Reversion Value Calculator
This tool calculates the estimated future sale value of an income-producing asset (like real estate) at the end of a holding period. This value is often called the "Reversion Value" or "Terminal Value" in valuation analysis.
Simply enter the Projected Future Net Operating Income (NOI) in the year of sale and the expected Terminal Capitalization Rate (Cap Rate) at that time.
Enter Future Asset Information
Understanding Reversion Value
What is Reversion Value?
Reversion Value, also known as Terminal Value, is the estimated market value of an investment property or other income-producing asset at the end of a defined holding period. It represents the cash flow received by the investor when they eventually sell the asset. It's a crucial component in discounted cash flow (DCF) analysis for valuing long-term investments.
How is Reversion Value Calculated?
The most common and simple method for calculating Reversion Value uses the expected Net Operating Income (NOI) in the year following the holding period (or the final year's NOI) and divides it by the expected market Capitalization Rate (Cap Rate) at the time of sale.
The basic Reversion Value Formula is:
Reversion Value = Projected Future NOI / Terminal Cap Rate (as a decimal)
When the Terminal Cap Rate is given as a percentage (as is common):
Reversion Value = Projected Future NOI / (Terminal Cap Rate / 100)
Key Components:
- Projected Future NOI: This is the estimated Net Operating Income the property is expected to generate in its final year of operation or the year immediately following the holding period. NOI is calculated as total property income minus operating expenses (excluding debt service and capital expenditures).
- Terminal Capitalization Rate (Cap Rate): This is the expected market capitalization rate at the time of the future sale. It reflects the expected rate of return or yield that a buyer would demand based on the property's income at that future point in time. Selecting an appropriate Terminal Cap Rate is critical and involves analyzing future market conditions, property type, location, and risk.
This basic model assumes the future NOI is stable or grows at a very modest, sustainable rate reflected within the Cap Rate itself (often implicitly assuming a stable perpetual income stream or using the Gordon Growth Model, simplified here). More complex DCF models may adjust this or use different terminal value calculations.
Reversion Value Examples
See how the Reversion Value changes with different inputs:
Example 1: Standard Property
Scenario: Estimate the sale value of a property in 5 years.
1. Known Values: Projected Future NOI = $100,000, Terminal Cap Rate = 8.0%.
2. Formula: Reversion Value = NOI / (Cap Rate / 100)
3. Calculation: Reversion Value = $100,000 / (8.0 / 100) = $100,000 / 0.08
4. Result: Reversion Value = $1,250,000.
Conclusion: The estimated future sale value is $1,250,000.
Example 2: Higher Risk / Lower Growth Expectation
Scenario: A property with higher perceived risk or lower growth potential might warrant a higher exit Cap Rate.
1. Known Values: Projected Future NOI = $75,000, Terminal Cap Rate = 10.0%.
2. Formula: Reversion Value = NOI / (Cap Rate / 100)
3. Calculation: Reversion Value = $75,000 / (10.0 / 100) = $75,000 / 0.10
4. Result: Reversion Value = $750,000.
Conclusion: The estimated future sale value is $750,000.
Example 3: Lower Risk / Higher Growth Expectation
Scenario: A stable property in a prime location might command a lower exit Cap Rate.
1. Known Values: Projected Future NOI = $150,000, Terminal Cap Rate = 6.0%.
2. Formula: Reversion Value = NOI / (Cap Rate / 100)
3. Calculation: Reversion Value = $150,000 / (6.0 / 100) = $150,000 / 0.06
4. Result: Reversion Value = $2,500,000.
Conclusion: The estimated future sale value is $2,500,000.
Example 4: Using a Decimal Cap Rate
Scenario: Calculation using a Cap Rate with a decimal.
1. Known Values: Projected Future NOI = $200,000, Terminal Cap Rate = 7.5%.
2. Formula: Reversion Value = NOI / (Cap Rate / 100)
3. Calculation: Reversion Value = $200,000 / (7.5 / 100) = $200,000 / 0.075
4. Result: Reversion Value = $2,666,666.67.
Conclusion: The estimated future sale value is approximately $2,666,667.
Example 5: Smaller Investment
Scenario: Estimating the sale value for a smaller investment property.
1. Known Values: Projected Future NOI = $25,000, Terminal Cap Rate = 9.0%.
2. Formula: Reversion Value = NOI / (Cap Rate / 100)
3. Calculation: Reversion Value = $25,000 / (9.0 / 100) = $25,000 / 0.09
4. Result: Reversion Value = $277,777.78.
Conclusion: The estimated future sale value is approximately $277,778.
Example 6: Impact of Higher NOI
Scenario: How a higher projected NOI impacts value (holding Cap Rate constant).
1. Known Values: Projected Future NOI = $120,000, Terminal Cap Rate = 8.0%.
2. Formula: Reversion Value = NOI / (Cap Rate / 100)
3. Calculation: Reversion Value = $120,000 / (8.0 / 100) = $120,000 / 0.08
4. Result: Reversion Value = $1,500,000.
Conclusion: Compared to Example 1 ($100k NOI), the higher NOI results in a higher Reversion Value.
Example 7: Impact of Higher Cap Rate
Scenario: How a higher Cap Rate impacts value (holding NOI constant).
1. Known Values: Projected Future NOI = $100,000, Terminal Cap Rate = 10.0%.
2. Formula: Reversion Value = NOI / (Cap Rate / 100)
3. Calculation: Reversion Value = $100,000 / (10.0 / 100) = $100,000 / 0.10
4. Result: Reversion Value = $1,000,000.
Conclusion: Compared to Example 1 (8% Cap Rate), the higher Cap Rate results in a lower Reversion Value.
Example 8: Commercial Property
Scenario: Estimating the future value of a commercial property.
1. Known Values: Projected Future NOI = $500,000, Terminal Cap Rate = 7.0%.
2. Formula: Reversion Value = NOI / (Cap Rate / 100)
3. Calculation: Reversion Value = $500,000 / (7.0 / 100) = $500,000 / 0.07
4. Result: Reversion Value = $7,142,857.14.
Conclusion: The estimated future sale value for this commercial property is approximately $7.14 million.
Example 9: Industrial Property
Scenario: Estimating the future value of an industrial property.
1. Known Values: Projected Future NOI = $300,000, Terminal Cap Rate = 9.5%.
2. Formula: Reversion Value = NOI / (Cap Rate / 100)
3. Calculation: Reversion Value = $300,000 / (9.5 / 100) = $300,000 / 0.095
4. Result: Reversion Value = $3,157,894.74.
Conclusion: The estimated future sale value for this industrial property is approximately $3.16 million.
Example 10: Very Low Cap Rate
Scenario: Estimating value in a market with very low yield expectations (low Cap Rate).
1. Known Values: Projected Future NOI = $80,000, Terminal Cap Rate = 4.0%.
2. Formula: Reversion Value = NOI / (Cap Rate / 100)
3. Calculation: Reversion Value = $80,000 / (4.0 / 100) = $80,000 / 0.04
4. Result: Reversion Value = $2,000,000.
Conclusion: A very low Cap Rate results in a high valuation relative to income.
Frequently Asked Questions about Reversion Value
1. What is Reversion Value?
Reversion Value is the estimated market value of an asset, typically real estate, at the end of a specific holding period. It's the value expected when the property is sold in the future.
2. How is the simple Reversion Value calculated?
The most basic method is dividing the Projected Future Net Operating Income (NOI) by the Terminal Capitalization Rate (Cap Rate) expected at the time of sale.
3. What is Projected Future NOI?
This is the estimated annual income the property will generate in the year you plan to sell it, after deducting all anticipated operating expenses.
4. What is Terminal Cap Rate?
The Terminal Cap Rate is the market capitalization rate expected at the time of the future sale. It reflects the yield a future buyer would expect on the property's income.
5. Why do I divide the Cap Rate by 100?
The Cap Rate is typically expressed as a percentage (e.g., 8%). For the calculation, you need to use its decimal form (e.g., 0.08), which is obtained by dividing the percentage by 100.
6. What units should I use for input?
Ensure you use consistent currency units for Projected Future NOI. The Terminal Cap Rate is a percentage. The resulting Reversion Value will be in the same currency unit as your NOI.
7. When is Reversion Value used?
It is primarily used in real estate valuation, particularly within Discounted Cash Flow (DCF) analysis, to estimate the future lump sum cash flow from the sale of an asset.
8. Is this calculation the same as a Discounted Cash Flow (DCF) analysis?
No, this tool only calculates the Reversion Value component *within* a DCF analysis. A full DCF also forecasts and discounts annual cash flows during the holding period and sums them with the discounted Reversion Value to find the present value.
9. Can the Reversion Value be zero or negative?
In this basic calculation, if Projected Future NOI is zero (or negative) and the Terminal Cap Rate is positive, the Reversion Value would be zero (or negative). However, the tool prevents non-negative NOI input. A zero or negative Cap Rate would imply infinite or negative value, which is not standard for this model, and the tool prevents non-positive Cap Rate input.
10. What factors influence the Terminal Cap Rate?
Many factors influence the future Terminal Cap Rate, including expected future market conditions, interest rates, inflation, property-specific risks, property type, age, condition, and location.
