Help me determine my "walk away" point

[Paul Witte]

I’m evaluating a deal for a buy-and-hold duplex in a stable, desirable area in a midwestern college town. The neighborhood is outside of the typical student rental perimeter around the University. The sale is being listed by an asset management company since the private seller is apparently incapacitated.

Though I know I need to get exact numbers for expenses as much as possible to be able to do a good analysis, I’m looking for how you would think through “How much is too much for rehab expenses?” on this deal.

Property details

Built in 1923 as a duplex with two side by side 3 bed 1.5 bath units. Hardwood floors and original woodwork. Detached 2 car garage in 2 divided bays (with doors missing for some reason). Corner lot. Property is in a stable area often inhabited by university-affiliated professionals.

Price

Initial asking price: $175,000, reduced 20 days after listed to $159k.

My offer of $155k was accepted today. Hoping to negotiate this down some after a complete property inspection.  If the seller won't budge, I'm trying to figure out my "walk away" point after calculating rehab costs.  

Property Condition & Rehab Needs

Seller-provided pre-inspection shows a property that looks like generally it has been neglected for 20 years. No major defects, but everything looks like it needs at least reconditioning. Mechanicals are past the end of their lifespan (furnaces are 38 years old, water heaters are leaking). Roof is ~12 years old.

Formal inspection hasn’t been done yet.

Expenses

Taxes are ~$4000/year

Haven't gotten PM estimates yet but assuming it's typical 8-10%ish

Expecting low vacancy rates since the area is desirable.

Financing would be a conventional 30 year loan at ~3.5% with 25% down ($38,750). Monthly payment for principal plus interest = $522.

Income

Units are currently rented with leases until March and July of 2021 at $895 and $925/mo, total $1820/mo.

Analysis

Rent to value: $1820 per month / $155k = ~1.2%

50% rule (expectation that 50% of rental income will on average go to non-mortgage expenses) = $910. Based on this gross rule, I’d expect cash flow of $1820 (monthly rents) - $910 (expense estimate) - payment ($522) to give an estimated cash flow of $388/month. I recognize this is a very rough estimate.  Based on this, cash-on-cash would be 8% if I put 20k into the rehab.  Is that fair?  Should I be estimating costs differently somehow?  

My question as stated above is “How do I decide how much is too much to pay for rehab costs?”

Thank you!