Buy & Hold Vs Fix and Flip Markets
I recently heard something that brought an idea I was thinking about to the surface. I heard that (in general) it is bad to look for buy & hold properties in neighborhoods that are hot "fix and flip" neighborhoods. This makes a lot of sense to me. I am wondering if people agree with that statement?
Some background:
I've been looking for buy & hold properties in Houston and I have been focusing on the neighborhoods up 290 and down S59 outside of the beltway. These areas have a lot of $100k to $150k houses that have Rent/Price ratios of about 1-1.25% and are decent neighborhoods. However, they are also the "hot" neighborhoods. They are definitely seller's markets. The days on market is usually only a few days and there are a ton of cash sales... this all screams hot market with a lot of flips going on.
In my mind, buying a rental property is like trying to buy a ultra high dividend stock with leverage. The strategy is to buy something that will produce great yield on your investment. (any appreciation is icing on the cake). That being said, a hot, fix and flip market will drive up prices which will increase the investment and therefore decrease the yield you make (assuming rent remains fixed).
I understand that these "hot" markets also happen to be some of the nicer neighborhoods that have potential of continuing to increase in value over the long run assuming migration to Houston continues. However, this is speculation that could always change. Again, drawing a metaphor to stocks... rents are to dividends as home values are to stock prices. Dividends are considered more stable and constant and less risky. So investing in a "hot" market is like buying a growth stock with the anticipation that the "inflated/competitive" price you are paying in time 0 will still be less than the price at Time N.... this is exacly the opposite strategy I am looking for with rental properties. I think the basic strategy here is to buy something at a good price (hopefully at a discount) that has a stable and strong yield.
Any comments?