The other thing is the homes all around my property are getting bought and scraped and row homes are being built in their place and I think that will make my little old house less desirable when it is towered by these townhomes. 

Make sure your agent communicates the reasoning why your offer is low (extensive renovations are needed, place is old, layout needs work, building permits needed, etc.). 

My question is, can I make improvements with the proceeds of the old house to the vacation rental including new floors, carpets, and furniture?

There are plenty of factors to consider and I try and look at as many angles as possible before saying "Always" or "Never"1) How old is this home?

The classification of multifamily properties is not set in stone.Some people look at it by Construction Year exclusively, and others weigh in the Property Conditions, Ammenities, etc.Here is a very general classification by construction year:Class A: 0-15 years oldClass B: 16-29 years oldClass C: 30+ years oldClass D: 30+ years old in high crime areas.To answer your specific question about section8 being a Class B or A, I’d say it is not likely. 

The place looks like decent condition, except for an old carport and crumbling balcony.

Every time I search NWI (northwest Indiana) I don’t see much, save for a couple of threads now years old.

I came across real estate after continuously seeing a real estate business in my local Houston neighborhood purchasing old, dingy homes and flipping them into something beautiful. 

The stove and heating system seems a bit old in two of the units, and no driveway so I am a bit concern if any of these tenants do move out in the future.

Just beginning to learn this FI world.