Well, that formula comes from larger apartment complexes where the assumption is that the property has been maintained.

Run the numbers again, maybe, with these assumptions and see what you get. 

Am I correct in my assumptions?

It will be a little harder to get started since you will have to be creative (ask someone to qualify for the loan sacrificing some of your returns, partner with someone, ask for seller financing, loan assumptions, etc.) and we are in a sellers market. 

Assumptions if you will;1) Frank sold me Property 1 for 300K.

Or else you open yourself to assumptions by folks.All buyers are left to think is the inside is truly terrible, tenant-owner relationship is bad, or something else which signals this is a distressed property.  

The other assumption or gamble here is over time the property will appreciate and rents will increase to a point where I no longer am losing on the investment.

If my assumption is correct and he is only planning to live overseas for a short period of time then I doubt the bank even knows that he is not currently using the home as a primary residence. 

I think your assessor is using 60% LTV interest rate assumptions + ROE + taxes to establish the market cap rate. 

@Dan Rudolph - I did mention I haven't modeled that, but considering the money greater in the 401k, I think that is all that matters because the same tax assumptions would be present for money earned inside or outside the 401k.