You will also get hit with a tax bill if you sell on that discounted price.

With this method you can you find properties that need work and at a discounted rate, fix them up and then rent them out to add them to your rental portfolio. 

I did talk to an agent who bought SFH in San Jose at a discount and is renting out by the room. 

That is a 5.8% discount on the price.

How do I go about finding those who'd rather just collect the insurance money then sell it off at a discount?  

Unless you've got deep pockets, a thirst for the edge, and are lawyered up it's probably not something you want to attempt. 

.- If you hold a rental until death, you can pass it on with a stepped-up cost basis, limiting captial gains if then sold (limited by inheritance tax limitations).Too many newbies on this site trying to replace their day job income via "passive" real estate investing w/o digging deep enough to understand how it really works.

Or do you have to offer your investors some kind of discount?  

I worry that a disgruntled renter could see potential deep pockets if they did their research. 

I guarantee virtually no one is meeting that rule in SD because they're all on here looking to buy in Cleveland or Detroit because in that market price to rent ratios are so askew that buying at a 50% discount probably doesn't get you the 1% rule.