Value of a MF property to be renovated

How do you value MF property in need of repairs?
I thought about this approach. Please comment:
1) Calculate value if innovated: $100,000
2) Calculate loss in rental income: $5,000 for the first year
3) Calculate repair costs: $20,000
4) Calculate value of the property (1)-(2)-(3).
Do you take any extra discount in additional to what I have above?
Do you use a different cap rate/discount rate for CFs for distressed properties to adjust the price?
Thank you!
In Buying Property - Asked by Jane T. - May 16, 2013
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Stanley P.
Downey, CA

You are taki ng more risk in this investment so you definately need a higher cap rate. However , competition for a $100,000 building is probably smaller investors who will be focused on cash flow; not cap rates.
I am told class A apartment cap rates in major cities are now between 3 and 4 percent and as high as 8 percent in less desireable cities/properties.

May 17, 2013
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David M.
Mobile, AL

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,
David Monroe
Commercial Real Estate Consultant

May 22, 2013
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Philicia L.
Brooklyn, NY

If you are valuing a distressed MF property, you can use the Sales Comparison to develop both “As Is" and “As Repaired" values. I would also recommend you establish the market rent by actually developing a rent comparable analysis. If you want to develop the Income Approach using the Gross Rent Multiplier (GRM) is also applicable, however it is key that you know your market rents and rent terms for your area. I always tell my Investment Clients to download the Appraisal Forms from the Fanniemae website and use the Sales and Income grids as a guideline for your analysis.

May 24, 2013
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Timothy C.
Chesapeake, VA

Start with how much the property would rent when fully renovated. Then drive down your operating expenses to derive NOI and value the property at your market's cap rate for similar properties. Then do a discounted cash flow analysis to account for 1. capital improvements 2. lease up time. That will provide you with the value.

Jun 14, 2013
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