What Cap rate to use for property valuation?

[Johnathan Norman]

So I am considering purchasing a small 6 unit apartment complex in Cleveland, OH all cash. The rents are below market and i feel with a little work the building could at minimum at market rates. Then after a year or so I'd like to cash out refinance the property to get capital for other investments later. 

My problem is i'm unsure how the banks will value the property. Cap rates in the area are all over the place (from 6% to 30%) so i'm unsure of what to use in my estimates. It is a class C property.  Any thoughts here? 

Also is there any potential for something preventing me from doing a cash out refinance later? assuming of course i'm able to keep the rents stable. 

[James Wise]

Originally posted by @Johnathan Norman:

So I am considering purchasing a small 6 unit apartment complex in Cleveland, OH all cash. The rents are below market and i feel with a little work the building could at minimum at market rates. Then after a year or so I'd like to cash out refinance the property to get capital for other investments later. 

My problem is i'm unsure how the banks will value the property. Cap rates in the area are all over the place (from 6% to 30%) so i'm unsure of what to use in my estimates. It is a class C property.  Any thoughts here? 

Also is there any potential for something preventing me from doing a cash out refinance later? assuming of course i'm able to keep the rents stable. 

 A building of this size they will use a combination of the income approach but still weigh the market comparables. If your talking about the building I think you are talking about appraisers will heavily weigh the value of this property on the sales price of comparable buildings as well as the rents that said comparable buildings are receiving. 

I know this as there are many buildings near this building that are almost an identical build to one another & I own or manage a large majority of them. I often get calls from appraisers looking for my opinion on what buildings of this size in that area go for and rent for etc...

On a side note there are no buildings in the Cleveland area that are trading at a 30 CAP. If there were I would probably not be on this site talking to any of you. I'd be burning through pencils writing purchase offers and making sure that none of you ever found out about my gold mine. lol. If you ever see something trading at a 30 CAP that is either an error in the Pro-forma or some type of variable cost has been left off.

Buildings built 1950+ of this size and area are typically trading at a 4-7 CAP. Small commercial Inventory is really tightening up around here and my guess is that number is going to keep going towards 4 and possibly below it in the coming months.

Hope that helps.

Good luck to you & I'll see you around the forums.