Is everybody coocoo for cash flow?

[Michael Totman]

Does anyone else feel my pain? I'm looking at properties trying to see if there is a good deal to be found but it seems sellers of small multi families are living in a dreamworld when it comes to prices. When I run the numbers, even when I try to cheat and assume "that cost would NEVER be that high so let's lower it..." I can't seem to make these things work. For example:

A 4 family building, seller wants $499,999. (I'm in the northeast, prices are high yes, but stay with me...).

The sellers numbers that they are presenting (water, electric, maintenance, mgt etc) in hopes of making this deal LOOK ENTICING TO A BUYER show that after financing the new owner at this price would be left with about a $10,000 annual LOSS!!

Even assuming someone paid all cash here, it's only about a 3.5% return based on their stated net income!  Forget tax benefits, are we really settling for 3.5% cash returns here?

I looked at the numbers, they are pretty accurate, so why is it listed so high? 

Another one, off market deal here, this time the seller wants $150k (this is down from the original $160k).  I look at the house with a contractor and it's going to need an easy $50-$60k to dress it up, fix foundation and asbestos issues, among other things and at best you might get $1,900 gross rent each month.  This one at least looks cash flow positive assuming nothing big goes after the rehab but still, it's a pretty thin margin here. 

I own a few other properties with a partner so I like to think I know the numbers, but, man, am I nuts or have my expectations for returns been unrealistic all these years? 

I thought I knew the numbers, thought I was smart, but please fellow BP readers help me understand and teach me why people seem to be paying these prices.