The hot Hawai'i housing market has entangled potential investors like Iniba in a conundrum: It's tempting when you see the median price of property rise by 50 percent as medain home prices did in the past four years. But it's scary to buy at what could prove to be peak prices.

Uncertainty is especially acute at this juncture in the housing market — home prices have been rising for six years in part because of falling interest rates. Now, with interest rates rising, there's a good chance home prices will begin to fall by year's end.

Still there are opportunities to profit, experts say, as long as you pick a property that provides positive cash flow and are willing to hold onto the property for years.

"Real estate investing is as good if not better than most asset classes, but you need a very long-run point of view," said Ricky Cassiday, owner of Data@Work, a real estate market analysis firm in Honolulu. "If you factor in appreciation and income, it's a pretty solid asset choice for investment."

If you're looking for investment advice, be careful where you go. Avoid real estate gurus who tout easy, no-money-down real estate strategies, said Walt Molony, spokesman for the National Association of Realtors in Washington, D.C.

"You don't get something for nothing," he said. "There are a lot of charlatans out there."

Investors need to do their homework. Pitfalls abound — problem tenants, costly repairs, not having enough capital to meet expenses when the property sits vacant, the potential for real estate prices to fall, among others.

A key to a successful real estate investment is positive cash flow, said Laura Yamada, co-founder of the 60-member Hawaii Real Estate Investors club in Honolulu. In the current market of higher home prices, generating positive cash flow is difficult, she said.

But it's not impossible. Try to find properties priced below market, such as fixer-uppers, foreclosures, those put on sale by cash-strapped or distressed homeowners or FSBOs — properties for sale by owner, Yamada said.

At 33, Yamada owns or co-owns four properties: Townhomes in Waipahu and Makakilo and single-family homes in Wai'anae and 'Ewa Gentry. Three of them were purchased below market: Wai'anae and Makakilo were foreclosures and the 'Ewa home was sold at the cost of the remaining mortgage by an owner tired of dealing with problem tenants.

Yamada said they plan to sell these three properties this year to take advantage of high home prices.

Yamada said it's acceptable to purchase in less desirable neighborhoods as long as the financials work out.

"Even if you don't buy in the best location, but you can buy it at a low enough price or rent it out for (positive) cash flow, I would say it's a good deal," she said.

Investors buy property for cash flow and capital appreciation, said Herb Conley, managing director of Coldwell Banker Pacific Properties in Honolulu.

Historically, the annual return — rent minus expenses — in Hawai'i has been 4 percent for residential properties that were purchased in cash, Conley said. You have to determine whether your money can earn a better return in real estate than other types of investments.

Let's say there's a two-bedroom condo you're interested in that costs $200,000 and you have that much in cash to invest, he said. You are able to rent out the unit for $1,100 a month and expenses would be $200 for the maintenance fee, $40 for taxes and $20 for insurance. The tenant pays utilities. You also set aside $100 a month for future repairs. Your monthly before-tax profit would be $740 — or $8,880 a year.

That's a 4.4 percent return on your $200,000.

It's a better return than a money market account. Furthermore, you could add significantly to your gains if the property appreciates and you sell it.

The situation changes if you borrow money to buy the property.

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By the numbers Property: Two-bedroom condo, fee simple Price: $200,000 Monthly rent possible: $1,100 Maintenance fee: $200 a month Taxes and insurance: $60 a month Allowance for future repairs: $100 a month Utilities: Tenant pays If you paid cash for the condo Yearly cash flow on rent of $1,100 a month: $8,880 ($740 multiplied by 12 months) Return: 4.4 percent ($8,880 divided by $200,000) If you put 20 percent down and borrow the rest at 6 percent Total monthly costs: $1,320 (includes mortgage and interest payments of $960) Yearly loss on rent of $1,100 a month: $2,640 ($220 multiplied by 12 months) Yearly cash flow on rent of $1,400 a month: $960 ($80 multiplied by 12 months) Return: 2.4 percent ($960 divided by your down payment of $40,000) Real Estate Investment Sources on the Web: Hawaii Real Estate Investors: www.hirei.org National Real Estate Investor: www.nreionline.com Creative Real Estate Online: www.creonline.com RealEstateInvesting.com RealEstatePromo.com Freetrainer.com (real estate software)

The other part of the calculation is rising rents. The situation improves for the investor as rents rise, which has been the case in O'ahu recently. In 1997, which was the recent bottom for the rental market, the average rent for apartments was $935. The average rent for all multifamily units on the island has climbed to $1,461 this year, the highest since at least 1988, according to Data@Work.

If you can charge $1,400 rent on your $200,000 condo, you'll have yearly profits of $12,480 and a 6.2 percent return if you have no mortgage. With a mortgage, your return would be 2.4 percent.

It's a challenge in this market to find a $200,000 condo that rents for $1,400, but not impossible. A three-bedroom, two-bath condo at Royal Kunia's Kulana Knolls in Waipahu, for example, has a market value of about $230,000 and can be rented out for $1,450 a month.

When investing in real estate, it's generally a bad idea to have negative cash flow. Then you are depending on rising home prices to make your investment profitable. Timing becomes the key. Many investors who bought Hawai'i real estate in the late 1980s and early 1990s were "upside down," or stuck with a property worth less than they paid for it, until just recently.

That's what happened to Elizabeth DePaul. She bought a one-bedroom condo in the Puu Alii development in Kane'ohe for $200,000 in 1990 and purchased the land under it later for $68,000. During the real estate downturn, her property value fell by more than half.

"When it was way down, I felt like, 'Look at all the money I've lost,' " said the third-grade schoolteacher, who is retiring this year.

The value of DePaul's condo has now rebounded to her purchase price.

If you don't want to take the risk of a downturn, you might be better off investing in something like tax-free municipal bonds, which might give you a better annual return.

That would also save you the headache of dealing with renters and maintenance. If you don't manage the property yourself, you'll need to hire a management company to rent out and keep up the property, but be prepared to pay roughly 10 percent of the rent as a fee. In this market of higher home prices, that fee might be the difference between a profit or loss.

Profits can also evaporate if your investment property remains vacant for long. It's good to have enough money to cover one or two months of possible vacancy a year, Conley said. Before buying, study the rental market to see if rents will hold up.

Offsetting your capital investment are tax breaks from investing in real estate. You can deduct the cost of repairs, improvements, any negative cash flow suffered, depreciation and more.

Finally, be prepared to hold the property through an entire cycle — typically 10 years — to weather any downturn.

For an investor who's willing to take on the risk and put up with any hassles, real estate investing can pay off.

"Real estate has shown to be one of the most stable investments over time," Yamada said. "I can see us making money."