The numbers certainly change the debt service by about a $100 or so a month reducing the cap rate, but my bigger concern is if I should just forget about this loan all together because of the callable part.  

That's because the basis is reduced by depreciation for rentals. 

I also used my VA loan, so I only had to pay closing costs of about $3.5k.Unfortunately, this area was in what’s called a “Mela-roos tax” zone for roads/neighborhood upkeep which added an extra $350/month to my PITI.Therefore, my total payments were $1600/month.When I moved in the summer of 2012, it looked like mortgage rates had sunken to about as low as they would go (I was wrong, they dropped another .75 basis points…but who can time the market).I decided that I would refinance to get a lower monthly payment.For $2k, I was able to reduce my monthly payments by $230.Add this to the fact that real estate prices were rising fast (my Ohio property was now worth about $95k and the one in California was at about $240K!).

If your offer $120k, and there's a deduction for a six percent sale commission to the agents, the net sale proceeds are reduced to $112,800.

I wonder about upping the purchase price to say $1.8 mil or higher if necessary and the numbers work, and getting the deposit reduced to something manageable.

The three lines in the R&R which pertain to my situation:"All Wood or Hard flooring material must be installed with sound dampening material to reduce sound transfer to the unit below.""

I would install a security system in my own house, and in many cases, it will  reduce the homeowners insurance costs, which I think is a selling point.

At that point they had a choice:1) Renegotiate with the current homeowner to start paying the mortgage again (possibly at a reduced value because it was the mortgage was purchased at a discount).- OR -2) Wait for the homeowner to miss one payment and foreclose on the property, thereby buying something for a deep discount if you don't mind going through the courts to eventually own the property.Has anyone seen this type of negotiation/deal with lenders?

I am asking this because that reduces my future cash flow assumption considerably.Let me know your thoughtsThanks 

In most cases I disregard outstanding student loans and medical payments.I consider the minimum gross income to be 3X rent.