How do you determine the ARV for multi-family properties such as duplexes or apartment complexes?
For commercial apartments over 5 units value is determined as a part of revenue. If you buy a property and current rents are about $400 per month for example and you put $10k per unit in and can now get market rents of $500 per month you just increased the value of the property.
If however rents are for example $400 per month and you bought a neglected property with a lot of defered maintence and when your $10k per unit is completed you can only get $400 per month per unit you did not change value very much but might have increased the life span of the property by 10 or 15 years.
In a 1 to 4 unit property value is determined by comps and not by income / expenses (Cap Rate).
Single family is from 1 to 4 units. These are valued based on comps. The value of the building is based on the sold comps of every other building just like it in the same area. That means that no matter how much money you put into it the value is capped at the value of every other build in the area.
The value of a 5 or more unit building is based on its operating income and cap rate. The cap rate classifies the building. The value is then based on the operating income of a building within that cap rate. A building right next door will be valued without regard to your building. It depends instead on how well it is being run. Occupancy rate expenses and rent rates go into that valuation.
With that in mind if you have a duplex up to a fourplex you have a bastard building. It is neither fish nor fowl. You operate it like a multifamily but it is valued as a single family. You are concerned with common maintenance and tenant behavior etc. You don’t, however, get very much economy of scale. You have problems with comps because there is not likely to be those types of units in the near vicinity and you have to go further than is comfortable to find comps. The owners of these types of properties tend to be low sophistication investors with owner financed deals because of their low credit strength and the difficulty of obtaining traditional financing because of the valuation problems. That means the location keeps the value low and it is very difficult to move their value based on your operation. So you get all the problems of multifamily without the benefits of multifamily.