Seeking Advice: Is $850K a Reasonable Offer for This Multifamily Property?

[Tayvion Payton]

I’m considering a 20-unit multifamily property listed at $1.6M, but the seller has indicated they’re willing to accept $1.25M. Here's a breakdown of the situation:

• Current Occupancy: 80% (16/20 units occupied).
• Current Gross Rent Roll: $14,265/month.
• Market Rent Potential: $17,665/month (100% occupancy).
• Renovation Needs: 15 units require full renovation ($10K/unit), 4 units are 75% renovated ($2.5K/unit), totaling $160K in renovation costs.
• Vacancy Loss: $41,820/year in lost income due to current vacancies.

Cap Rate Analysis

The seller lists the cap rate as 9.59%, but this is based on the projected NOI of $119,858 (assuming full occupancy and market rents). In its current state:

• Current NOI: $79,058 (based on 80% occupancy).
• Current Cap Rate (at $1.25M): 6.32%, reflecting the property’s as-is performance.
• Value at a 7.5% Cap Rate (Market): $1.05M, based on current NOI.

Given the renovations, vacancies, and risks tied to stabilizing the property, I’m considering offering $850K to reflect its current state and value-add potential. Does this approach seem reasonable, or am I undervaluing the property? I’d appreciate feedback from experienced investors!