Residual value is the projected sale price of a property at the end of a projected hold period. Central input for IRR calculations — often the single largest contributor to projected returns.
In a multifamily underwriting model, residual value is calculated by applying an assumed exit cap rate to the projected NOI at sale. Because this is often 5–10 years in the future, assumptions about cap rate trajectory and rent growth drive large swings in projected returns.
For LA multifamily 2026, residual value underwriting has become more conservative than 2021 — exit cap rates modeled wider, rent growth modeled slower. Residual values from 2021 underwriting often look optimistic in hindsight. Buyers apply realistic (not aspirational) residual assumptions.
From the Sterman LA Multifamily Glossary — defined the way a broker with $1.41 billion across 254 closed transactions actually uses these terms.
Michael Sterman, Senior Managing Director Investments, Marcus & Millichap.
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