@Emmanuel N Okafor, First I want to say congratulations on building a tremendous portfolio and significant cash flow in single family rentals! You are clearly doing a ton of great things already and I aspire to grow my portfolio and cash flow to be in a position that you are some day.
I don't have the level of experience that other's on the forum have in multi-families, so take what I say with a grain of salt, and of course due your own due diligence. I am however under contract with a partner on a 11 unit value-add opportunity myself so I am sharing how we have approached some of the analysis.
Are you purchasing this property based on the T12 as a stabilized property or based on the value add opportunity? If you looking to buy the property for the value add opportunity I think the best way to analyze the deal is to look not at what cap rate you are buying it for now, but what the value should be post rehab/ or repositioning.
As I have read and gleamed from others the reason why cap rates for value add opportunities are lower than stabilized opportunities is because investors are willing to pay more up front, because based on the value add they are actually getting a better return post the value add being completed.
The price that you are willing to pay should be commensurate with how much value add there is, and what the risks are pertaining to the execution of that value add. You mention being able to cut expenses to 50%, sub-meter units, potentially raise rents. I think understanding the feasibility, cost, timeline, and business plan, as well as exit strategy will help lead you to what price you are willing to pay for the value add.
An example: Let's say you've analyzed the T12 and you are highly confident that reducing expenses is able to be done (let's say because you already have quotes from your vendors (PM, landscaping, cleaning crews etc) that will get you where you need to be easily and quickly. As you would be able to add $1M to the value of the property with little work you might be willing to pay up on the purchase price for the ability to gain some of that higher valuation. The more you pay up for the property of course the less of that higher valuation you get to keep. Maybe one investor is willing to pay $500K more for the ability to easily add $1M, but another is only willing to pay $200k, and still another is willing to pay $800k. It will come down to what is your strategy, and how confident are you in being able to execute against that strategy to hit the value add.
All this being said, you of course want to also look at your exit CAP rate, and in a rising interest rate environment it's entirely possible that CAP rates will expand again so if you are paying up for the ability to execute value add I would also stress test the post value-add valuation with an expansion of CAP rates to ensure that your value-add opportunity isn't eaten up by a decrease in overall valuations.
