According to your formula, the point where selling price = capitalized value represents some level of cashflow yield over time, which is the right way to approach this. But a couple of questions:
Why settle on a period of 8-10 years?
Also, try running this calculation using a property where you know approximate rental income and asking price. What I think you will find is that selling prices need to fall a long, long way before your model shows them as attractive.
I rent a 3BR in Carmel Valley and according to your model, the price of similar units on the market nearby will have to fall by 40-50% before they make sense on a cashflow basis!
