Transitioning from SFRs to Small Multi's

[Matt Inouye]

Hi BP Community,

I am starting to look into multi-families as the next phase of my REI journey. (just some back history - I have a few SFRs and a duplex as buy and holds but am becoming interested in slightly bigger deals). My question is two-fold:

1 - I was hoping to receive some guidance in figuring out a "prudent" way of valuing a 5-10 unit property.  I live in a crazy-stupid expensive area of the country so I have to stress this is not a discussion of Good vs Bad deal... but rather potential ways to come up with valuation(s) based on what the market's willing to accept.

2 - If anyone invests/speculates down in Orange County California, is a 4.5% cap about the going rate for the county? or are there more specific cap rates as you drill down.

Current Scenario:

Asking: $1,000,000

Current Rents: $50,000 (ttm) - owner is under market

Expenses: $10,000 (ttm) - low prop taxes, bought in 2011

Actual NOI: $40,000

Cap Rate for Property: 4%

Potential Future Scenario:

Potential Market Rents: $70,000 (conservative... utilizing numbers 15% below what rentometer.com says is average for area)

Expenses: $20,000 (higher prop tax)

Potential NOI: $50,000

CapEX: $100,000 (to bring units up to current rent)

Avg. Cap Rate For Area: 5%

My (VERY LIMITED) attempt at trying to calculate a valuation:

If I back into this with average area cap rates (5%)  and actual NOI ($40K) I get a valuation of: $800,000 ($40,000/5%)

If I back into it using "potential" future numbers I get: $900,000 => $1,000,000 ($50,000/5%) - $100,000 CapEx

It almost seems as if the owner is trying to achieve a valuation for potential market rents without having first pushed the rent increases through.

Any thoughts on different ways to value an under-rent property in need of some capex?

Thanks in advance

Matt