The property should definitely be valued on income. The cost/unit is more of a rule which originates from income of the property.
Ray Alcorn teaches determining the value using the income approach, replacement cost, and comparable sales all combined to form the big picture based on your investment criteria.
The income approach usually carries the most weight but all of them are only as good as the information used in determining the value.
24 unit multi-family property in downtown Indianapolis. Can be bought for about $330,000. It needs probably around $250,000 in rehab. All units are small 2BR/1BA apartments. I’m figuring rents to be about $570/unit when completed. Expense rates to be around 45%. So, yearly NOI should be around $90,000. Based on those numbers, I’m thinking end value should be about $900,000, so a cash-out refinance should provide an exit for my initial cash investment.
My biggest concern here is that I’m hearing typical value per unit is more like $20-25,000 per unit. Which would put this property at around $600,000 rather than the $900,000. If this is the case, I’d be drastically overpaying for the property. On the other hand, my figures translate into a 10% cap rate which seems reasonable for this type of investment. I know that commercial property is valued primarily on income, so I assume that the NOI is more relevant than cost/unit.
Sounds like you have some questions on the rehabbed property value. Look at the recent sales and for lease side of LoopNet for your market area. It can give you an idea of the competing rents, amount of competition (vacancies) and similar property sales prices. LoopNet does charge a monthly subscription for this, but it will help you get a sense of your market. There are also probably other sources for your area, so check them as well.