However, we play to sell within the year and either buy another primary residence that better fits our needs or buy an investment property and use the cash flow to pay for our rent - that's the choice we've given ourselves.So, if we did go the investment route, I was thinking that I would invest out of state where the cap rates are much higher and gain enough cash flow to live almost rent free (I think I would need a cap rate of about 10% on a $700K or $800K property).

Yes, this is after EVERYTHING is paid including savings for Cap Ex.

Thanks @Julie Marquez I have punched in the numbers on the BP calculator and it seems to be telling me that cap rate is ~5% and 0.8 in the 2% rule.

Cap rates are always worth watching but they will do what they do.  

Seller is really pushing to carry the note, for various reasons including avoiding the big cap gains tax hit from a sale.

Definitions: 1% test: monthly rents should be equal to or greater than 1% of the price of the asset. 50% test: 50% of the Gross Income/CAP rate (I used 8%) should be greater than the price of the asset.Quick back of the napkin:Gross rent (Owner Occupied): 15,000Expenses (all yearly):Taxes $6,500Management (8%) = $1,200 (You will need to pay for your time as landlord)Repairs (10%) = $1,500Vacancy (10%) = $1,500Mortgage (30, 5.25,20%DP) = $9,500Insurance (guestimate) = $1,125Total: $21,325NCF = 15,000 - 21,325 = -6325 or -527 per month...You would be paying 527 per month or more to live there. 

The building is:in the downtown area which is attracting a lot of new business and residential projects right now4 stories (top 3 I would like to convert into living -reno and sell, the first floor I would like to recruit a restaurant)nearby our arena which hosts a lot of shows and draws a large crowdgreat location and a lot of potentialMy question is, how do I go about:exploring tax credits offered for a project like thisfind the capital for the reno (I can afford the down payment but am capped out at that)what else should I be looking at in a commercial property?

That, coupled with cheap money, has depressed cap rates severely in the MFH markets all across the country.  

Also save some of that cap ex money, its what its for!

Cap rates do not apply to single families.