Tale of two Properties and the road less traveled

[Pete Harper]

I'm evaluating two commercial deals and looking for feedback.  This will be our second commercial deal. Previously we purchased a 12 unit property off-market.  Both properties are in super small markets, city size 3000-5000 people, hence the road less traveled.  Being a small market there are no recent comps other than our own purchases over the past two years.  I'm having a bit of trouble coming up with a cap-rate; numbers range from 6-10%.

Property A 1985: 24 units, 2B/1BA, asking $800K, Rents $600-650, 90%(est) occupancy, water-sewer-trash provided, onsite laundry. Gross Rent=$180k (est), Expenses=$104k(est), NOI=$76k(est). It needs a new roof $100k, Closing cost $16k, all in $916K asking Cap-rate 8.3%

Property B 1981: 60 units, 2B/1BA, asking $3M, Rents $440-725, 82% occupancy not including 27% delinquent or 55% paying, separate meters, in-unit W/D. No amenities (pool etc). Gross Rent=$434k, Expenses=$289k, NOI=$145k From the curb I can see a lot of issues; boarded up windows, fogged windows, feral cats living in crawlspace and etc.. A couple things struck me going through financials. They are paying 7% PM fee to out of state company plus another 17% to on-site PM. At 24% PM fee I would expect better management. All-in $3.1M asking Cap-rate 4.7%

Other things to consider.  We currently own 18 units in the same city as Property A.  We have had near 100% occupancy for the past year. In fact we have a waiting list even pulling tenants from property A.  The only open units have been undergoing renovations.  If we purchase property A we will be the #2 landlord in the city. Property B is in a neighboring town about 25 miles away.  I can tell they have struggled to fill their vacancies by the "$675 first months rent free" signs all over town.  The numbers scream "miss management" to me.  Property B is the largest property in its city. (Big fish little pond?)

Thoughts?