9 months later -> deal #2

[Masroor Ahmed]

About 9 months ago, I bought my first REI, a 7-unit for $250K. It's maybe a B- neighborhood and the major lesson has been that vacancies are tough to keep down. I priced the deal assuming 15% vacancy and so far it's been ~25% effective vacancy. I've already put in 2 evictions and maybe another one coming. However, my property management firm is doing decent and getting solid/new tenants. That all being said…

Now my neighboring 2 buildings are off-MLS but up for sale. Two buildings, 19-units in total. Obviously, I'm excited to have a look. Here are the high level numbers – mostly based on my own estimates being a recent owner next door:

$119K Scheduled Rent

$93K Actual Rental income

$9K Mgmt Fees (9%)

$20K RE taxes

$15K ($50/unit/mo + $200/mo. exterior lawn/snow)

$9K Insurance (This is an est based on my 7-unit costing $3.5K)

$15K Utilities

$5K CapEx/reserves

$20K NOI (of course they provided a much higher NOI estimate)

Feel free to question my assumptions, but the real difficulty I'm having is assessing what vacancy rate I should assume in valuing the building. To put another way, if I price it on current NOI @ 8% cap (which is about right for this deal), that implies $250K or $13K/unit. However, looking at MF comps (which probably have much better vacancy rate), they're more around $35K/unit. And besides, I paid $35K/unit recently and you could argue I overpaid, but not that much. This vacancy issue means that at $450K I could be getting a steal, or could be inheriting zero cash flow and a subpar return. What would you offer? (FYI they're asking $590K FWIW).