On 2-4 family homes you typically aren't going to use cap/discount rates because these properties are not considered commercial by the lending institutions. You would value the property based on comparables in the area on it's after repair state because this is how an appraiser is going to value. Even though you are purchasing the property for cash flow, because it's not considered commercial from the lender, the appraiser is going to value the same way they would for a single family residence.
On 5 units and above you want to determine what the stabilization rate, the number of units rented for break even cash flow, then determine the amount of time it will take you to get to stabilization. This needs to be factored into the renovation budget, much like you did for lost rent in you question example. The cap/discount rates differ from market to market. Distressed class C properties in my market are going for 10-12%.
All the Best,
Commercial Real Estate Consultant
May 22, 2013