Cindy, Aloha! So you want to "make a SMART investment for long term income."
Candor is one of my strengths. Uh... weaknesses.. uh ???
I have given away a lot of my secrets to investors. Let's see if I can do it again...
Nobody can go see all the possible great rentals that hit the market each day, and the only sane thing to do is make some assumptions to narrow the search field: (1) Rents are consistent by bedroom count for each neighborhood. (2) A rental rehab costs less than a flip rehab. (3) If done carefully, single family homes and multi-family units CAN be adequately compared side-by-side for return potential. (4) Everyone wants the same deals, so you have to move FAST. (5) The market is extremely tight right now, but there are still some needles in the haystack. (6) To find the very best deals, always do your own marketing to find motivated sellers, but continue to work with wholesalers and agents who can send some deals your way.
As a Utah realtor I have the best Utah data at my finger tips, and nobody loves the data more than me! (Yes, there are a few other crazy data hounds out there.) I currently use over 1600 rental data points each day to try to pinpoint the top Single Family and Multi-Family rentals in Utah, Salt Lake, Davis, Weber and Tooele counties. (Sorry, no Park City, since that is on a different Realtor board). Yes, most agents can get the same data, but few can last more than a few weeks with all the numbers floating around or program a simple spreadsheet adequately to extract the golden nuggets. But they are out there! Until you master your own deal finding, and since 80% of the deals are on the MLS, I recommend you work closely with an agent. At a minimum, an agent can set up multiple "hot sheet" searches to find rentals that meet "The 1% Rule" (monthly rent must equal 1% of the purchase price).
The second step after determining potentially good rental spreads is to get a close estimate on rehab costs. If there are pictures on the MLS, then you are off to a great start. For a flip, I recommend $10 per square foot plus $10,000 as a rough guide. For a rental, you can cut it in half. Older properties need more $$$. You will confirm your numbers later.
Third step. Once you have a few properties that are interesting to you, you need to compare them side by side. At this stage, you can do a blind offer, or you can make the seller and the listing agent happy and actually go SEE the homes to refine your numbers. (What a concept!) Unless you just love Property X and must have it at all costs, I am guessing you are trying to get a good, stable RETURN on your money. So as you compare, don't forget taxes, insurance, vacancy, maintenance, and property management. Once you are confident you have all the data fairly accurate, then look at the Cash on Cash Return for the first year. If you want to, you can also figure a cap rate, the gross yield, and the Internal Rate of Return, which is like the CCR but uses 5 to 10 years using the annual cash flows. But the CCR is usually adequate to get started.
Four. The market is HOT right now. You either must be willing to pay close to full price or just wait for a few months. Is it too hot? Is is overpriced? Not in Salt Lake. But there are some great returns in other states, in other markets too. Since you are in Hawaii, you should look all over. Once you decide to make an offer, don't get caught up in the multiple offer game. Decide your max offer and then stick to it. There will be other deals. The "newbies" who "must get a deal" will not last long in the market. Take your time. Be a professional. This is a business, not a hobby.
I have heard people accuse investors of always chasing the highest return to the exclusion of safety and prudence. Perhaps they are suggesting that deferred maintenance is not always factored in, or something else. For example, the roof on a 4 plex that already has two layers is going to cost you at least 3 months of income WHEN it needs replacing. Hmmm. Will that be year 3 or year 7 or 12? There are certainly lots of variables to consider!
Few agents will ever try to convince you to NOT buy a house. Please find one who is not afraid to explore the downside dangers with you--one who wants to help you buy five houses and not just one--one who is doing enough business to not ever send any sales pressure your way. The deal must always stand on its own!!!
Whew! . . . I think that is enough candor for one night.
