Calculating ARV for an 8-Unit When There Are No True Comps
Joseph EscamillaPro Member
Lender · Charleston, SC · Member since 2018 · 41 posts · 14 votesCalculating ARV for an 8-Unit When There Are No True Comps
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Greg ScottPro Member
Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votesYou are mixing single family and apartment vernacular. Remove "comps" from your vocabulary.
You have an existing NOI. You just need to know the prevailing cap rate is for properties like the one you are looking at. Smaller properties tend to have higher cap rates than bigger ones. If this is in a B or C class neighborhood, the prevailing cap rate is probably in the 6-7% range.
At NOI of $70K would put the current value of the property at $1M to $1.16M. If you can improve NOI to $85K that would put the value to $1.21 to $1.42M.
Of course, if you are using this to try to estimate what sort of leverage you can get, the valuation is somewhat irrelevant. The NOI will drive the loan size, and most loans are limited by their DSCR, not their appraised value.
11 Replies
- 8moGreg ScottPro MemberRental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
You are mixing single family and apartment vernacular. Remove "comps" from your vocabulary.
You have an existing NOI. You just need to know the prevailing cap rate is for properties like the one you are looking at. Smaller properties tend to have higher cap rates than bigger ones. If this is in a B or C class neighborhood, the prevailing cap rate is probably in the 6-7% range.
At NOI of $70K would put the current value of the property at $1M to $1.16M. If you can improve NOI to $85K that would put the value to $1.21 to $1.42M.
Of course, if you are using this to try to estimate what sort of leverage you can get, the valuation is somewhat irrelevant. The NOI will drive the loan size, and most loans are limited by their DSCR, not their appraised value.
- Lender · Charleston, SC · Member since 2018 · 41 posts · 14 votes8mo
Quote from @Greg Scott:
You are mixing single family and apartment vernacular. Remove "comps" from your vocabulary.
You have an existing NOI. You just need to know the prevailing cap rate is for properties like the one you are looking at. Smaller properties tend to have higher cap rates than bigger ones. If this is in a B or C class neighborhood, the prevailing cap rate is probably in the 6-7% range.
At NOI of $70K would put the current value of the property at $1M to $1.16M. If you can improve NOI to $85K that would put the value to $1.21 to $1.42M.
Of course, if you are using this to try to estimate what sort of leverage you can get, the valuation is somewhat irrelevant. The NOI will drive the loan size, and most loans are limited by their DSCR, not their appraised value.
Thank you Greg this is great info!
The property is a C class building. It's definitely tough for me to remove comps from my vocabulary because that is all i know! lol
For example, by your math (which I totally agree with) the current value of the property would be $1,000,000 (if using 7% cap rate). It's been listed for months @ $755k with no major issues. The seller has told us he would even take $660k! It almost seems too good to be true. This is what causes me to continue to revert back to trying to find comps. I'm torn between thinking I'd be the idiot for buying it or a genius.
Lastly, I understand the DSCR ratio - but if doing a cashout refi, most lenders cap the LTV at 70%-75% of the appraised value regardless of DSCR ratio. Please correct me if i am missing something there.
Thanks again!!
- Lender · Charleston, SC · Member since 2018 · 41 posts · 14 votes8mo
Quote from @Joseph Escamilla:
Quote from @Greg Scott:
You are mixing single family and apartment vernacular. Remove "comps" from your vocabulary.
You have an existing NOI. You just need to know the prevailing cap rate is for properties like the one you are looking at. Smaller properties tend to have higher cap rates than bigger ones. If this is in a B or C class neighborhood, the prevailing cap rate is probably in the 6-7% range.
At NOI of $70K would put the current value of the property at $1M to $1.16M. If you can improve NOI to $85K that would put the value to $1.21 to $1.42M.
Of course, if you are using this to try to estimate what sort of leverage you can get, the valuation is somewhat irrelevant. The NOI will drive the loan size, and most loans are limited by their DSCR, not their appraised value.
Thank you Greg this is great info!
The property is a C class building. It's definitely tough for me to remove comps from my vocabulary because that is all i know! lol
For example, by your math (which I totally agree with) the current value of the property would be $1,000,000 (if using 7% cap rate). It's been listed for months @ $755k with no major issues. The seller has told us he would even take $660k! It almost seems too good to be true. This is what causes me to continue to revert back to trying to find comps. I'm torn between thinking I'd be the idiot for buying it or a genius.
Lastly, I understand the DSCR ratio - but if doing a cashout refi, most lenders cap the LTV at 70%-75% of the appraised value regardless of DSCR ratio. Please correct me if i am missing something there.
Thanks again!!
I'll add that of course this is not the only metric we are looking at to see if its a good deal. Other metrics check out, but we are specifically trying to figure out what this ARV will be so we can cash out refi.
- 8moGreg ScottPro MemberRental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votesBased on further detail you have provided, I can almost certainly tell you what is going on here. The sellers probably have very low expenses because they are not paying for their own labor. That drives NOI up artificially high. Since the property has been sitting, I'll bet if you apply a true level of expenses, the NOI is much lower.
Quote from @Joseph Escamilla:
Quote from @Greg Scott:
You are mixing single family and apartment vernacular. Remove "comps" from your vocabulary.
You have an existing NOI. You just need to know the prevailing cap rate is for properties like the one you are looking at. Smaller properties tend to have higher cap rates than bigger ones. If this is in a B or C class neighborhood, the prevailing cap rate is probably in the 6-7% range.
At NOI of $70K would put the current value of the property at $1M to $1.16M. If you can improve NOI to $85K that would put the value to $1.21 to $1.42M.
Of course, if you are using this to try to estimate what sort of leverage you can get, the valuation is somewhat irrelevant. The NOI will drive the loan size, and most loans are limited by their DSCR, not their appraised value.
Thank you Greg this is great info!
The property is a C class building. It's definitely tough for me to remove comps from my vocabulary because that is all i know! lol
For example, by your math (which I totally agree with) the current value of the property would be $1,000,000 (if using 7% cap rate). It's been listed for months @ $755k with no major issues. The seller has told us he would even take $660k! It almost seems too good to be true. This is what causes me to continue to revert back to trying to find comps. I'm torn between thinking I'd be the idiot for buying it or a genius.
Lastly, I understand the DSCR ratio - but if doing a cashout refi, most lenders cap the LTV at 70%-75% of the appraised value regardless of DSCR ratio. Please correct me if i am missing something there.
Thanks again!!
Regarding LTV, that formula is almost self-correcting. NOI drives how much DSCR you can afford. NOI also drives value, so what you can afford goes up as the price goes up. Interest rates drive what your mortgage payment can be and therefore affect your DSCR. Interest rates also affect cap rates so as interest rates go up values go down. In other words, higher interest rates will push down on what you can afford, but they also push down the value of the property.
The exception to the above paragraph is when your expenses are artificially low because you have been donating free labor. - Lender · Charleston, SC · Member since 2018 · 41 posts · 14 votes8mo
Quote from @Greg Scott:
Based on further detail you have provided, I can almost certainly tell you what is going on here. The sellers probably have very low expenses because they are not paying for their own labor. That drives NOI up artificially high. Since the property has been sitting, I'll bet if you apply a true level of expenses, the NOI is much lower.Quote from @Joseph Escamilla:
Quote from @Greg Scott:
You are mixing single family and apartment vernacular. Remove "comps" from your vocabulary.
You have an existing NOI. You just need to know the prevailing cap rate is for properties like the one you are looking at. Smaller properties tend to have higher cap rates than bigger ones. If this is in a B or C class neighborhood, the prevailing cap rate is probably in the 6-7% range.
At NOI of $70K would put the current value of the property at $1M to $1.16M. If you can improve NOI to $85K that would put the value to $1.21 to $1.42M.
Of course, if you are using this to try to estimate what sort of leverage you can get, the valuation is somewhat irrelevant. The NOI will drive the loan size, and most loans are limited by their DSCR, not their appraised value.
Thank you Greg this is great info!
The property is a C class building. It's definitely tough for me to remove comps from my vocabulary because that is all i know! lol
For example, by your math (which I totally agree with) the current value of the property would be $1,000,000 (if using 7% cap rate). It's been listed for months @ $755k with no major issues. The seller has told us he would even take $660k! It almost seems too good to be true. This is what causes me to continue to revert back to trying to find comps. I'm torn between thinking I'd be the idiot for buying it or a genius.
Lastly, I understand the DSCR ratio - but if doing a cashout refi, most lenders cap the LTV at 70%-75% of the appraised value regardless of DSCR ratio. Please correct me if i am missing something there.
Thanks again!!
Regarding LTV, that formula is almost self-correcting. NOI drives how much DSCR you can afford. NOI also drives value, so what you can afford goes up as the price goes up. Interest rates drive what your mortgage payment can be and therefore affect your DSCR. Interest rates also affect cap rates so as interest rates go up values go down. In other words, higher interest rates will push down on what you can afford, but they also push down the value of the property.
The exception to the above paragraph is when your expenses are artificially low because you have been donating free labor.Great points thank you very much !
- 8moFrank PyleBusiness MemberSpecialist · USA · Member since 2024 · 279 posts · 130 votes
Yeah for small multifamily, ARV is basically stabilized NOI divided by a cap rate, but the cap rate is the whole game and it rarely comes from perfect 8 unit comps in the same few blocks.
Most appraisers I see will triangulate it using any recent sales they can support, even if that means 4 to 6 units, 10 to 20 units, nearby neighborhoods, and older sales adjusted for market movement. They back into cap rates from those sales, sanity check with broader market reports and lender data, then apply a risk premium or discount for things like condition, tenant quality, location nuance, and how believable the rent bumps are. Price per unit and price per square foot show up as secondary checks, but the narrative usually lives in the income approach and the strength of the rent comp package.
On forced appreciation, expect them to be conservative unless you can prove market rents with tight comps and show the rehab scope is real and funded. A lot of times they will give you a value on current in place income and then a separate as stabilized value that still uses a slightly higher cap rate or a haircut on pro forma rents.
What cap rate range are you underwriting and what is purchase price? Also are your rent increases based on actual nearby lease comps for similar unit size and condition, or more of a market average number you are targeting?
- Lender · Charleston, SC · Member since 2018 · 41 posts · 14 votes8mo
Quote from @Frank Pyle:
Yeah for small multifamily, ARV is basically stabilized NOI divided by a cap rate, but the cap rate is the whole game and it rarely comes from perfect 8 unit comps in the same few blocks.
Most appraisers I see will triangulate it using any recent sales they can support, even if that means 4 to 6 units, 10 to 20 units, nearby neighborhoods, and older sales adjusted for market movement. They back into cap rates from those sales, sanity check with broader market reports and lender data, then apply a risk premium or discount for things like condition, tenant quality, location nuance, and how believable the rent bumps are. Price per unit and price per square foot show up as secondary checks, but the narrative usually lives in the income approach and the strength of the rent comp package.
On forced appreciation, expect them to be conservative unless you can prove market rents with tight comps and show the rehab scope is real and funded. A lot of times they will give you a value on current in place income and then a separate as stabilized value that still uses a slightly higher cap rate or a haircut on pro forma rents.
What cap rate range are you underwriting and what is purchase price? Also are your rent increases based on actual nearby lease comps for similar unit size and condition, or more of a market average number you are targeting?
Thank you Frank for this info this is super helpful. So sounds like from what you are saying, cap rate is the determining factor but in order to get the cap rate an appraiser kind of backs into it using all the other market data? So wouldn't that mean they are technically using comps?
From research and advice I am finding that a C class property usually has a cap rate between 6%-8% (correct me if you disagree). Purchase price is $660,000. At $70k in NOI, that would be a 10.6% cap rate. If I could stabilize NOI at $85k and use the same cap rate you're telling me this property should be worth $800k+? It just almost seems too good to be true.
And yes we are using rental comps to come up with that future NOI.
Thank you !
Joe
- Lender · Marlboro, NJ · Member since 2025 · 243 posts · 149 votes8mo
This is a very real issue with small multifamily, and you’re asking the right questions.
At a high level, yes, value is ultimately tied to NOI and a cap rate, but for 5–10 unit properties appraisers rarely treat it as a pure formula exercise.
In situations with limited comps, appraisers usually triangulate value using a mix of:
- Imperfect local sales (often 4–6 units if that’s what exists)
- Nearby submarkets with similar tenant profiles and asset age
- A band-of-investment approach to sanity-check the income value
Small multifamily almost always trades at a higher cap rate than institutional assets, even when the income profile looks strong, due to buyer pool, management intensity, and liquidity. That alone can temper ARV expectations.
When you’re forcing appreciation, most appraisers will be conservative. In practice, they tend to:
- Anchor heavily to in-place NOI
- Give partial, not full, credit for projected rent increases
- Require clear evidence that the higher NOI is achievable and sustainable
Deferred maintenance and condition usually show up through adjustments or effective NOI assumptions rather than a big swing in cap rate. Price per unit is typically more of a reasonableness check than a primary driver.
The key underwriting takeaway is to assume the appraisal may land somewhere between current NOI and fully stabilized NOI, at least initially. If the deal only works when 100% of the NOI increase is immediately capitalized, it's fragile. If it still works with a haircut, you're probably on solid footing.
This tension between income upside and conservative valuation is pretty common on small MF value-add deals, so you’re not off base at all.
- Lender · Charleston, SC · Member since 2018 · 41 posts · 14 votes8mo
Quote from @Pierre Guirguis:
This is a very real issue with small multifamily, and you’re asking the right questions.
At a high level, yes, value is ultimately tied to NOI and a cap rate, but for 5–10 unit properties appraisers rarely treat it as a pure formula exercise.
In situations with limited comps, appraisers usually triangulate value using a mix of:
- Imperfect local sales (often 4–6 units if that’s what exists)
- Nearby submarkets with similar tenant profiles and asset age
- A band-of-investment approach to sanity-check the income value
Small multifamily almost always trades at a higher cap rate than institutional assets, even when the income profile looks strong, due to buyer pool, management intensity, and liquidity. That alone can temper ARV expectations.
When you’re forcing appreciation, most appraisers will be conservative. In practice, they tend to:
- Anchor heavily to in-place NOI
- Give partial, not full, credit for projected rent increases
- Require clear evidence that the higher NOI is achievable and sustainable
Deferred maintenance and condition usually show up through adjustments or effective NOI assumptions rather than a big swing in cap rate. Price per unit is typically more of a reasonableness check than a primary driver.
The key underwriting takeaway is to assume the appraisal may land somewhere between current NOI and fully stabilized NOI, at least initially. If the deal only works when 100% of the NOI increase is immediately capitalized, it's fragile. If it still works with a haircut, you're probably on solid footing.
This tension between income upside and conservative valuation is pretty common on small MF value-add deals, so you’re not off base at all.
This is all super helpful thank you Pierre!
- 8moFrank PyleBusiness MemberSpecialist · USA · Member since 2024 · 279 posts · 130 votes
Yes, they are using comps, just income comps. Appraisers back into value using market rent comps to support NOI and cap rates pulled from recent sales of similar rental properties.
Your math is right, but the big question is whether the cap rate stays the same after you stabilize. If it is trading at a 10.6 cap at 660k, the market is pricing in risk like collections, deferred maintenance, management, tenant quality, or shaky income. If you truly get to 85k NOI and the market would pay an 8 cap, that points closer to 1.06M, so something in the assumptions is off or the market cap on stabilized will still be high.
Do this today, rebuild NOI from trailing expenses and include property management, vacancy, bad debt, maintenance, and capex reserves plus higher taxes and insurance after sale.
What is the current rent and occupancy, and are your taxes and insurance based on post purchase estimates or the current owner bills?
- Rental Property Investor · Henrico, VA · Member since 2019 · 265 posts · 155 votes8mo
Have you walked the property, familiar with the neighborhood? I wonder about tenant quality and the neighborhood security (crime) and potential headaches the current owner may have, and possible deferred maintenance/major repair. Are current tenants staying or vacating? Class C building or neighborhood or both? If the neighborhood is ok, could be promising and work on the rest potentially. The other thing is there are probably just less eyes on it being over 4 units and commercial, but still small enough to not attract larger investors. It's a nice size I think.
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