Advice on First Deal - lemon or an opportunity?

[Aaron Hurst]

I'm getting closer to making an offer on an out-of-state class C buy-and-hold multifamily property.    I'm looking for a >10% cash-on-cash return.  However, I've seen the full income statement from the last 2 years, and the previous owner hasn't been making nearly as much as I would expect, mainly due to high costs.

First question: should I be worried that this is a lemon... or is it an opportunity?

Income and Costs (all numbers are annual)

Nominal rent - 43.6k

Actual rent - 37.3k (14.5% vacancy.  33% turnover rate)

Management - 4.5k (10.6% - could bring down with a PM switch)

Maintenance - 5.0k (11.6% - ok, older building and a fair amount of tenant turnover)

CapEx - 2.4k (5.4% - mostly plumbing costs: is that a worry?)

Tax - 2.6k (6%)

Landlord Gas Water Heating - 1.3k (2.9%)

Landlord Gas+Oil Heating - 2.8k (6.5%)

Landlord Other Utilities - 5.5k (12.6%)

Insurance - 1.1k (2.6%)

NOI - 11.8k

Lending costs - 8.6k

As is, cash on cash would be 5.5%

Is (eventually) getting 10% cash-on-cash realistic here?  Where is this going wrong, and how would you bring up the income?  Or should I be bringing down my offer a lot?

Agent and I agree that a oil-to-gas conversion would pay off very quickly.  Split metering for gas heating and hot-water might be a pricier but good longer-term investment.

Thoughts?

Thanks!

--Aaron