Reversion Value: Meaning, Formula, Example

If you're digging deeper into real estate investment analysis, chances are you've come across the term reversion . It might sound a bit abstract, but it’s one of the most important concepts to understand when you're thinking long-term especially when modeling the future profitability of a property.

In this post, we’ll break down what reversion value means, how it’s used, some of its real-world limitations, and what it looks like in a practical investment scenario.

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What Is Reversion Value?

The reversion value is essentially the amount you expect to sell a property for at the end of your planned holding period. In other words, it’s the projected resale value of a real estate asset down the road—usually calculated as part of a discounted cash flow (DCF) analysis.

This is not the same as what the property is worth today. Instead, it represents a future dollar (or pound) amount based on assumptions about what the market and the property will look like years from now. You typically estimate it by applying a terminal capitalization rate to the property’s forecasted Net Operating Income (NOI) in the final year.

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Why Does Reversion Value Matter?

Reversion value plays a critical role in evaluating whether a deal is worth pursuing. It's used to:

• Estimate your total return on investment, especially in long-term projections.

• Inform your exit strategy, helping you decide when to sell or refinance.

• Guide acquisition pricing, especially for institutional buyers and syndicators.

  
  

That said, it comes with a big asterisk: it’s only as good as your assumptions. You’re predicting future property income, market conditions, and capitalization rates all of which can shift dramatically due to interest rates, economic cycles, or property-specific issues.

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Real-World Example

Let’s say you buy a multifamily building for £1.5 million, and you plan to hold it for 7 years. Your projected Net Operating Income (NOI) in year 7 is £125,000. You expect the market cap rate at that time to be 6.25%.

Here’s how you calculate the reversion value:

Reversion Value = Year 7 NOI ÷ Terminal Cap Rate

Reversion Value = £125,000 ÷ 0.0625 = £2,000,000

This £2 million becomes your “exit price” in the financial model. You’d then discount that value back to today using your discount rate (let’s say 10%) to understand what it’s worth in today’s dollars. That figure, combined with your annual net cash flows, helps you determine the investment’s Internal Rate of Return (IRR).

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Limitations of Reversion Value

While it’s a useful tool, reversion value can be dangerously misleading if used carelessly. Here’s why:

• Cap rate assumptions are subjective. A small change can shift the value significantly.

• Future NOI is speculative. Vacancy, maintenance, and market shifts can throw off your projections.

• Market conditions change. A recession or overbuilding in the area could suppress resale value.

  
  

This is why many professional investors run sensitivity analyses testing multiple reversion scenarios with different cap rates and NOI projections to understand the full risk range.

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Final Thoughts

Reversion value isn’t just a number—it’s a bet on the future. If you use it wisely, it can help you project returns and make smarter investment decisions. But if you rely too heavily on best-case assumptions, it can paint an unrealistic picture of your deal’s potential.

Before locking in a reversion value, ask yourself: Is this a conservative projection? What if the market changes? What’s my backup plan? The answers to those questions are what truly set apart smart investors from hopeful speculators.