Jim presents a detailed scenario, and while I question some of his numbers, his basic premise is OK. That's what you'd do to try to find positive cash flow properties.
Admittedly, I'm not at all familiar with Sacramento, but you raised a good point about the quality of the neighborhood in which a house is priced below $100,000. (In areas of South Carolina, you can get a really nice house for that. In the Washington, D.C., area, you'd end up with a mobile home.) And, at least in the DC area, investor money costs more than 6.5%, the vacancy reserve is too low (you should, in your calculations, assume up to 2 months vacancy a year; this calculation assumes 1 month every two years), and there's no protection if property values decline. If they do, if housing prices decline, then it's likely that rental rates will decline accordingly.) Still....
Let me offer another possibility. Investigate the possibility of a sandwich lease-option. You'd lease the property from the owner for a set amount, with an option to buy at a set price. You then turn around and lease the property to a tenant buyer, giving the tenant buyer the option to purchase it. The amount you're charging your tenant buyer for the lease is slightly higher than the amount you're paying to the owner, and the purchase price you'd charge the tenant buyer is slightly higher than the price you have optioned it for from the owner.
Advantages: You don't have to put 20% down. You can sometimes do lease-options with no upfront option money (the value of the lease is the valuable consideration). Or, if you do put down an option fee, as an option fee it's credited toward the purchase price of the property. Typically, although everything's negotiable, some of the monthly rent you're paying is credited toward the purchase price. And you'll find that any upfront option fee plus the monthly rent credit builds up your equity a lot faster than an amortized loan will. If the market strengthens in 5 years or so (right now, your lease option in California probably should be for 5-7 years), you've locked in today's prices. And if the market falls further, at the termination of the lease, as with any lease, you just walk away. You haven't bought a depreciating asset.
What you have to do is negotiate a slightly below-market rent for the property from the owner, and then offer it for somewhat more to the tenant-buyer. The advantages to the tenant-buyer are many. He/she, too, locks in today's price when he/she buys. You'll typically credit some of the tenant-buyer's lease payments to the purchase price or closing cost, so there's some equity buildup for the tenant-buyer. And it's a way to offer the possibility of home ownership to someone who otherwise might not be able to afford it today.
Offer your tenant-buyer a shorter lease-option period than the one you have with the owner, so if the tenant-buyer doesn't purchase, you have time to find another tenant-buyer. Or, if property values have gone up, you can buy it and realize some instant equity. Or, with your option, you can sell your option to an investor or home buyer.
One other nice thing about lease-options is that you're not stuck looking for dirt-cheap properties that'll cash flow. Any property will cash flow if your expenses are less than your income. You could lease-option a nice home in a nice neighborhood, and so long as the lease is somewhat below market, you can make it cash flow.
Hope that helps.